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Partnership Accounts/Accounting :: What do we account for? What's the difference?

partnership,accounts,profit,sharing,ratio,admission,retirement,death,dissolution,reconstitution,parternership,act
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Partnership » A Form of Business Organisation  
 
Partnership is a form of business organisation. A business and its ownership are independent concepts. The idea that the actual business and the form of organisation that is owning it are different would help you in creating an understanding on the difference in accounting for partnership firms and other forms of business organizations. The same business may be owned by a "sole proprietor", a "partnership firm", a "co-operative society", a "company" or any other form of business organisation.

Ascertaining the profit or loss is an idea related to the business. How the profit made is dealt with is an idea related to the form of business organisation. Thus the process of profit ascertainment (final accounting) for a business would be the same whatever may be the form of business organisation.

» What's the difference?

The way the profits made by an organisation are shared is what is different from organisation to organisation. Taking a hypothetical case of a business owned by different types of business organisations, the process of ascertaining profits would be more or less the same but the process of dealing with profits made would be different from one form of business organisation to another.

The have an understanding on the difference in accounting where the same business is conducted by two different forms of business organisations, let us consider an example of a business being conducted by a sole proprietor "Mr. Narayanan" and another case of the same business being run by a partnership firm "M/S Mani and Murthy" who share the profits of the firm between them in the ratio 1 : 2.

Final Accounting » Business Owned by a Sole Proprietor  
 

Final Accounting

Trial Balance of M/s Wearall Textlies as on 31st March 2006
Particulars L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
Capital
Opening Stock
Closing Stock
Purchases
Rent Paid
Sales
Wages
Commission Received
Assets
Debtors
Creditors










15,000
25,000
1,50,000
25,000

50,000

1,51,000
45,000
1,00,000




3,20,000

3,000


38,000
Total   4,61,000 4,61,000

DrTrading and Profit and Loss a/cCr
Particulars Amount
(in Rs)
Amount
(in Rs)
Particulars Amount
(in Rs)
Amount
(in Rs)
To Opening Stock
To Purchases
To Wages
To Gross Profit
 
 
15,000
1,50,000
50,000
1,30,000
By Sales
By Closing Stock
 
3,20,000
25,000
    3,45,000     3,45,000
To Rent
To Net Profit

 
25,000
1,08,000
By Gross Profit
By Commission Received
 
1,30,000
3,000
    1,33,000     1,33,000
           

DrCapital a/cCr
Particulars Amount
(in Rs)
Amount
(in Rs)
Particulars Amount
(in Rs)
Amount
(in Rs)
To Balance c/d   2,08,000 By Balance b/d
By Net Profit
  1,00,000
1,08,000
    2,08,000     2,08,000
      By Balance b/d   2,08,000

• Recording Gross Profit and Net Profit

Should the posting relating to gross profit and net profit read "To P & L a/c" and "To Capital a/c" respectively. How is it that it shows "Gross Profit" and "Net Profit"

Explanation Hide/Show

  • Gross profit (from Trading a/c) is transferred to Profit and Loss a/c.
  • Net profit (from Profit and Loss a/c) is transferred to Capital a/c.

⇒ The journal entry for recording Gross Profit and net profit should be
Journal in the books of M/s ____ for the period from __ to ____
Date V/R
No.
L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
March 31st Dr
1,30,000
1,30,000
[For the gross profit transferred to profit and loss account.]
March 31st Dr
1,08,000
1,08,000
[For the net profit transferred to capital account.]

DrTrading and Profit and Loss a/cCr
Particulars Amount
(in Rs)
Amount
(in Rs)
Particulars Amount
(in Rs)
Amount
(in Rs)



To Profit & Loss a/c
 


1,30,000
     
    3,45,000     3,45,000

To Capital a/c
 
1,08,000
By Trading a/c   1,30,000
    1,33,000     1,33,000
           

• The Basic purpose of accounting?

These postings can be interpreted as
  • In "Profit and Loss a/c":
    There is a transfer of Rs. 1,30,000 Credit balance from "Trading a/c" to this account.
    and
    There is a transfer of Rs. 1,08,000 Credit balance from this account to "Capital a/c".
  • In "Trading a/c":
    There is a transfer of Rs. 1,30,000 Credit balance from this account to "Profit and Loss a/c".
  • In "Capital a/c":
    There is a transfer of Rs. 1,08,000 Credit balance from "Profit and Loss a/c" to this account.

But, the postings fail to specify the reason for which the balances have been transferred.

We only understand that there is a transfer from so and so account to so and so account and not the reason for which the transfer is being made.

The basic purpose of accounting is derivation of information
The more information we need, the more accounting heads we have to create.

