NCERT Solutions for Class 12 Accountancy Chapter 1: Accounting for Partnership- Basic Concepts; Download for free

NCERT Solutions for Class 12 Accountancy Chapter 1: Jagran Josh brings to you appropriate and detailed solutions of  Class 12 NCERT Accountancy textbook Chapter-1, Accounting for partnership-Basic Concepts. You can download all the solutions for free, by clicking on the link below. Easy, appropriate and stepwise solutions have been prepared for better understanding of students. NCERT Accountancy Chapter 1 deals with understanding of the basic concepts of partnership in accountancy.

Following topics from this chapter should be laid emphasis on:

• Partnership Deed
• Distribution of profit among partners (profit and loss appropriation account)
• Interest on capital
• Interest on drawings
• Guarantee of profit to a partner
• Past Adjustments

Practise of NCERT solutions can help a student prepare well for upcoming CBSE Board Examination 2024 and relevant competitive examinations.

Related:

CBSE Class 12 Accountancy Syllabus 2023-24 (PDF)

CBSE Class 12 Accountancy Sample Paper 2023-24 (PDF)

NCERT Solutions are presented below as:

Short Answer Questions

1. Define Partnership Deed.

Ans. The legal agreement/document containing all the terms and conditions for the partnership(business/organization/firm), can be referred to as a Partnership Deed. It can be oral as well as written. Objective of the business, contribution of capital by each partner, ratio in which profits and losses will be shared by each partner form the partnership deed. All the members/partners of the partnership are required to sign this deed. In-order to avoid any kind of misunderstanding and disputes in the partnership, partners adhere to this agreement.

2. Why is it considered desirable to make the partnership agreement in writing?

Ans. Partnership Act 1932 states that it is not mandatory for a partnership agreement to be in written form. However, a written agreement can help in settling disputes and avoiding misunderstanding among the partners. In case of disputes, if the agreement is duly signed and registered, it could serve as an evidence in the court of law.

3. List the items which may be debited or credited in capital accounts of the partners when:

(i) Capitals are fixed.

(ii) Capital are fluctuating.

Ans. The following items may be debited and credited in capital accounts of the partners when:

(i) Capitals are fixed:

ii)Capitals are fluctuating:

          4.Why is Profit and Loss Appropriation Account prepared?

Ans. Profit and Loss Appropriation Account is prepared to show how profits are appropriated or distributed among the partners of a firm. It is an extension of Profit and Loss account. All adjustments related to partner’s salary, partner’s commission, interest on capital, interest on drawings etc are made through this account, thus it is also known as Profit and Loss Adjustment Account.

5. Give two circumstances under which the fixed capitals of partners may change.

Ans. Two circumstances under which the fixed capitals of partners may change are:

1. When fresh capital or additional capital is introduced by a partner.
2. Some amount from capital is withdrawn permanently.

Under both of these circumstances, consent of all the partners involved in the partnership is mandatory.

6. If a fixed amount is withdrawn on the first day of every quarter, for what period the interest on total amount withdrawn will be calculated? 

Ans. If a fixed amount is withdrawn on the first day of every quarter, for a period of seven and half months, the interest on total amount withdrawn will be calculated.

7.In the absence of Partnership deed, specify the rules relating to the following :

(i) Sharing of profits and losses.

(ii) Interest on partner’s capital.

(iii) Interest on Partner’s drawings.

(iv) Interest on Partner’s loan

(v) Salary to a partner.

Ans. In the absence of Partnership deed, the rules relating to the following are:

1. Sharing of Profit and Losses- Profit sharing ratio among the partners will be equal.
2. Interest on partner’s capital- No interest on partner’s capital can be given.

• Interest on partner’s drawings- No interest is charged on partner’s drawings.

1. Interest on partner’s loan- If a partner lends loan to the firm, he/she would get an interest at rate of 6% per annum.
2. Salary to a partner- No partner would get salary, if the partnership deed is absent.

Long Answer Questions

 1.What is meant by partnership? Explain its chief characteristics? Explain.

Ans. An agreement between two or more individuals to setup a business or share profit and losses of the  business/firm they plan to setup together, is called a partnership. It can be either oral or written. Section 4 of the Indian Partnership Act 1932 deals with the processes and peculiarities of partnership. It defines partnership as “ the relation between persons who have agreed to share the profits of a business carried upon by all or any of them acting for all”. People who have entered into a partnership are individually known as “partners” and collectively, the entity is known as a “firm”. The name under which the business is carried on is referred to as “firm name”.

