CSEET · Fundamentals of Accounting

Partnership and LLP Accounts: formula sheet

Full chapter guide

Key formulas

Definition of partnership: Agreement + Business + Profit sharing + Mutual agency; All four must be present. Mere sharing of profits is not enough.
Profit sharing when deed is silent: Profit is shared equally by all partners; Capital contributed does not matter. Equal shares even if capitals differ.
Salary or commission when deed is silent: No salary or commission to any partner; A partner is not entitled to remuneration for taking part in the business unless agreed.
Interest on capital when deed is silent: No interest on capital; If the deed allows it, it is paid only out of profits.
Interest on partner's loan or advance: Interest = Loan × 6 ÷ 100 × Time (in years); Applies when a partner gives a loan or advance beyond his capital. It is a charge against profit, not an appropriation.
Interest on drawings when deed is silent: No interest charged on drawings; Charge it only if the question or the deed says so.
Loss sharing when deed is silent: Losses are shared in the same ratio as profits; So losses are also shared equally.
Fixed capital: closing balance: Closing capital = Opening capital + Capital introduced − Capital withdrawn; Profit, interest, salary and drawings do not enter this account.
Fixed capital: current account: Closing current A/c = Opening (Cr) + Interest on capital + Salary/Commission + Share of profit − Drawings − Interest on drawings − Share of loss; Treat an opening debit balance as a minus. A negative result means a debit balance.
Fluctuating capital: closing balance: Closing capital = Opening capital + Additional capital + Interest on capital + Salary/Commission + Share of profit − Drawings − Interest on drawings − Share of loss − Capital withdrawn; All items go into one account.
Opening capital from closing: Opening capital = Closing capital − Additions to capital (profit, interest, salary, new capital) + Deductions (drawings, interest on drawings, losses); Use this when the question gives closing balances and asks for opening capital.
Sides of the account: Credit: opening balance, capital introduced, interest on capital, salary, profit. Debit: drawings, interest on drawings, capital withdrawn, loss; Keep this fixed in your mind and every account will follow.
Interest on capital: Capital × Rate ÷ 100 × Period (in years); Use the opening capital unless the question gives additions or withdrawals during the year. Allowed only if the deed provides for it, and only out of profits.
Interest on drawings (fixed amount, start of every month): Total drawings × Rate ÷ 100 × 6.5 ÷ 12; Average period is 6.5 months for a 12-month year.
Interest on drawings (fixed amount, middle of every month): Total drawings × Rate ÷ 100 × 6 ÷ 12; Average period is 6 months.
Interest on drawings (fixed amount, end of every month): Total drawings × Rate ÷ 100 × 5.5 ÷ 12; Average period is 5.5 months.
Interest on drawings (single date): Amount × Rate ÷ 100 × Months remaining to year end ÷ 12; Count months from the date of drawing to the closing date of the year.
Divisible profit: Net profit + Interest on drawings − Interest on capital − Salary − Commission − Transfer to reserve; Share this balance in the profit-sharing ratio. If the deed is silent, share equally.
Insufficient profit: Profit available shared in the ratio of interest on capital due; Interest on capital is payable only out of profits, so the amount paid cannot exceed the profit.
Sacrificing ratio: Sacrificing share = Old share − New share (for each old partner); If the question does not say how the old partners give up shares, assume they sacrifice in their old ratio. Then the sacrificing ratio equals the old ratio.
New profit sharing ratio (equal sacrifice in old ratio): Old partner's new share = Old share × (1 − New partner's share); Example: old share 3/5, new partner gets 1/5. New share = 3/5 × 4/5 = 12/25.
Goodwill brought by the new partner: Premium = Firm's goodwill × New partner's share; The premium is shared by old partners in the sacrificing ratio, not the old ratio unless both are the same.
Hidden goodwill: Total capital of new firm = New partner's capital ÷ His share Goodwill of firm = Total capital of new firm − (Adjusted capitals of old partners + New partner's capital); Adjusted capitals include revaluation result and reserves. Use this only when goodwill is not given and the new partner's capital and share are known.
Revaluation account: Loss: Dr Revaluation A/c, Cr Asset A/c (decrease in value) or Cr Liability A/c (increase in value) Profit: Dr Asset A/c (increase in value) or Dr Liability A/c (decrease in value), Cr Revaluation A/c; Net profit or loss goes to old partners' capital accounts in the old ratio.