• Solution

To provide us the information clearly indicating that the transfer is on account of Gross Profit being transferred to the Profit & Loss a/c and the Net Profit being transferred to the Capital a/c we create two accounts by name "Gross Profit" and "Net Profit"
  • The Gross Profit from the "Trading a/c" is transferred to the "Gross Profit a/c" and from there to the "Profit & Loss a/c".
  • The Net Profit from the "Profit & Loss a/c" is transferred to the "Net Profit a/c" and from there to the "Capital a/c".
Journal in the books of M/s ____ for the period from __ to ____
Date V/R
No.
L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
March 31st Dr
1,30,000
1,30,000
[For the gross profit transferred to Gross Profit account.]
March 31st Dr
1,30,000
1,30,000
[For the gross profit transferred to profit and loss account.]
March 31st Dr
1,08,000
1,08,000
[For the net profit transferred to Net Profit account.]
March 31st Dr
1,08,000
1,08,000
[For the net profit transferred to capital account.]

DrTrading and Profit and Loss a/cCr
Particulars Amount
(in Rs)
Amount
(in Rs)
Particulars Amount
(in Rs)
Amount
(in Rs)



To Gross Profit
 


1,30,000
     
    3,45,000     3,45,000

To Net Profit
 
1,08,000
By Gross Profit a/c   1,30,000
    1,33,000     1,33,000
           

DrCapital a/cCr
Particulars Amount
(in Rs)
Amount
(in Rs)
Particulars Amount
(in Rs)
Amount
(in Rs)
To Balance c/d   2,08,000
By Net Profit
 
1,08,000
    2,08,000     2,08,000
      By Balance b/d   2,08,000

DrGross Profit a/cCr
Particulars Amount
(in Rs)
Amount
(in Rs)
Particulars Amount
(in Rs)
Amount
(in Rs)
To Profit and Loss a/c   1,30,000 By Trading a/c   1,30,000
    1,30,000     1,30,000
           

DrNet Profit a/cCr
Particulars Amount
(in Rs)
Amount
(in Rs)
Particulars Amount
(in Rs)
Amount
(in Rs)
To Capital a/c   1,08,000 By Profit and Loss a/c   1,08,000
    1,08,000     1,08,000
           

By doing this we ensure that the postings would give us the required information. For this we have to create additional accounting heads.

• Controlling Accounts

The accounts that we create only for the purpose of giving us additional information are called controlling accounts. These accounts do not carry any balance at the end. They are just raised and immediately written off.

You can notice this from the "Gross Profit a/c" and "Net Profit a/c". They just receive and send the amounts through them so that the postings would show phrases that would give the information we need.

We make use of the concept of controlling accounts in many situations in accounting.

partnership,accounts,profit,sharing,ratio,admission,retirement,death,dissolution,reconstitution,parternership,act

Final Accounting » Business Owned by the Partnership Firm  
 
Assuming all other data to be the same and the capital of Rs. 1,00,000 is owned by the two partners Mani and Murthy as Rs. 30,000 and Rs. 70,000 respectively.
Trial Balance of M/s Wearall Textlies as on 31st March 2006
Particulars L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
Mani's Capital
Murthy's Capital
Opening Stock
Closing Stock
Purchases
Rent Paid
Sales
Wages
Commission Received
Assets
Debtors
Creditors












15,000
25,000
1,50,000
25,000

50,000

1,51,000
45,000
70,000
30,000




3,20,000

3,000


38,000
Total   4,61,000 4,61,000

The Trading and profit and loss account would be the same ⇒ Net Profit = Rs. 1,08,000.

DrTrading and Profit and Loss a/cCr
Particulars Amount
(in Rs)
Amount
(in Rs)
Particulars Amount
(in Rs)
Amount
(in Rs)
To Opening Stock
To Purchases
To Wages
To Gross Profit
 
 
15,000
1,50,000
50,000
1,30,000
By Sales
By Closing Stock
 
3,20,000
25,000
    3,45,000     3,45,000
To Rent
To Net Profit c/d

 
25,000
1,08,000
By Gross Profit
By Commission Received
 
1,30,000
3,000
    1,33,000     1,33,000
To Net Profit (Mani)
To Net Profit (Murty)

 
36,000
72,000
By Net Profit b/d  
1,08,000
    1,08,000     1,08,000
           

• Distribution of Profits among Partners

Partners profit sharing ratio ⇒ Mani : Murthy = 1 : 2
=
1
3
:
2
3

Partners share of profits = Firms profit × Profit sharing proportion

Mani's Share =
Rs. 1,08,000 ×
1
3
= Rs. 36,000
Murthy's Share =
Rs. 1,08,000 ×
2
3
= Rs. 72,000
Rs. 72,000

DrPartners Capital a/c'sCr
Particulars Mani
(in Rs)
Murthy
(in Rs)
Particulars Mani
(in Rs)
Murthy
(in Rs)
To Balance c/d 1,06,000 1,02,000 By Balance b/d 70,000 30,000
      By Net Profit 36,000 72,000
  1,06,000 1,02,000   1,06,000 1,02,000
      By Balance b/d 1,06,000 1,02,000

The difference that you can notice is that the profit of Rs. 1,08,000 instead of getting into the account representing a single owner (capital account) is distributed among all the owners i.e. their respective capital accounts.

Is that all the difference !!!  
 

Surely, not

If this is the only difference, then you have completed learning Partnership accounting.

This example is given to make you understand that Capital and its related aspects differ for each form of business organisation. Therefore, learning about accounting for partnership firms involves learning about the various aspects related to Capital.

Author Credit : The Edifier ... Continued Page 3

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