Characteristics of partnership are listed as below:

• Two or more persons– Any partnership can only take place if there is an involvement of more than one individual. The minimum number of people to form a partnership is two and the maximum number for the same would be 100. Section 464 of the Companies Act 2013, states that the central government is responsible for allocation of number of partners in a firm. According to the union government’s prescription, the maximum number of partners in a firm should be 50.
• Agreement– Agreement is the most fundamental unit of a partnership. A partnership can only be counted as valid if it is associated with an agreement. It can be written as well as oral, but a written agreement is preferred as it can serve as an evidence in the court of law, in cases of disputes and misunderstandings.
• Business– Partnership can only be termed so, only if it done for the purpose of business. Co-ownership over a property does not account as partnership. For example: Rita and Hari have purchased a piece of land together, then they will be referred to as joint owners of the land, but, if they deal with selling of the piece of land, they will be known as partners.
• Mutual agency– The partnership acts as a mutual agency among all the partners. This means that all the partners are principal as well as agent of the business. Each one of them is entitled to participate in the business affairs. A partner can bind other members and other members can bind him/her by his/her acts in regard to the business. Partnership can only flourish if there is mutual agency among partners.
• Sharing of profit– The main objective of a partnership is sharing of its profits and losses. Though the definition as per the Indian Partnership Act defines partnership as relation between people who agree to share profits of a business, sharing of losses comes unsaid since partnership is based the concept of mutual agency, as described earlier.
• Liability of partners– Each member/partner in a partnership is liable to every action performed by any partner for the firm, while he/she is a partner. The liability of each partner in a partnership is unlimited. Sometimes, partners private assets can also be used to clear off firm’s debts.

2. Discuss the main provisions of the Indian Partnership Act 1932 that are relevant to partnership accounts if there is no partnership deed.

Ans. For smooth functioning of a partnership, it is important to sign a partnership deed. But sometimes, partnership begins to function without signing of any such document. In such situations, Indian Partnership Act 1932 comes handy. It has laid down some provisions that are relevant to partnership accounts if there is no partnership deed. Those provisions are as follows:

• Profit Sharing Ratio-If there is absence of partnership deed or so to say if a partnership deed is silent about the profit sharing ratio, then the profits and losses of the firm are to be distributed equally irrespective of the amount of capital put into the business by a partner.
• Interest on capital– No partner can have the right to claim any interest on the amount of capital contributed by him/her in the firm. But interest on the capital be given if it is agreed on by all the partners of the firm. If the partnership deed is silent, no interest on capital can be given to any partner.
• Interest on drawings– No interest would be charged on the drawings from the firm, if there’s no mention of interest in the deed.
• Interest on loan– If any partner has lent loan to the firm, he/she would be entitled to get an interest rate of 6% per annum.
• Remuneration for firm’s work– No partner would get salary or any form of remuneration for the conduct of business from the firm until and unless it is so mentioned in the partnership deed.

Apart from the aforementioned points, Indian Partnership Act specifies the subject of contract in the following cases:

• If any partner derives profit for his/her own self, by using the company’s property, company’s name or company’s connection, he/she would be liable for profit and pay to the firm.
• If any partner carries out any business related to the firm or poses threat to the firm by being its competitor, then he/she shall be accounted to pay to the firm, all profit he/she has made in that business.

3. Explain why it is considered better to make a partnership agreement in writing.

Ans. A partnership functions on the basis of an agreement. It can be presented either in written form or oral form. The written agreement signed by partners to share the losses and profits of a business can be called as partnership deed. It lays down terms and conditions of a business which makes it easy to solve misunderstandings and settle disputes. Though, Indian Partnership Act of 1932 does not necessitate a written agreement, it is advised to sign the partnership deed because it serves as a record for the future. In case of any disputes, the written agreement acts as a solid proof in the court of law.

The partnership deed consists of all details about the firm and lays down all the aspects that might affect relationships of partners. The clauses present in the deed can be altered on the account of agreement from every partner. It is important to properly draft and register a deed under the Stamps Act to avoid any discourse in the future.

4.Illustrate how interest on drawings will be calculated under various situations.

 Ans. Drawings refer to the withdrawal of money from the firm by a partner/partner(s) for their personal use. Agreement needs to have mention of interest on withdrawal for implication of interest. If the partnership deed is silent, no interest on drawings can be applied. But, if partnership deed contains provision regarding the same, the interest is charged at a mutually agreed rate, for the period for which drawings have been made.

Various situations under which interest on drawings is calculated are:

Situation 1: When fixed amount is withdrawn every month

Example: Amit withdraws 10,000 per month during year end on March 31^st. The interest on withdrawal of this amount under different situations will be:

 Case 1: When amount is withdrawn in the beginning of each month

            If a certain amount is withdrawn on the first day of the month, then interest on total amount would be calculated for 6^1/2 months. Mathematically, it can be calculated as:

Average Period= No. Of months of 1 drawings + No. Of month of last drawings

                                                                                                     2

                                  =                        12+1  

                                                                  2

                                 =    6^1/2  months

As per example;

Interest on drawings= Rs 1,20,000 x 8 x 13 x 1

                                                           100 x 2 x 12

                                              = Rs 5200

Case 2: When amount is withdrawn in the middle of each month

             In this case, nothing will be added or deducted from the total period. Th interest would be calculated for 6 months. Mathematically, it can be calculated as:

   Average Period= No. Of months of 1 drawings + No. Of month of last drawings

                                                                                                         2

                                     =                    11.5 +0.5

                                                                    2

                                     =    6  months

As per example;

