|... From Page 4|
|Profit Sharing Ratio|
By profit sharing ratio in a partnership firm, we mean the ratio in which the profits and losses of the firm are to be distributed amongst the partners.
The basis for arriving at the ratio is the agreement between the partners. If there is a partnership deed, the ratio should be ascertained from the provisions in the partnership deed. In the absence of a partnership deed and where there is no indication as to the agreement between the partners in this aspect, it should be considered as equal share for all partners.
The ratio may be a specified as absolute values or it may be taken as the ratio fo their Capital account balances or it may be based on anything else as agreed upon by the partners. Deriving this ratio (if it is not given) would be one important requirement in problem solving.
• Different Ratios for Profit Sharing and Loss Sharing
If the partners so agree, the Profit Sharing Ratio and the Loss Sharing Ratio may be different. There may be a partner who has a share in profits only but not in losses.
• Share in Losses only !!
There cannot be a partner who has a share in losses only but not in profits. This is for the reason that there would be no partnership if there is no share in profits.
|Expressing the Profit Sharing Ratio|
The profit sharing ratio may be expressed in a number of different forms. Whatever may be the form in which the ratio is expressed it can always be converted to a form suitable to you.
• Simple Ratio [Natural Numbers represent shares]
May, Day and Way are partners sharing profits in the in the ratio 1 : 3 : 4.
Rewriting the ratio as below would aid in your calculations
• Simple Ratio [Fractions represent shares]
Where the shares are represented by fractional numbers, one should always ensure that the sum of the fractional parts adds up to 1.
» Like Fractions represent shares
Fractions with the same denominator are like fractions.
Just check up whether the numerators are adding (2 + 3 + 4) up to the common denominator (9) or not.
To be cautious make it a habit to write down the ratio in fractional form if the shares are given as natural numbers and vice versa so that you can check this aspect as well as have a form useful for calculations.
» Unlike Fractions represent shares
Fractions without a common denominator are unlike fractions
• What to do in such cases
If you find that the fractions representing shares of partners are not adding up to 1, you have to derive the actual ratio using the given fractions.
|Interest on Capital|
Interest on Capital is to be paid
• On What Balance is Interest Paid
Interest is paid on capital for the reason that it has been used for the purpose of the partnership business.
The balance in Capital account unless where it is fixed, keeps fluctuating on account of a number of reasons, thus making it difficult to assess the amount of capital employed in the business. There would be a change on account of appropriations made at the end of the accounting period like salary to partners, commission to partners, etc. Even during the course of the accounting period, the balances may change on account of additional capital introduced, capital withdrawn, etc.,
In the absence of appropriate information, it is a convention that interest is paid on the opening balances in Capital Accounts.
In problem solving we will come across these situations.
|Interest on Drawings|
Interest on Drawings is to be charged
• Calculating Interest on Drawings
Interest is charged on drawings for the reason that the amount has been withdrawn by the partners without allowing it for being used for the purpose of the business.
In the absence of appropriate information, it is a convention that the interest on drawings is calculated on the "Drawings a/c" balance at the end.
In problem solving we will come across these variations.
|Salary to Partners|
Salary is to be paid to partners only if it is specifically agreed upon.
If there is no mention in the partnership agreement then no salary need be paid.
|Commission to Partners|
Commission is to be paid to partners only if it is specifically agreed upon.
If there is no mention in the partnership agreement then no commission need be paid.
• Methods of Expressing Commission
Commissions may be calculated on a number of bases, as a % of Sales, as a % of Gross Profit, as a % of Net Profit, as a % of Purchases, etc., depending on the reason for which the commission is being paid and the agreement between the partners.
There are two basic methods of expressing commission as a % of something else. Let us consider Commission being calculated as a % of Net Profit as an example.
» Before Charging Such Commission
This is the normal calculation. Where there is no specific mention of the method, this is what we assume.
» After Charging Such Commission
Under this method, the commission is expressed as a certain % of something after charging such commission.
» Finding Net Profit after Charging Commission (without knowing the commission)
Let the commission be Rs. x (Using Net Profit = Rs. 1,25,000)
» Formula for Calculating Commission after Charging Such Commission
From the above calculations, we can derive a formula that would be easier to remember and use
Example25% of net profits
• Before charging such commission = Net Profits before charging such commission × 25%
|Author Credit : The Edifier||... Continued Page 6|