Chapter Two
Partner's Accounts
- :These accounts include the following accounts
.Capital Accounts .1
.Interest on Capital = Capital Interest .2
.Partners Drawing account .3
.Interest on Drawing = Drawing's Interest .4
.Partner's Loan Account .5
.Interest on Partners Loan Account .6
.Partner's Salary Account .7
.Partner's Current Account .8
..………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
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Capital Interest
Interest will be allowed to each partner on the capital contributed by them.
While, computing such interest, due care must be taken of the capital
introduced of an accounting year. The accounting entries for such interest on
:capital will be as follows
Interest on Capital a/c xxx .1
Partner's Current a/c xxx
…………………………………………………
Profit and Loss Distribution a/c xxx .2
Interest on Capital a/c xxx
…………………………………………………
Example: - A, B, and C partners in partnership with capital I.D 360,000
divided between them at ratio 3: 2: 1. Partnership contract shows the interest
.on capital 6% per annual
.Required: - 1. Computed the Capital Interest
.Adjustment Entries .2
.Closing Entries .3
- :Solution
:Computed the Capital Interest .1
A. Capital = 360,000 * 3/6 = I.D 180,000
Interest = 180,000 * 6/100 = I.D 10,800
B. Capital = 360,000 * 2/6 = I.D 120,000
Interest = 120,000 * 6/100 = I.D 7,200
C. Capital = 360,000 * 1/6 = I.D 60,000
Interest = 60,000 * 6/100 = I.D 3,600
I.D 21,600
:Adjustment Entries .2
From: Bank a/c 360,000
To: Capital a/c
A. 180,000
B. 120,000
C. 60,000
)To record A, B, and C share capital at Partnership(
……………………………………………………………………
2
From: Capital Interest a/c 21,600
To: A. Current a/c 10,800
B. Current a/c 7,200
C. Current a/c 3,600
.……………………………………………………………………
:Closing Entry .3
From: Profit and Loss Distribution a/c 21,600
To: Capital Interest a/c 21,600
………………………………………………………………………
Example: - A. & B. Partners in Partnership with capital I.D 500,000 divide between
.them at ratio 3: 2
The partnership contract (agreement) shows the interest on capital at a rate 10% per
.year
.Required: - 1. Computed (Calculated) the Capital Interest
.Journal Entries .2
.Closing Entries .3
:Solution
.Computed (Calculated) the Capital Interest .1
Interest = Partner's Capital Share * Rate * Period
A. Capital = 500,000 * 3/5 = I.D 300,000
Interest = 300,000 * 10/100 = I.D 30,000
B. Capital = 500,000 * 2/5 = I.D 200,000
Interest = 200,000 * 10/100 = I.D 20,000
I.D 50,000
3
:Journal Entries .2
From: Bank a/c 500,000
To: Capital a/c
A. 300,000
B. 200,000
( (To record A and B share capital at partnership
………………………………………………………
Form: Capital Interest a/c 50,000
To: A. Current a/c 30,000
B. Current a/c 20,000
...……………………………………………………
:Closing Entry .3
From: Profit & Loss Distribution a/c 50,000
To: Capital Interest a/c 50,000
…………………………………………………………
Example: - At 31/12/2015 the trail balance shows: X. Capital I.D 400,000 and Y.
.Capital I.D 300,000 in X and Y partnership
.Partnership contract shows the interest on capital at a rate 8% per year
.Required: 1. Computed the Capital Interest
.Journal Entries .2
.Closing Entries .3
- :Solution
:Computed the Capital Interest .1
X. Interest = 400,000 * 8/100 = I.D 32,000
Y. Interest = 300,000 * 8/100 = I.D 24,000
I.D 56,000
OR X and Y interest together = 700,000 * 8/100 = I.D 56,000
……………………………………………………………………
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:Journal Entries .2
From: Bank a/c 700,000
To: Capital a/c
X. 400,000
Y. 300,000
)To record X and Y capital(
.………………………………………………
From: Capital Interest a/c 56,000
To: X. Current a/c 32,000
Y. Current a/c 24,000
.…………………………………………………
:Closing Entry .3
From: Profit & Loss Distribution a/c 56,000
To: Capital Entries /c 56,000
………………………………………………………
Interest on Partner's Drawings
The partnership agreement may provide for charging of interest on drawings, i.e. the
money withdrawn by the partners for their personal use out of the firm. All such
interest is computed on the basis of the period for which money remained outstanding
.from the partners during the course of the accounting year
- :The accounting entries for the interest on drawings will be as follows
Partner's Current Account (Individually) a/c xxx .1
To: Interest on Drawing a/c xxxx
.……………………………………………………
Interest on Drawing a/c xxx .2
To: Profit & Loss Distribution xxx
....…………………………………………………