Interest on drawings= Rs 1,20,000 x 8 x 6 x 1

                                                             100 x 12

                                            = Rs 4800

Case 3: When amount is withdrawn at the end of the each month

            If a certain amount is withdrawn at the end of the month, then interest on total amount would be calculated for 5^1/2 months. Mathematically, it can be calculated as:

Average Period= No. Of months of 1 drawings + No. Of month of last drawings

                                                                                                      2

                                   =                            11+0

                                                                      2

                       =                     5^1/2 months

As per example;

Interest on drawings= Rs 1,20,000 x 8 x 11 x 1

                                                         100 x 2 x 12

= Rs 4400

Solution 2: When fixed amount is withdrawn quarterly

Example:  Suppose Satish and Tilak are partners in a firm, sharing profits and losses equally. During financial year 2016–2017, Satish withdrew Rs. 30,000 quarterly. If interest is to be charged on drawings @ 8% per annum, the calculation of average period and interest on drawings will be as follows:

Case 1: When amount is withdrawn in the beginning of each quarter

             If the amount is withdrawn at the beginning of each quarter, the interest is calculated on the total money withdrawn during the year, for a period of seven and half months i.e., 12 + 3 

                                                                                                                                                                               2

As per example;

 Alternatively, the interest can be calculated on the total amount withdrawn during the accounting year, i.e. Rs. 1,20,000 for a period of 7½ months

=  (12+9+6+3)/4. as follows:

= Rs 12,000 x 8    x 15   x 1                                          

                              100     2       12

= Rs 6,000

Case 2: When the amount is withdrawn at the end of each quarter

            If the amount is withdrawn at the beginning of each quarter, the interest is calculated on the total money withdrawn during the year, for a period of four and half months i.e., 9 + 0

                                                                                                                                                                          2

As per example;

 Alternatively, the interest can be calculated on the total amount withdrawn during the accounting year, i.e. Rs. 1,20,000 for a period of 4½ months

=  (9+6+3+0)/4. as follows:

= Rs 12,000 x 8    x 9 x 1                                     

                              100   2    12

= Rs 3,600

Solution 3: When varying amounts are withdrawn at different intervals

 In this case the calculation is done by using the product method. For each withdrawal, multiply the money withdrawn by the period for which it remained withdrawn during the financial year. Here, period is referred to as from the time period the withdrawal has been made till the last day of the accounting year. Mathematically, it can be represented as

Total of products x Rate x 1  

                                                        12

Example: Shahnaz withdrew the following amounts from her firm, for personal use during the year ending March 31, 2017. Calculate interest on drawings by product method, if the rate of interest to be charged is 7 per cent per annum.

Interest= Sum of Products × Rate × 1

                                                                              12

           = Rs 4,30,000 x 7     x 1    

                                            100    12

         = 30100

               12

         =  Rs 2,508 (approx)

Solution 4: When dates of withdrawal are not specified

When dates of withdrawal are not specified, it is assumed that withdrawals have been made on a regular interval throughout the year.

Example: Shakila withdrew Rs. 60,000 from partnership firm during the year ending March 31, 2020 and the interest on drawings is to be charged at the rate of 8 per cent per annum. For calculation of interest, the period would be taken as six months, which is the average period assuming, that amount is withdrawn evenly in the middle of the month, throughout the year. The amount of interest on drawings works out to be Rs. 2,400 as follows:

      = Rs 60,000 x 8     x 6  

                                    100    12

     = Rs 2,400

5. How will you deal with a change in profit sharing ratio among existing partners? Take imaginary figures to illustrate your answer?

Ans. Change in profit sharing ratio can occur because of varied reasons such as death of a partner, retirement of a partner, admission of a partner into the partnership. Sometimes, partners among themselves decide on changing the profit sharing ratio. In any of the above cases, the amount of profit and loss to the date of change is credited or debited into the accounts of partners in their old profit sharing ratio. Multiple adjustments in various things such as goodwill, reserves and accumulated profits, profit or loss on the revaluation of the company, etc have to be considered.

Undistributed profits like general reserve are also similarly credited into the capital accounts of partners in the old sharing ratio. But, if existing partners make a change in their profit sharing ratio, some partners might gain at the expense of the rest loosing. So, the sacrificing partner has to be compensated by the gaining partner.

Illustration:

Reeta , Sita and Geeta are partners in a firm and share their profit at a ratio of 3:2:1. In future, they decide to share the ratio equally. On that date, the books of the firm shows 1,20,000 as the general reserve, profit due to revaluation of building of Rs 30,000. The entry is adjusted in the following manner without affecting the books of the account.

In this case, Reeta had to face a loss of 25,000 at the expense of Geeta. So, Geeta will have to compensate that particular amount for Reeta.

To find full exercise solutions of NCERT questions, click on the link below.

Also Read:

CBSE Class 12 Syllabus 2023-24 (All Subjects)

CBSE Class 12 Sample Papers 2023-24 (All Subjects)

NCERT Books for Class 12 (All Subjects)

NCERT Solutions for Class 12 (All Subjects)