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Written according to the New Text book (2013-2014) published by the Maharashtra State Board

of Secondary and Higher Secondary


Education, Pune.

STD. XII Commerce

Book-Keeping &
Accountancy

Second Edition: July 2014

Salient Features

Precise Theory for every topic including Specimen Journal Entries and Formats
for Ledger Accounts.

Covers Answers To All Textual Questions.

Includes Board Questions (March 08 March 14) and additional questions for
practice to facilitate better preparation.

Two Model Question Papers as per the latest paper pattern.

Includes a section of Solved Examples for every chapter covering an array of


questions from simple to complex.

Includes Board Question Paper of March 2014.


Simple and Lucid language.
Self evaluative in nature.

Solutions to practice problems available in downloadable PDF format at


www.targetpublications.org

Printed at: Repro India Ltd., Mumbai

No part of this book may be reproduced or transmitted in any form or by any means, C.D. ROM/Audio Video Cassettes or electronic, mechanical
including photocopying; recording or by any information storage and retrieval system without permission in writing from the Publisher.

TEID : 757

Preface

Book Keeping and Accountancy is an indispensable subset of accounting. It refers to the process of
accumulating, organizing, storing and accessing the financial information of a business concern, thus
facilitating in its day-to-day operations. It further aids in preparing the financial statements such as Trading
Account, Profit & Loss Account and Balance Sheet at the end of each accounting year.
We present to you "Std. XII Commerce: Book-Keeping and Accountancy" with a revolutionary fresh
approach towards content, thus laying a platform for an in depth understanding of the subject.
This book has been written according to the revised syllabus and guideline as prescribed by the state board
and includes specimen journal entries/ ledgers and illustrations. We have provided a section of solved
examples for every chapter, which covers an array of questions from simple to complex. It further
encompasses solutions to all textual questions.
Furthermore, towards the end of every chapter, we have provided a set of sums for practice along with board
questions from March 2008 to March 2014 which helps in revision. The book also includes two model
question papers as per the latest paper pattern.
Solutions to practice problems
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We are sure, this study material will turn out to be a powerful resource for students and facilitate them in
understanding the concepts of this subject in the most lucid way.
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Best of luck to all the aspirants!

Yours faithfully,
Publisher

Board paper Pattern


Time: 3 Hours

Total Marks: 80

Q.1. Attempt any THREE of the following sub-questions :


[15]
Includes five sub-questions of five marks each. Out of the five, three sub-questions have to be
answered.
(A)

Answer the following questions in one sentence each:


Five sub-questions will be given.

[one mark each]

(B)

Write a word/term/phrase which can substitute each of the following statements :


Five sub-questions will be given.
[one mark each]

(C)

Select the most appropriate alternative from those given below and rewrite the
statements:
Five sub-questions. Each sub question carries four options.
[one mark each]

(D)

State whether the following statements are True or False :


Five sub-questions will be given.
[one mark each]

(E)

Prepare a specimen of Bill of Exchange.

Q.2. Practical problem on Single Entry System.


OR
Theory Questions on Analysis of Financial Statements.
Two sub-questions will be given.

[8]

[four marks each]

Q.3. Practical problem on Reconstitution of Partnership (Admission / Retirement / Death of a


Partner).
[10]
OR
Practical problem on Reconstitution of Partnership (Admission / Retirement / Death of a
Partner).
Questions will be asked from any two of the above three chapters.
Q.4. Practical problem on Bill of Exchange.

[10]

Q.5. Practical problem on Dissolution of Partnership Firm .


[10]
OR
Practical problem on Accounting for Shares / Debentures.
One question will be asked from Dissolution of Partnership Firm and the second question will be
asked either from Accounting for Shares or Accounting for Debentures.
Q.6. Practical problem on Accounts of Not for Profit Concerns.

[12]

Q.7. Practical problem on Partnership Final Accounts.

[15]
Total:

Scheme of Evaluation
(A)
(B)

Written Examination
Project Preparation (with Viva)
Total:

Marks
80
20
100

80

Unitwise Weightage

No.

Units

Marks

Marks With Option

Problem

Objectives

Total

Problem

Objectives

Total

1.

Introduction to Partnership
(Objectives
only)
and
Partnership Final Accounts

15

02

17

15

03

18

2.

Accounts of Not for Profit


Concerns

12

01

13

12

02

14

10

02

12

02

22

04

24

10

20

04

20

25

118

3.

4.

5.

6.

Admission / Retirement /
Death of a Partner
OR
Admission / Retirement /
Death of a Partner
Dissolution of Partnership Firm
OR
Accounting for Shares /
Accounting for Debentures
Bill of Exchange (Objectives
include 5 marks for question
on specimen)
Single Entry System
OR
Analysis of Financial Statements
(Theory Questions)

10
10
10
10

02

12
10

10

06

16

08

02

10

10
08
08

Total

65

15

80

93

No.
1.
2.
3.
4.
5.
6.
7
8
9
10
11
12

Units
Introduction to Partnership
Partnership Final Accounts
Reconstitution of Partnership (Admission of Partner)
Reconstitution of Partnership (Retirement of Partner)
Reconstitution of Partnership (Death of Partner)
Dissolution of Partnership Firm
Accounts of Not for Profit Concerns
Single Entry System
Bill of Exchange (Trade Bill)
Company Accounts Part I (Accounting for Shares)
Company Accounts Part II (Accounting for Debentures)
Analysis of Financial Statements
Model question paper I
Model question paper II
Board Question Paper March 2014

Note: All Textual questions are represented by * mark.