Example: - At 1/7/2015 X. Drawing out I.D 15,000 cashes from the partnership bank
.account. The partnership contract shows the interest on drawing is 10% per year
5
.Required: - 1. Computed Interest on Partner's Drawing
.Journal Entries for above Transaction .2
- :Solution
:Computed Interest on Partner's Drawing .1
Interest = sum (amount) * Rate * Period
From 1/7/2015 to 31/12/2015 = 6 months
I.D 750 = 6/12 * 10/100 * 15,000 =
…………………………………………………………
:Journal Entries .2
From: X. Drawing a/c 15,000
To: Bank a/c 15,000
)To record the drawing by X. at 1/7/2015(
………………………………………………………
From: X. Current a/c 750
To: Interest on Drawing a/c 750
)To record Interest on X. Drawing on 31/12/2015(
………………………………………………………
Example: - On 31/12/2015 the trail balance of A & B partnership shows B. Drawing
account balance I.D 21,000 being at 1/10/2015. And contract shows drawing rate
.10%
.Required: - Adjustment entries on 31/12/2015
:Solution
Interest = amount * rate * period
From 1/10 to 31/12/2015 = 3 months
I.D 700 = 3/12 * 10/100 * 21,000 =
From: B. Current a/c 700
To: Interest on Drawing a/c 700
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…………………………………………………………
Interest on Partner's Loan
Interest will be allowed to partner whom give a loan to the partnership and the partner
contract shows the percentage. While, computing such interest, due care must be
:taken of loan given. We need to know the following
.Amount of the Loan .1
.Percentage Charged .2
.The Period .3
The interest = amount * (…%) * period
:Then we do the adjustment entries, as in the following example
Example: - A, B, and C partnership, C give Loan to the partnership at 1/4/2016
.At 10% per year. Of I.D 10,000
.Required: - 1. Compute the Loan Interest
.Adjustment Entries .2
.Closing Entries .3
:Solution
.Compute the Loan Interest .1
From 1/4 to 31/12/2016 = 9 months
Interest on Loan = 10,000 * 10/100 * 9/12 = I.D 750
..……………………………………………
:Adjustment Entry .2
From: Partner's Loan Interest a/c 750
To: Partner C. Current a/c 750
……………………………………………………
:Closing Entry .3
From: Profit & Loss a/c 750
7
To: Partner's Loan Interest a/c 750
...……………………………………………
Example: - P and S were in partnership sharing profits and losses at the ratio of 7: 3
.respectively. The capital was I.D 280,000 to P and I.D 120,000 to S
Interest on capital @ 5% per annum and S salary I.D 1,000 per month. Interest on
.drawing 8% . Interest on partner's loan 10%
:On 31st December 2015 the ledger book shows the following
Dr Cr
Net profit before interest on partner loan 76,125
Partner (P) loan I.D 15,000 starts at
1/4/2015
S. Salary 6,000
S. Drawing starts at 1/7/2015 5,000
P. Drawing starts at 1/10/2015 2,000
.Requires: - 1. Adjustments & Closing Entries
.Profit & Loss Distribution account .2
.Partner's Current account .3
:Solution
:Adjustments & Closing Entries .1
- :Capital interest -
P = 280,000 * 5/100 = 14,000
S = 120,000 * 5/100 = 6,000
Total = 20,000
From: Interest on Capital a/c 20,000
8
To: Current a/c
P. 14,000
S. 6,000
.……………………………………………………
From: Profit and Loss Distribution a/c 20,000
To: Interest on Capital a/c 20,000
……………………………………………………
Interest on (P) Loan: From 1/4/2015 to 31/12/2015 = 9 months -
I.D 1,125 = 9/12 * 10/100 * 15,000
From: Interest on Partner's Loan a/c 1,125
To: P. Current a/c 1,125
.……………………………………………………
From: Profit & Loss a/c 1,125
To: Interest on Partner's Loan a/c 1,125
………………………………………………………
:S. Salary -
Salary Per Year = 1,000 * 12 = I.D 12,000
Salary Paid (6,000)
Salary due I.D 6,000
From: S. Salary a/c 6,000
To: S. Current a/c 6,000
..…………………………………
From: Profit & Loss Distribution a/c 12,000
To: S. Salary a/c 12,000
……………………………………
From: Current a/c
9
P. 2,000
S. 5,000
To: P. Drawing a/c 2,000
S. Drawing a/c 5,000
…………………………………………
P. Drawing Interest = 2,000 * 8/100 * 3/12 = 40 -
S. Drawing Interest = 5,000 * 8/100 * 6/12 = 200
Total 240
From: P. Current a/c 40
S. Current a/c 200
To: Drawing Interest a/c 240
………………………………………
From: Drawing Interest a/c 240
To: Profit & Loss distribution a/c 240
:Profit & Loss Distribution .2
Profit & Loss a/c
Interest on Loan 1,125 Net Profit b/d 76,125
Net Profit c/d 75,000
76,125 76,125
From: Profit & Loss a/c 75,000
To: Profit & Loss Distribution a/c 75,000
....................................................................................................................