Reserves and accumulated profits: Credit old partners' capital accounts in the old ratio; Applies to general reserve, profit and loss balance and other reserves. A debit balance in P&L is shared as a loss.
Journal entry for premium in cash: Bank A/c Dr (capital + premium) To New partner's Capital A/c To Premium for Goodwill A/c Premium for Goodwill A/c Dr To Old partners' Capital A/cs (sacrificing ratio); If goodwill is raised in the books, it is credited to old partners in their sacrificing ratio. In the hidden goodwill example this equals the old ratio, because the sacrifice is in the old ratio.
Gaining ratio: Gaining ratio = New ratio − Old ratio (for each continuing partner); Used for retirement and death. If the result is positive, the partner gains.
Sacrificing ratio: Sacrificing ratio = Old ratio − New ratio; Used on admission. Do not use it for retirement.
Retiring partner's goodwill share: Goodwill credited = Total goodwill × Retiring partner's old share; Debit the continuing partners' capital accounts in the gaining ratio.
Goodwill already in books: Dr All old partners' capital (old ratio) Cr Goodwill account; Write off the old balance first, then raise the new goodwill share.
Revaluation result: Revaluation profit or loss is shared in the old ratio; Increase in assets or decrease in liabilities is profit. Opposite is loss.
Profit up to date of death: Share of profit = Past profit × (Months elapsed ÷ 12) × Deceased partner's share; Use the basis given: last year's profit, average profit, or sales. Credit it to the deceased partner's capital.
Amount due to retiring or deceased partner: Capital + Share of reserves + Goodwill share + Revaluation profit + Profit till death − Drawings − Revaluation loss − Share of accumulated losses; Paid in cash, or moved to a loan account or executor's account.
Settlement of accounts rule: Pay: (i) outside debts, (ii) partners' advances, (iii) partners' capital, (iv) residue in profit ratio; This is the order in Section 48 of the Indian Partnership Act, which applies on dissolution.
Order of payment (Section 48(b)): Outside debts → partners' advances (loans) → partners' capital → residue in profit ratio; Each step is paid rateably. Cash must be enough for the earlier step before the next is paid. Applies subject to agreement.
Realisation Account balancing figure: Profit or loss = Credit side total − Debit side total; Credit side: liabilities transferred, cash from assets sold, assets taken by partners. Debit side: assets transferred, liabilities paid, expenses. Credit larger means profit.
Transfer of profit or loss: Profit: Realisation A/c Dr, to Partners' Capital A/cs. Loss: Partners' Capital A/cs Dr, to Realisation A/c; Share in the profit-sharing ratio.
Losses and deficiency (Section 48(a)): Profits → capital → partners individually in profit ratio; Default rule, subject to agreement.
Garner v Murray: Deficiency of insolvent partner is shared by solvent partners in the ratio of their capitals before dissolution; Use last balance sheet capitals, before adding reserves or sharing realisation loss. The insolvent partner's own share of loss stays in his account.
Final cash check: Opening cash and bank + realisation receipts − payments = total paid to partners; If the closing cash does not equal the closing capital total, there is an error.
Books of account: Proper books + double entry + cash or accrual basis, kept at registered office; Section 34(1). Period of keeping and type of books are as prescribed in the rules.
Statement of Account and Solvency (preparation): Prepare within 6 months from end of the financial year; signed by designated partners; Section 34(2). Prepared as at the last day of the financial year.
Filing of the statement: File with Registrar every year, in prescribed form, manner, time and fee; Section 34(3). Commonly filed as Form 8. The due date is in the rules, so check the current rules.
Penalty for late filing: ₹100 per day of default; maximum ₹1,00,000 for the LLP and ₹50,000 for each designated partner; Section 34(5). Applies to failure to file under Section 34(3).
Fine for not keeping books, not preparing the statement, or not auditing: LLP: ₹25,000 to ₹5,00,000. Each designated partner: ₹10,000 to ₹1,00,000; Section 34(6). Covers default under Section 34(1), (2) and (4).
Winding up for non-filing: Default in filing Statement of Account and Solvency or annual return for any 5 consecutive financial years; Section 64(e). The Tribunal may wind up the LLP.
Winding up for too few partners: Number of partners below 2 for more than 6 months; Section 64(b). The Tribunal may wind up the LLP.