Page No.
1
17
95
155
190
219
267
323
359
418
457
477
498
503
508

Target Publications Pvt. Ltd.

01

Chapter 01: Introduction to Partnership

Introduction to partnership

Contents:

1.1

1.1

Introduction

1.2

Partnership

1.3

Partnership Deed

1.4

Indian Partnership Act, 1932

1.5

Methods of Capital Accounts

Introduction

There are many forms of business organizations. Sole Trading Concern is the oldest form. The sole proprietorship
is a form of business that is owned, managed and controlled by a single individual. He has to arrange capital for
the business and he alone is responsible for its management. But, when he needs to expand the business, he needs
more resources and capital. It becomes very difficult for a sole trader to manage and run the activities of the
business alone with limited resources and capital.
The limited access of a sole proprietor to financial resources and his limited managerial skills create the need for
an additional partner. Thus, the Partnership form of business comes into existence.
1.2

Partnership

Meaning and Definition:


Partnership is an association of two or more persons who agree to combine their financial resources and
managerial abilities to operate a business and share Profits and Losses in an agreed ratio.
The definition of Partnership as per the Indian Partnership Act, 1932 is, Partnership is the relation between
persons who have agreed to share profit of business carried on by all or any of them acting for all.
Features:
i.
Agreement:
Partnership is formed on the basis of an agreement between two or more persons to carry on business
activities. Without agreement partnership cannot be formed. Agreement may be in written or oral form.
The terms and conditions of partnership are laid in a document known as Partnership Deed.
ii.
Registration:
It is not compulsory to register a partnership firm except, in the state of Maharashtra. However, if the
partners so decide, it may be registered with the Registrar of Firms.
iii. Lawful Business:
Illegal business activities are not permitted by law. Partnership form of business should only undertake
those business activities which are permitted by law or which are legal.
iv. Membership:
To form a partnership firm minimum two persons are required. The maximum limit on the number of
persons is 10 for banking business and 20 for other businesses. If the number exceeds the above limit, the
partnership becomes illegal.
v.
Sharing of Profits and Losses:
There must be an agreement among the partners to share the Profits and Losses of the business in an agreed
profit sharing ratio. All partners of the firm will be entitled to an equal share in Profit and Losses, if the
partnership deed is silent about the ratio.
1

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Std. XII (Commerce): Book-Keeping & Accountancy

vi.

Unlimited Liability:
The partners of the firm have Unlimited Liability. They are jointly as well as individually liable for the
debts and obligations of the firms. If the Assets of the firm are insufficient to meet the firms Liabilities, the
personal properties of the partners can also be utilized for the repayment of the firms Liabilities. However,
the Liability of a Minor Partner is limited to the extent of his share in the profit.
vii. Management:
All the partners can participate actively in the business management depending on the agreement formed.
viii. Dissolution:
Dissolution means to close the business. Legally a partnership comes to an end if any partner dies, retires or
becomes insolvent.
ix. Relationship between the Partners:
The partnership business may be carried on by all or any of the partners acting for all. Thus, each partner is
a principal and so can act in his own right. At the same time, he can act on behalf of the other partners as an
agent. Thus, every partner acts as an Agent as well as Principal.
Types of Partners:
Following are the various types of partners:
i.
Active Partners:
Partners who take active part in the conduct of day-to-day transactions of the firm are called Active
Partners. These partners perform the business activities on behalf of the other partners.
ii.
Sleeping Partners:
A Sleeping Partner is also known as Dormant Partner. Sleeping or Dormant Partners are those, who do not
take active part in the management of the business. Such partners only contribute capital in the firm and are
bound by the activities of other partners. However, they share in the profits and losses of the business
iii. Nominal Partners:
Nominal partners are those who lend their name to the firm but do not have interest in the business. They do
not make any capital contribution, and are not entitled to take part in management, but are liable to third
parties, like the other partners.
iv. Minor Partner:
A minor is a person who has not completed 18 years of age. A minor cannot become a partner because he is
not qualified to enter into a contract. However, he may be admitted to the benefits of partnership with the
mutual consent of all the partners. His liability is limited to the extent of his share in the capital and profits
of the firm. He cannot file a suit against the firm or its partners to get his share except when he wants to
disassociate himself from the firm.
v.
Partner in Profits only:
This type of a partner only shares in the profits of the firm. However, his liability for the firms debts is
unlimited. He is not allowed to take part in the management of the firm. A partnership firm may associate
with such a partner for their money and goodwill.
vi. Partner by Estoppel:
A Partner by Estoppel neither contributes capital nor is entitled to any share in the profits. He is actually not
a partner in the firm. However, any person who represents himself in front of a third party as a partner of
the firm becomes a Partner by Estoppel. He becomes liable to the third parties that presume him to be a
partner of the firm.
1.3

Partnership Deed

Partnership Deed is the written agreement between or among the partners. It is also known as Articles of
Partnership. Partnership Deed lays down the terms and conditions of partnership and the rights, duties and
obligations of partners for the internal management of the firm. A partnership deed is very helpful in situations of
conflicts or disputes arising between partners. The relations of partners are governed by the Partnership Deed. A
Partnership Deed generally contains the following important contents:
i.
Names and addresses of the Partnership Firm.
ii.
Nature of business to be conducted and its duration.
iii. Names, Addresses and other information about the partners.
2

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Chapter 01: Introduction to Partnership

iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.
xiii.
xiv.
xv.

The total amount of Capital contributed by the each partner.


