Accounting entries in partnership firm

by :
DR. T.K. JAIN
AFTERSCHO☺OL
centre for social entrepreneurship
sivakamu veterinary hospital road
bikaner 334001 rajasthan, india
FOR – PGPSE PARTICIPANTS
mobile : 91+9414430763

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 Basics

Dont give any salary or interest on capital to

any partner (unless there is some other
agreement).
Interest on loan from partners @6%
divide profits equally among partners.

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 Important issues....

Find out gaining ratio or sacrificing ratio :

new ratio – old ratio

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 Revaluation account

Revaluation account is prepared whenever a

new partner joins or a partner retires or a
partner dies or there is dissolution of
partnership or sale of partnership etc..
find the profit / loss from realisation and
distribute to partners in their profit sharing
ratio
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 entries...

Credit partners for the money they bring, for

their share of profit or for their share of
goodwill
debit partners for loss, for their withdrawals for
thier share of losses

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 How to identify goodwill?

There are many methods like :

average profit method
super profit method
capitalisation method
etc.

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 What to do with goodwill ?

Goodwill is generally not shown in balance

sheet. When a partner joins, create a goodwill
account by crediting the amount to old partners
in their old profit sharing ratio. Afterwards
close goodwill account by debiting it to all the
partners in their new profit sharing ratio
(incuding the new partner's account).
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 Joint life insurance acount
There are two options - treat joint life
insurance premium as revenue expenditure or
treat it as capital expenditure. If you treat it as
revenue expenditure, then joint life policy
account will not be created and therefore
whenever a partner retires, you have to create a
joint life policy account. If you treat it as
capital expenditure, you have a joint life policy
account in your balance sheet.
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 Retirement of a partner

When a partner retires, he gets credits for his

share in reserves, joint life policy (surrender
value) and profits. Generally assets, and
liabilities are revalued when a partner retires
and due to revaluation whatever profit / loss is
there is transferred to partners in old profit
sharing ratio.
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 Retirement entries

Suppose a joint life policy is there – which is

already there in the balance sheet – then the
entry will be for revaluation only.

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 Dissolution of partnership

Partnership can be dissolved voluntarily or on

insolvancy or on order of court or on death of
all the partners. The losses are distributed in
profit sharring ratio – but sometimes Garner
v/s Murray rule is applied.

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 Surplus capital method for
distribution of proceeds

When a partnership is dissolved, first of all

make the payment to secured creditors, then to
unsecured creditors and then to partners' loan
accounts and then you have to pay to partners
for their capital. First find out surplus capital
and then distribute the proceeds in this ratio so
that the partners capital become in the ratio of
profit sharing.
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 What is the difference between
secured / unsecured creditors

Secured creditors are those, who have some

property exclusively marked for their loans.
They may have some property mortgaged or
some pledge of some type. Unsecured creditors
dont have any security / guarantee / property to
guarantee.

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 What is surplus capital ?

X and Y have capital of 10000 and 2000, however, their

profit sharing ratio is 1:1, so there is surplus capital of X
of 8000, because if you will pay X Rs. 8000, their capital
will be in profit sharing ratio. Thus surplus capital is that
capital which when paid makes the capital in the ratio of
their profit sharing. Suppose A,B,C have capital of 1,3,
and 5 thousand, but their profit sharing ratio is 1:1:1, so B
and C have surplus capital of 2 and 4 and therefore
surplus capital ratio is : 1:2

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What is Maximum loss method ?

In this method, we identify maximum loss at

each stage and distribute it to members The
maximum loss is identified at each stage of
dissolution. And this loss is distributed to
partners in their profit sharing ratio. Thereafter
whatever balance is left in their capital account
is paid to that partner.
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 Example of maximum loss
method

Suppose the maximum possible loss is Rs.

1200. The profit sharing ratio is 1:1:1 and the
capitals of A,B,C are 1000, 900, 500. now
distribute the losses. Each partner gets loss of
400. Thus maximum loss of A,B,C are : 600,
500, 100. Thus A,B,C will be paid Rs. 600,
500 and 100 respectively.
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 X,Y and Z share profit in 5:3:2. firm is dissolved.
Creditors : 7500, Capital : X 18000, Y : 15000, Z :
12000, Cash 3000, Debtors 27000, Stock 22500,
Stock was realised in 13500, debtors in 23250,
realisation exp. 750

Money realised : (13500+23250-750-7500) = 28500 loss :

( 3750+9000+750)=13500

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 Surplus capital method :

First divide the capitals by their profit sharing

ratios :X 18000/5 = 3600 Y : 15000/3 = 5000,
Z : 12000/2 = 6000, the minimum is 3600, so
as per that notional capitals should be : 3600*5
= 18000, 36*3= 10800, and 36*2 = 7200.
thus surplus capital : X = 0, Y = (15000-
10800) = 4200, Z = (12000-7200) = 4800 thus
Y and Z have to be paid 4200 and 4800.
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 Maximum loss method
Here we distribute the loss to the partners :
13500 distributed in 5:3:2 :
6750, 4050, 2700 this is distributed to X,Y,Z
X = (18000-6750)=11250
Y=(15000-4050)= 10950
Z=(12000-2700) = 9300 to be distributed to
X,Y,Z. Answer

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A,B,C share profit in ratio 9:4:3, B retires, his share is
taken by A and C in 1:3. D was admitted as partner
with ¼ share, half of which is gifted by A and
remaining by A &C equally.
New share of A : 9+1 = 10/16
new share of C: 3+3 = 6/16
A's gaining ratio: 10/16 – 9/16 = 1/16 and that of C : 3/16
D gets : 1/4, 1/8 from A and 1/8 by A and C eqully. So new
share of A : 10/16 – 1/8 – 1/16 = 7/16
new share of C: 6/16 – 1/16 = 5/16
thus new ratios are A:C:D: 7:5:4

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