Quick revision

The deed's terms override the default rules, which apply only where the deed is silent.
Fixed capital: the capital account stays unchanged and a separate current account takes the adjustments.
Fluctuating capital: profit, drawings, interest and salary all go through the one capital account.
Appropriation account is prepared after the Profit and Loss Account; interest on capital and salary are charged against profit.
Interest on drawings is a gain to the firm, so it is credited in the appropriation account.
On admission, revalue assets and liabilities first and share the profit or loss among old partners in the old ratio.
Sacrificing ratio = old share − new share for each old partner.
Retiring partner's gaining ratio = new share − old share for each continuing partner.
Section 32 of the Partnership Act: a retired partner stays liable to third parties until public notice is given, but not to those who dealt without knowing he was a partner.
Section 42: subject to contract, a firm is dissolved by the death or insolvency of a partner, expiry of a fixed term, or completion of an undertaking.
Section 48 sets the order for paying assets on dissolution: outside debts, partners' advances, partners' capital, then residue by profit share.
Under the LLP Act, a partner can resign by at least thirty days' written notice (Section 24), and an LLP must keep books and file a Statement of Account and Solvency (Section 34).

Common mistakes

Sharing profit in the ratio of capital when the deed is silent Fix: Without an agreement, profit is shared equally. Use the capital ratio only if the deed or question says so.
Allowing interest on capital by default Fix: Allow it only if agreed. Even then it is paid only out of profits.
Posting profit, drawings and interest to the capital account when capital is fixed Fix: When you see the word fixed, send every item except capital introduced or withdrawn to the current account.
Deducting interest on drawings from the partner's side wrongly, or adding it Fix: Debit the partner's account with interest on drawings. Treat it as a deduction.
Charging interest on capital or drawings when the deed says nothing about it. Fix: Allow interest on capital, interest on drawings and salary only if the question or deed says so. Otherwise share profit equally.
Putting interest on drawings on the debit side of the appropriation account. Fix: It is income to the firm. It is credited to the appropriation account and debited to the partner.
Sharing the revaluation profit or loss in the new ratio. Fix: Revaluation relates to the period before admission, so it goes to old partners in the old ratio. The new partner gets none of it.
Crediting the premium for goodwill in the old ratio when the sacrifice is different. Fix: Always calculate the sacrificing ratio as old share minus new share. Use it for goodwill premium.
Using the sacrificing ratio for retirement Fix: On retirement, the continuing partners gain. Always compute new ratio minus old ratio.
Sharing revaluation profit or reserves in the new ratio Fix: These items belong to the period before the exit. Share them among all old partners in the old ratio.

Exam tips

Know the provisions that apply when the deed is silent, because they are needed for appropriation account questions. Write the points as a list: profit sharing, salary, interest on capital, interest on loan, drawings.
Quote the 6% rate and say clearly that it applies to loans, not capital.
In theory answers, name Section 69 for the effect of non-registration and Section 4 of the LLP Act for non-applicability. Do not quote other section numbers unless you are sure.
Show every adjustment line by line. Marks are given for the method even if you slip on the arithmetic.
Use the 15 minutes of reading time to mark 'silent' items in each question.
Look at the first line of the question. The words fixed or fluctuating decide the whole layout.
Draw both a capital account and a current account in the fixed method. Examiners give separate marks for each.
Show the profit appropriation workings clearly, even when the question asks only for partners' accounts.