The amount of drawings permissible for each partner.
Rate of Interest on Capital and Drawings, if any.
Profit Sharing Ratio of the partners.
Rate of Interest on Loan given by partners to the firm.
Accounting and Audit procedures of the firm.
Methods of valuation of the Goodwill of the firm.
Provisions for admission, retirement and insolvency of partners.
Provisions for Dissolution of the firm and settlement of accounts after dissolution.
Division of work among the partners and their Remuneration / Commission, if any.
Method of operating Bank Accounts and authority for signing the cheques.
Other terms and conditions which are agreed by all the partners.

1.4

Indian Partnership Act, 1932

The Indian Partnership Act is in force since 1932. This act is applicable in the absence of partnership deed or if
the partnership deed is silent on any specific point. Stated below are the important provisions of this act:
i.
Distribution of Profits:
In the absence of partnership deed, all the partners are treated as equal and they will be entitled to equal
share in the Profits and Losses of the business. However, if profit sharing ratio is given, then Profits /
Losses should be shared by partners in the agreed ratio only.
ii.
Interest on Capital:
According to the Act, no interest is to be allowed on Partners Capital. However, if a provision is made in
the partnership deed, it should to be given to the partners as per the agreement.
iii. Interest on Drawings:
As per the Act, there is no provision for Interest on Drawings. However, if the partnership deed states that
Interest on Drawings is to be charged, then it should be charged as per the agreement.
Interest on Drawings is to be charged for a period of six months in cases where the total amount of
Drawings is given but the dates of withdrawals are not available.
iv. Interest on Partners Loan:
Interest on Loan should be allowed at the rate of 6% per annum as per the Act. If a separate provision is
made in the partnership deed then interest should be allowed as per the agreement.
v.
Salary or Commission to Partners:
Partners are not entitled to any Salary or Commission for doing any additional or extra work for the firm.
However, if any special provision is made in the partnership deed then it should be provided as per the
agreement.
vi. Admission of a New Partner:
According to the Act, a person can be admitted into partnership only with the consent of all the existing
partners.
1.5

Methods of Capital Accounts

An amount contributed by a partner either in the form of cash or kind into the business of a partnership firm is
known as Partners Capital. This amount may be equal or it may be in the profit sharing ratio or as per the
common understanding among partners. Capital Accounts of partners can be maintained in two ways:
i.
Fixed Capital Method:
Under the Fixed Capital Method, the amount of capital of the partners remains fixed unless some additional
capital is introduced or some amount of capital is withdrawn by an agreement among the partners. Thus,
under fixed capital method, two accounts are maintained for each partner namely Partners Capital Account
and Partners Current Account.
a.
Partners Capital Account: The below items are recorded in this account:
1.
Amount contributed by a partner at the beginning.
2.
Additional Capital introduced by a partner during the year.
3.
Part of capital amount withdrawn during the year.
3

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Std. XII (Commerce): Book-Keeping & Accountancy

Journal Entries recorded in Partners Capital Account under Fixed Capital Method:
Date
i.

ii.

iii.

Particulars

L.F.

Additional Capital introduced by Partners in Cash


Cash/Bank A/c
To Partners Capital A/c
(Being additional capital introduced)
Additional Capital introduced by Partners in Kind
Asset A/c
To Partners Capital A/c
(Being capital brought in the form of asset)
Capital is Withdrawn by the Partner
Partners Capital A/c
To Cash/Bank A/c
(Being amount of capital withdrawn by partner)

Dr.

xxx

xxx

xxx

xxx

Credit
`

xxx
xxx

Dr.

xxx
xxx

Dr.

xxx
xxx

Format for Partners Capital Account under Fixed Capital Method:


Partners Capital Account
Dr.
X
Y
Particulars
Particulars
`
`
To Cash/Bank A/c
xxx
xxx By Balance b/d (Credit Balance)
(Amount of Capital Withdrawn)
By Cash/Bank A/c
(Additional Capital)
By Assets A/c
(Capital in Kind)
To Balance c/d (Credit Balance)

Debit
`

By Balance c/d (Debit Balance)

Cr.
X
`
xxx
xxx

Y
`
xxx
xxx

xxx

xxx

xxx

xxx

xxx

xxx

[Note: Generally Partners Capital Account shows a Credit Balance and is shown on the Liability side of the
Balance sheet. If the account has a Debit Balance, it is shown on the Asset side of the Balance sheet.]
b.

Partners Current Account: This account is maintained when partners adopt the Fixed Capital
Method. Below items are recorded in this account:
1.
Amount withdrawn by partners for their personal use.
2.
Goods withdrawn by partners for their personal use.
3.
Interest on Partners Capital.
4.
Interest on Partners Drawings.
5.
Salary or Commission to Partners.
6.
Distribution of Profit or Loss of the Firm.

Journal Entries recorded in Partners Current Account under Fixed Capital Method:
Date
i.

ii.

Particulars
Interest on Capital allowed to Partners
Interest on Capital A/c
To Partners Current A/c
(Being interest on capital allowed to partners)
Transfer of Interest on Capital to Profit & Loss Account
Profit & Loss A/c
To Interest on Capital A/c
(Being interest on capital transferred to Profit & Loss A/c)

L.F.
Dr.

Debit
`

Credit
`

xxx
xxx

Dr.

xxx
xxx

Target Publications Pvt. Ltd.


iii.

Chapter 01: Introduction to Partnership

Salary/Commission allowed to Partners


Salary/Commission A/c
To Partners Current A/c
(Being salary or commission allowed to partners)
Transfer of Salary/Commission to Profit & Loss Account
Profit & Loss A/c
To Salary/Commission A/c
(Being salary/commission transferred to Profit & Loss A/c)
Interest charged on Partners Drawings
Partners Current A/c
To Interest on Drawings A/c
(Being Interest on drawing charged)
Transfer of Interest on Drawings to Profit & Loss Account
Interest on Drawings A/c
To Profit & Loss A/c
(Being interest on drawings transferred to Profit & Loss
Account)
Drawings made by the Partners in Cash
Drawings A/c
To Cash A/c
(Being cash withdrawn for personal use)
Drawings made by the Partners in Goods
Drawings A/c
To Goods A/c
(Being goods withdrawn for personal use)

iv.

v.

vi.

vii.

viii.

ix.

x.
a.

b.

Transfer of Drawings to Partners Current Account


Partners Current A/c
To Drawings A/c
(Being drawings transferred to Partners Current Account)
For distribution of Net Profit or Net Loss
Net Profit
Profit & Loss A/c
To Partners Current A/c
(Being profit transferred to Current Account)

Dr.

xxx
xxx

Dr.

xxx
xxx

Dr.

xxx
xxx

Dr.

xxx
xxx

Dr.

xxx
xxx

Dr.

xxx
xxx

Dr.

xxx
xxx

Dr.

xxx
xxx

Net Loss
Partners Current A/c
To Profit & Loss A/c
(Being net loss transferred to Current Account)

Dr.

xxx
xxx

Format for Partners Current Account under Fixed Capital Method:


Partners Current Account
Dr.
To Balance b/d (Debit Balance)
To Drawings A/c (Cash)
To Drawings A/c (Goods)
To Interest on Drawings A/c
To Profit and Loss A/c (Loss)

X
`
xxx
xxx
xxx
xxx
xxx

Y
`
xxx
xxx
xxx
xxx
xxx

To Balance c/d (Credit Balance)

xxx

xxx

xxx

xxx

Particulars

By Balance b/d (Credit Balance)


By Interest on Capital
By Interest on Loan
By Salary to Partner
By Commission to Partner
By Profit and Loss A/c (Profit)

X
`
xxx
xxx
xxx
xxx
xxx
xxx

Cr.
Y
`
xxx
xxx
xxx
xxx
xxx
xxx

By Balance c/d (Debit Balance)

xxx

xxx

xxx

xxx

Particulars

Target Publications Pvt. Ltd.

Std. XII (Commerce): Book-Keeping & Accountancy

[Note: Partners current account can either have a Debit Balance or a Credit Balance. If Partners Current
Account has a Debit Balance, it should be shown on the Asset side of the Balance sheet and if it has a Credit
Balance, it should be shown on the Liability side of the Balance sheet.]
ii.

Fluctuating Capital Method:


In the Fluctuating Capital Method, only one account, i.e. Partners Capital Account is maintained for each
partner. All the transactions affecting a Partner's Account like Interest on Capital, Drawings, Interest on
Drawings, Salary/Commission to Partners and Share of Profit or Loss are recorded in the Partners Capital
Account. As a result of this, the Closing Balance of the Partners Capital Account keeps fluctuating
(changing). Thus, it is known as the Fluctuating Capital Method. Below transactions are recorded in the
Partners Capital Account under this method:
1.
Capital Introduced or the Opening Balance 2.
Additional Capital introduced during the year
3.
Interest on Capital
4.
Drawings made during the year
5.
Interest on Drawings
6.
Salary/ Commission to Partners
7.
Withdrawal of Capital
8.
Share of Profit or Loss
9.
Closing Balance

Format for Partners Capital Account under Fluctuating Capital Method:


Partners Capital Account
Dr.
Particulars
To Balance b/d (Debit Balance)
To Drawings A/c (Cash)
To Drawings A/c (Goods)
To Interest on Drawings A/c
To Cash/Bank A/c
(Withdrawal of Capital)
To Profit and Loss A/c
(Share of Loss)

To Balance c/d (Credit Balance)

X
`
xxx
xxx
xxx
xxx
xxx

Y
`
xxx
xxx
xxx
xxx
xxx

xxx

xxx

xxx

xxx

xxx

xxx

Particulars
By Balance b/d
(Credit Balance)
By Cash/Bank A/c
(Additional Capital)
By Assets A/c
(Capital in Kind)
By Interest on Capital A/c
By Interest on Loan A/c
By Salary A/c
By Commission A/c
By Profit and Loss A/c
(Share of Profit)
By Balance c/d (Debit Balance)

X
`
xxx

Cr.
Y
`
xxx

xxx

xxx

xxx

xxx

xxx
xxx
xxx
xxx
xxx

xxx
xxx
xxx
xxx
xxx

xxx

xxx

xxx

xxx

Notes:
i.
Credit Balance of Partners Capital Account is shown on the Liability side of the Balance sheet and Debit
Balance of Partners Capital Account is shown on the Asset side of the Balance sheet.
ii.
In the absence of information, partners follow Fluctuating Capital Method.
iii. Interest on Capital is paid on the Opening Balance only if date of additional capital is not given. If the date of
additional capital is given, then interest on capital will be given on total capital and will be calculated as under
a.
On Opening Balance for 12 months.
b.
On Additional Capital from date of additional capital to date of Balance Sheet i.e., 31st Mar.
Interest on Capital is paid only if there is a profit in the business.
iv.
Interest on Drawings is provided as under:
a.
If Drawings are made at the beginning of every month, Interest is charged for 6.5 months.
b.
If Drawings are made in the middle of every month, Interest is charged for 6 months.
c.
If Drawings are made at the end of every month, Interest is charged for 5.5 months.
d.
In absence of information, Interest is charged for 6 months.
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Chapter 01: Introduction to Partnership

Solved Examples
Q.1. Ram and Shyam are partners with their capital ` 30,000 and ` 20,000. Net Profit of the firm is ` 40,000,
what will be each partners share if:
i.
Partnership deed is silent or in the absence of information.
ii.
They share in the ratio of their capital.
iii. They share in ratio of 3 : 4.
iv. The profit is ` 19,001 and partners share equally.
Solution:
i.
If the partnership deed is silent or in the absence of information both partner will share Profits &
Losses equally i.e. 50 : 50
Rams Share
= ` 20,000
Shyams Share = ` 20,000.
ii.
If they share Profits & Losses in the ratio of their capital, then the Profit sharing ratio will be
calculated as under:
Ram : Shyam
30,000 : 20,000
i.e. 3 : 2
So, their profit will be
20, 000
3 = ` 12,000
Rams Share
=
5
20, 000
2 = ` 8,000
Shyams Share =
5
iii. If they share Profits & Losses in the ratio of 3 : 4 then profit will be calculated as under:
40, 000
3 = ` 17,143
Rams Share
=
7
40, 000
4 = ` 22,857
Shyams Share =
7
iv. If the profit is `19,001 and partners share equally, profit will be distributed as under:
Ram : Shyam
1
:
1
19, 001
i.e.
= ` 9,500.5
2
In this case, Profit will be shared as under
Rams Share = ` 9,501
Shyams Share = ` 9,500
` 1 is given more to Ram because he had contributed more capital as compared to Shyam.
Q.2. Calculate the Interest on Capital in the following situation:
Rate of interest is 12%. Capital of Ram ` 40,000, Laxman ` 60,000 and Shyam ` 30,000. Shyam was
admitted on 01-10-11 for year ending 31-3-12.
Solution:
No. of Monthsin the Firm
Interest on Partners Capital = Capital Rate of Interest
12
12 12

= ` 4,800
Interest on Rams Capital
= 40,000
100 12
12 12

= ` 7,200
Interest on Laxmans Capital = 60,000
100 12
12
6

= ` 1,800
Interest on Shyams Capital = 30,000
100 12
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Std. XII (Commerce): Book-Keeping & Accountancy

Q.3. Capital of Arjun is ` 20,000 and that of Kailash is ` 30,000 as on 01-04-11. Arjun introduced additional
capital of ` 15,000 on 01st Jan, 2012 and Kailash introduced additional capital of ` 10,000 on 01-07-2011.
What will be the amount of interest for the year ending 31-03-12, if rate of interest is 12%.
Solution:
i.
Interest on Arjuns capital will be calculated as under
12 12
a.
Arjuns Old Capital = 20,000

= ` 2,400
100 12
12
3
b.
Arjuns New Capital = 15,000

= ` 450
100 12
Total Interest on Arjuns Capital = 2,400 + 450 = ` 2,850
ii.
Interest on Kailashs Capital will be calculated as under
12 12
= ` 3,600

a.
Kailashs Old Capital = 30,000
100 12
12
9
b.
Kailashs New Capital = 10,000
= ` 900
100 12
Total Interest on Kailashs Capital = 3,600 + 900 = ` 4,500

Q.4. Bunty has a capital of ` 50,000 and Chunky has a capital of ` 30,000 as on 01-04-11. If the rate of interest
is 12% and Bunty had reduced his capital to ` 30,000 on 01-10-11, what will be interest on their capital as
on 31-03-2012.
Solution:
Interest on Buntys Capital will be calculated in two parts:
i.
Interest on ` 30,000 for 12 months
12
12

= 3,600
30,000
100 12
ii.
Interest on ` 20,000 for 6 months
12
6

= 1,200
20,000
100 12
Total Interest on Buntys capital = 3,600 + 1,200 = ` 4,800.
Interest on Chunkys Capital
12
= ` 3,600.
30,000
100
Q.5. Calculate the Interest on Drawings at the rate of 10% per annum in the following situations:
Drawings of Laxman ` 2,000 p.m.
i.
Made at the beginning of the month.
ii.
Made during the middle of the month.
iii. Made at the end of each month.
iv. If problem is silent about the date of withdrawal.
Solution:
i.
If ` 2,000 p.m. is withdrawn at the beginning of each month then interest will be calculated for
6.5 months.
10 6.5
2,000 12

= ` 1,300
100 12
ii.
If ` 2,000 p.m. is withdrawn during the middle of the month then interest on drawing will be
calculated for 6 months.
10
6

= ` 1,200
2,000 12
100 12
8

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iii.

iv.

Chapter 01: Introduction to Partnership

If ` 2,000 p.m. is withdrawn at the end of each month then interest on drawing will be calculated for
5.5 months.
10
5.5

= ` 1,100
2,000 12
100 12
If the problem is silent about the date of drawings then interest on drawings will be charged for 6 months.
10
6

= ` 1,200
2,000 12
100 12

Q.6. Gross profit of the firm is ` 60,000 and Vijay is paid 10% commission on gross profit then what will be his
commission?
Solution:
Vijays Commission will be:
10
= ` 6,000
60,000
100
Q.7. Net Profit of the firm is ` 18,000 after paying commission at the rate of 10% to Raman, a partner. What is
his commission and what is the profit before commission?
Solution:
Profit before commission (100) = Net Profit (90) + Ramans Commission (10)
100
= ` 20,000
= 18,000
90
10
Ramans Commission = 20,000
= ` 2,000
100
Q.8. Rahul and Sumit are partners sharing profits and losses in the ratio 2:1. On 1st April, 2012 their Capital
balances are Rahul ` 60,000 and Sumit ` 30,000, their drawings are ` 6,000 and ` 4,000 respectively.
According to the partnership deed, 10% interest is allowed on partners capital and 12% interest is charged
on their drawings. Rahul gets salary of ` 3,000 per month and Sumit is entitled to receive commission @
5% on sales which is ` 5,00,000. The profit of the firm is ` 30,000.
Prepare Partners Capital Account and Partners Current Account for the year ended 31st March, 2013 in the
below situations:
A. Fixed Capital Method
B.
Fluctuating Capital Method
Solution:
A.
Fixed Capital Method:
Partners Capital Account
Dr.
Cr.
Rahul
Sumit
Rahul
Sumit
Particulars
Particulars
`
`
`
`
By Balance b/d
60,000
30,000
To Balance c/d
60,000
30,000
60,000

30,000

60,000

30,000

Rahul
`
6,000
36,000

20,000

Cr.
Sumit
`
3,000

25,000
10,000

62,000

38,000

Partners Current Account


Dr.
Particulars

To Drawings A/c
To Interest on Drawings A/c
To Balance c/d

Rahul
`
6,000
360

Sumit
`
4,000
240

55,640

33,760

62,000

38,000

Particulars

By Interest on Capital A/c


By Salary A/c
By Commission A/c
By Profit & Loss A/c

Target Publications Pvt. Ltd.


B.

Std. XII (Commerce): Book-Keeping & Accountancy

Fluctuating Capital Method:


Partners Capital Account

Dr.
To Drawings A/c
To Interest on Drawings A/c

Rahul
`
6,000
360

Sumit
`
4,000
240

To Balance c/d

1,15,640

63,760

1,22,000

68,000

Particulars

Working Notes:
i.
Dr.
Particulars

To Interest on Capital A/c


Rahul
Sumit
To Rahuls Salary A/c
To Sumit Commission A/c
To Net Profit c/d
Rahul (2/3)
Sumit (1/3)

ii.

iii.

Particulars

By Balance b/d
By Interest on Capital A/c
By Salary A/c
By Commission A/c
By Profit & Loss A/c

Rahul
`
60,000
6,000
36,000

20,000

Cr.
Sumit
`
30,000
3,000

25,000
10,000

1,22,000

68,000

Amount
`

Cr.
Amount
`

360
240

600

Effects to Profit and Loss Account


Amount
`

Amount
`

6,000
3,000

20,000
10,000

9,000
36,000
25,000

Particulars

By Interest on Drawings A/c


Rahul
Sumit

30,000

Interest on Capital:
10
10
= ` 6,000; Sumit = 30,000
= ` 3,000
Rahul = 60,000
100
100
Interest on Drawings:
12
6
12
6

= ` 360; Sumit = 4,000

= ` 240
Rahul = 6,000
100 12
100 12

[Note: When the amounts of total drawings are given but date of withdrawals are not given then for calculation of
interest on drawings, the period would be taken as six months.]
iv.

Rahuls Salary = 3,000 12 = ` 36,000

v.

Commission on sales to Sumit = 5,00,000

vi.

Distribution of Profits:
Rahuls Share = 30,000

5
= ` 25,000
100

2
1
= ` 20,000; Sumits Share = 30,000 = ` 10,000
3
3

Q.9. Sona and Mona are partners. They started their business on 1-04-2012 on which date they contributed ` 3,00,000
each as their capital. On 1-07-2012, Sona purchased furniture of ` 60,000 for the firm from her personal
resources. On 1-10-2012, Mona supplied her own Machinery Costing ` 70,000 for the business of the firm. On
1-01-2013 Sona and Mona had withdrawn ` 30,000 & ` 40,000 respectively for their personal use.
The Partnership Deed provides for Interest on Capital @ 7% p.a. and Interest on Drawings @ 10% p.a.
Sona is to get salary of ` 2,000 per month starting from 1-07-2012 and Mona is to get commission on sales
@ 10%. Sales for the year is ` 2,00,000 and Net Profit for the year is ` 50,000.
Prepare Capital and Current Account of the Partners in the following situations:
A. Fixed Capital Method
B.
Fluctuating Capital Method
10

Target Publications Pvt. Ltd.

Chapter 01: Introduction to Partnership

Solution:
A.
Fixed Capital Method:
Partners Capital Account
Dr.
Particulars

Sona
`

Mona
`

Particulars

By Cash/Bank A/c
By Furniture A/c
By Machinery A/c
To Balance c/d

3,60,000

3,70,000

3,60,000

3,70,000

Sona
`
3,00,000
60,000

Cr.
Mona
`
3,00,000

70,000

3,60,000

3,70,000

Sona
`
24,150
18,000

25,000

Cr.
Mona
`
23,450

20,000
25,000

67,150

68,450

Sona
`
3,00,000
60,000

24,150
18,000

25,000

Cr.
Mona
`
3,00,000

70,000
23,450

20,000
25,000

4,27,150

4,38,450

Partners Current Account


Dr.
To Drawings A/c
To Interest on Drawings A/c

Sona
`
30,000
750

Mona
`
40,000
1,000

To Balance c/d

36,400

27,450

67,150

68,450

Particulars

B.

Particulars

By Interest on Capital A/c


By Salary A/c
By Commission A/c
By Profit & Loss A/c

Fluctuating Capital Method:


Partners Capital Account

Dr.
Particulars

To Drawings A/c
To Interest on Drawings A/c

To Balance c/d

Sona
`
30,000
750

Mona
`
40,000
1,000

3,96,400

3,97,450

4,27,150

4,38,450

Particulars

By Cash/Bank A/c
By Furniture A/c
By Machinery A/c
By Interest on Capital A/c
By Salary A/c
By Commission A/c
By Profit & Loss A/c

Working Notes:
i.
Interest on Capital:
a.
Calculation of Interest on Capital for Sona
7
12

= ` 21,000
Opening Capital = 3,00,000
100 12
7
9
Additional Capital = 60,000

= ` 3,150
100 12
Total Interest on Capital payable to Sona = 21,000 + 3,150 = ` 24,150
b.
Calculation of Interest on Capital for Mona
7
12

= ` 21,000
Opening Capital = 3,00,000
100 12
7
6

= ` 2,450
Additional Capital = 70,000
100 12
Total Interest on Capital payable to Mona = 21,000 + 2,450 = ` 23,450
11

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ii.

Interest on Drawings:

iii.

10
3

= ` 750
100 12
10
3

= ` 1,000
b.
Mona = 40,000
100 12
Sonas Salary:
2,000 9 = ` 18,000
Monas Commission:
10
= ` 20,000
2,00,000
100
a.

iv.

Std. XII (Commerce): Book-Keeping & Accountancy

Sona = 30,000

Objective Type Questions


I.

Answer in one sentence only:

[1 mark each]

*1. What is partnership?


Ans: Partnership is an association of two or more persons who agree to combine their financial resources
and managerial abilities to conduct a business and share profits and losses in an agreed ratio
*2. How many persons are required to form partnership business?
Ans: Minimum two persons are required to form partnership business.
*3. What is the liability of partners?
Ans: The Liability of Partners is Unlimited, Joint and Several.
*4. What is the relation between the partners?
Ans: The relationship between partners is that of Principal and Agent.
*5. Who is called nominal partner?
Ans: A partner who lends his name to the firm but does not have any interest in the business is known as a
Nominal Partner.
*6. Who is called Minor partner?
Ans: A partner of less than 18 years in age is called Minor Partner.
7.
What is the liability of the partner in profit only?
Ans: The Liability of a Partner in Profit only is Unlimited.
8.
Who is a Partner by Estoppel?
Ans: The person who is not actually a partner but, represents himself as a partner in front of third parties is
known as Partner by Estoppel.

*9. What is partnership deed? [Mar 12, Oct 11]


Ans: Partnership Deed is the written agreement between or among the partners that lays down the terms
and conditions of partnership and the rights, duties and obligations of partners for the internal
management of the firm.
*10. Why is partnership deed prepared?
Ans: Partnership deed is prepared to resolve future conflicts and disputes among partners.
*11. Which act is applicable to partnership business?
Ans: The Indian Partnership Act, 1932 is applicable to partnership business.
12.

At what rate is the Interest on Partners Loan is paid in the absence of provision in partnership
deed?
Ans: In the absence of a provision in partnership deed, Interest on Partners Loan is paid at 6% p.a.
12

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Chapter 01: Introduction to Partnership

*13. What are the methods of maintaining Partners Capital Account?


Ans: Fixed Capital Method and Fluctuating Capital Method are the two methods of maintaining Capital
Account of partners.
*14. What do you mean by Fixed Capital Method?
OR
What is Fixed Capital Method? [Mar 11]
Ans: Fixed Capital Method is a method of maintaining Capital Account of partner, where the capital is kept
fixed and all the other transactions are recorded by preparing Partners Current Account except, when
additional capital is introduced in the business or capital is withdrawn by a partner.
*15. What is Fluctuating Capital Method?
Ans: Fluctuating capital method is where all the transactions related to partners are recorded through
Partners Capital Account and there is no requirement to prepare Partners Current Account. In this
method, the capital of the partner is fluctuating.
*16. When is Partners Current Account opened?
Ans: Partners Current Account is opened under Fixed Capital Method.
II.

Write the word/ term/ phrase which can substitute each of the following statements:

[1 mark each]

*1.

An association of two or more persons to carry on business.

*2.

A partnership agreement between the partners in written form.

3.

Written terms of agreement between the partners.

4.

The maximum number of partner in banking business.

*5.

To close the business of partnership firm.

6.

The relationship between partners.

*7.

A partner who is engaged in day to day activities of the business.

8.

Active partner is also called as.

*9.

A partners who contributes only capital for the business but does not take any active part.

*10. A partner who provides only his name to the partnership firm. [Mar 08]
*11. A partner below the age of 18 years.
12.

A partner whose liability is limited.

*13. The partner who is entitled to share profits only.


*14. A partner who acts and behaves like a partner, but he is not a partner of the firm.
*15. A amount contributed by the partners into the business.
*16. An amount withdrawn by partner from the business for his personal use.
*17. Under this method capital balances of partner remains constant.
*18. Capital method in which Partners Current Account is opened.
19.

Capital method in which both, Capital Account and Current Account are maintained for each partner.

*20. Method of capital account in which capital balances of partners changes every year.
21.

Capital Method under which only Partners Capital Account is maintained.


13

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Ans: 1.
3.
5.
7.
9.
11.
13.
15.
17.
19.
21.
III.

Partnership
Partnership Deed
Dissolution
Active Partner
Sleeping Partner/Dormant Partner
Minor Partner
Partner in Profit Only
Partners Capital
Fixed Capital Method
Fixed Capital Method
Fluctuating Capital Method

Std. XII (Commerce): Book-Keeping & Accountancy

2.
4.
6.
8.
10.
12.
14.
16.
18.
20.

Partnership Deed
Ten
Principal and Agent
Working Partner
Nominal Partner
Minor Partner
Partner by Estoppel
Drawings
Fixed Capital Method
Fluctuating Capital Method

Select the most appropriate alternative from those given below and rewrite the statements:
[1 mark each]
*1. Partnership is an association of _______ or more persons.
(A) two
(B) seven
(C) ten
(D) twenty

2.

Partnership business must be _______.


(A) lawful
(C) voluntary

(B)
(D)

illegal
immoral

3.

Minimum _______ persons are required to form a partnership.


(B) two
(A) one
(C) three
(D) seven

*4.

Maximum _______ persons are required to form a partnership having trading business.
(A) twenty
(B) fifty
(C) seven
(D) ten

*5.

Maximum _______ persons are required to form a partnership having banking business.
(A) two
(B) seven
(C) ten
(D) twenty

*6.

The liability of the partner in a firm is _______.


(A) zero
(B)
(C) unlimited
(D)

limited
proportionate

7.

Partners are _______ liable for the debts of firm.


(A) individually
(B) jointly
(C) several
(D) personally

*8.

A partner who provides only capital to the firm is called as _______.


(A) active
(B) nominal
(C) sleeping
(D) minor

9.

A partner who does not take active part in the management of business is known as _______.
(A) Working Partner
(B) Sleeping Partner
(C) Nominal Partner
(D) Partners in Profit only

*10. A partner who lends only his name to the firm is called as _______ partner.
(A) partner in profits only
(B) partner by estoppel
(C) nominal
(D) minor
*11. A partner below 18 years of age is called as _______ partner.
(A) active
(B) sleeping
(C) nominal
(D) minor
14

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12.

Chapter 01: Introduction to Partnership

In the absence of partnership deed the partners share profits and losses in the _______ ratio.
(A) capital
(B) equal
(C) 1 : 2
(D) initial contribution

*13. The Indian Partnership Act is in force since _______. [Mar 10, Oct 10]
(A) 1932
(B) 1956
(C) 1960
(D) 1984
*14. The Interest on capital of a partner is credited to _______ Account.
(A) Trading
(B) Profit and Loss
(C) Partners Capital
(D) Cash
*15. The drawings of partners are transferred to _______ Account.
(A) Trading
(B) Profit and Loss
(C) Partners Capital
(D) Balance Sheet
*16. The interest on drawings is transferred to _______ side of Partners Current Account.
(A) debit
(B) credit
(C) asset
(D) liability
*17. If dates of drawings are not given interest on drawings is charged for _______ months.
(B) six
(A) three
(C) nine
(D) twelve
*18. Under fixed capital method, Capital Account and _______ Account is opened for each partner.
(A) Partners Drawing
(B) Partners Salary
(C) Partners Current
(D) Partners Commission
*19. Under Fixed Capital Method, salary or commission to partner is credited to _______ Account.
(A) Partners Capital
(B) Partners Current
(C) Partners Drawings
(D) Partners Salary
*20. A debit balance of Partners Current Account will appear on the _______ side of the Balance Sheet.
(A) Assets
(B) Liability
(C) Debit
(D) Credit

IV.

21.

The balance of Capital Account fluctuates under _______ Capital Method.


(A) Blocked
(B) Fluctuating
(C) Fixed
(D) Semi Blocked

22.

Under _______ Capital Method only Capital Account of partners is opened.


(A) Fixed
(B) Fluctuating
(C) Single
(D) Double

State whether the following statements are TRUE or FALSE:

*1.

Partnership is an association of two or more persons.

*2.

Partnership firm is a trading concern.

*3.

Partnership agreement must be in written form.

*4.

There is no limit to maximum number of partners in a firm.

5.

There can be partnership firm with 25 partners.

6.

There can be partnership only for the sharing of loss.

*7.

Partner must share profits and losses equally.

*8.

If the partnership deed is silent, partners share profits and losses equally.

[1 mark each]

15

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Std. XII (Commerce): Book-Keeping & Accountancy

9.

Each partner has a right to take part in the conduct of business.

10.

Partners not taking an active part in the business is called sleeping partner.

11.

The liability of the sleeping partner is limited.

*12. A partner who provides only capital to the firm is called as nominal partner.
13.

A partner who gives only his name to the business is called nominal partner.

*14. The liability of minor partner is limited.


15.

Partnership deed must always be in written form.

16.

Partnership firm in India is governed according to Indian Partnership Act 1932.

*17. The interest on drawings is an income of the partnership firm.


*18. An interest on capital is an expenditure of the partnership firm.
*19. Partners are entitled to get salary or commission.
*20. The balance of capital account remains constant under fixed capital method.
*21. Partners Current Account is opened when fluctuating capital method is adopted.
*22. Partners current account always shows credit balance.
*23. Capital Account always shows credit balance.
24.
Ans: 1.
5.
9.
13.
17.
21.

16

Adjustments to partners capital are passed through Current Account when the capitals are fluctuating.
True
2.
True
3.
False
4.
False
False
6.
False
7.
False
8.
True
True
10. True
11. False
12. False
True
14. True
15. True
16. True
True
18. True
19. False
20. True
False
22. False
23. False
24. False