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Profit & Loss Distribution a/c
To S. Salary 12,000 By Profit & Loss 75,000
To Capital Interest 20,000 By Drawing Interest 240
To Current account 43,240
P. 43,240 * 7/10
S. 43,240 * 3/10
75,240 75,240
…………………………………………………………………………
Current Account
Data P S Total Data P S Total
Drawing 2,000 5,000 7,000 Capital Interest 14,000 6,000 20,000
P. Loan Interest 1,125 / 1125
Drawing intrese 40 200 240
S. Salary / 6,000
Balance 43353 19772 63125
26,125 12,000 15,125 26,125 12,000 15,125
Example
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At 1/1/2015 X, Y, and Z agreed to form a partnership with capital I.D 600,000 .1
divided between them at ratio 5: 3: 2. They deposited all the capitals in the partnership
.bankaccount
.X. Lend the partnership I.D 30,000 paid into partnership bank account at 1/7/2015 .2
Y. Draw out I.D 6,000 for his personal use from the partnership bank account at .3
.1/10/2015
:The partnership contract shows the follows
.Capital interest at a rate 5% per year -
.Partner's Drawing interest at rate 8% -
.Partner's loan interest at rate 10% -
.Z. Salary is I.D 12,000 per year -
.Required: - 1. Journal Entries During the Year
.Adjustment Entries at 31/12/2015 .2
.Prepare Current account .3
- :Solution
X. Share = 600,000 * 5/10 = I.D 300,000
Y. Share = 600,000 * 3/10 = I.D 180,000
Z. Share = 600,000 * 2/10 = I.D 120,000
.1/1/2015 -
From: Bank a/c 600,000
To: Capital a/c
X. 300,000
Y. 180,000
Z. 120,000
)To record X, Y, and Z capitals at 1/1/2015(
..………………………………………………………
.1/7/2015 -
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From: Bank a/c 30,000
To: X. Loan a/c 30,000
.…………………………………………………
.1/10/2015 -
From: Y. Drawing a/c 6,000
To: Bank a/c 6,000
…………………………………………………
Capital Interest = Amount * Rate .31/12/2015
X. Capital Interest = 300,000 * 5/100 = I.D 15,000
Y. Capital Interest = 180,000 * 5/100 = I.D 9,000
Z. Capital interest = 120,000 * 5/100 = I.D 6,000
Total Interest I.D 30,000
From: Capital Interest a/c 30,000
To: X. Current a/c 15,000
Y. Current a/c 9,000
Z. Current a/c 6,000
.Note / Capital Interest is Closed in P.L.D
..………………………………………………………………
Drawing Interest = Amount * Rate * Period .31/12/2015
From 1/10 to 31/12/2015 = 3 months
I.D 120 = 8/100 * 3/12 * 6,000 =
From: Y. Current a/c 120
To: Drawing Interest a/c 120
.Note / Interest on Drawing is Closing in P.L
.…………………………………………………………………
Loan Interest = Amount * Rate * Period .31/12/2015
13
From 1/7 to 31/12/2015 = 6 months
I.D 1,500 = 10/100 * 6/12 * 30,000 =
From: Loan Interest a/c 1,500
To: X. Current a/c 1,500
.Note / Its Closing in P.L.D
.………………………………………………………
From: Z. Salary a/c 12,000
To: Current a/c 12,000
..…………………………………………………………
Current a/c
Data X Y Z Data X Y Z
Drawing Inter. 120 Capital Inter. 15,000 9,000 6,000
Loan Interest 1,500
Z. Salary 12,000
Current Forward
Bal. c/f 16,500 8,880 18,000
18,000 9,000 16,500 18,000 9,000 16,500
Example
:On 31/12/2016 the trail balance of A, B, and C partnership show
Dr Cr
14
A. Capital a/c 100,000
B. Capital a/c 75,000
C. Capital a/c 50,000
A. Loan a/c 1/4/2016 2,000
B. Drawing a/c 1/10/2016 8,000
C. Salary a/c 9,000
:The partnership contract shows the following
.Capital Interest at rate 6% per year -
.Drawing Interest at rate 8% per year -
.Partner's loan interest at rate 10% per year -
.C. Salary I.D 1,000 per month -
.Required: - 1. Adjustment Entries at 31/12/2016
.Prepare Current Account .2
- :Solution
:Adjustment Entries .1
A. Capital Interest = 100,000 * 6/100 = I.D 6,000 -
B. Capital Interest = 75,000 * 6/100 = I.D 4,500
C. Capital Interest = 50,000 * 6/100 = I.D 3,000
From: Capital Interest a/c 13,500
To: A. Current a/c 6,000
B. Current a/c 4,500
C. Current a/c 3,000
.………………………………………………………
From 1/10 to 31/12/2016 = 3 months
B. Drawing Interest = 8,000 * 8/100 * 3/12 = I.D 160
From: B. Current a/c 160
15
To: Interest on Drawing a/c 160
.…………………………………………………
From 1/4 to 31/12/2016 = 9 months
A. Loan Interest = 2,000 * 10/100 * 9/12 = I.D 150
From: Interest on Partner's Loan a/c 150
To: A. Current a/c 150
.…………………………………………………
C. Salary = 1,000 * 12 = I.D 12,000
From: C. Salary a/c 3,000
To: Current a/c 3,000
………………………………………………………………
:Prepare Current Account .2
Current a/c
Data A B C Data A B C
Drawing Interest 160 Capital Inter. 6,000 4,500 3,000
Loan Interest 150
C. Salary 12,000
Balance c/f 6,150 4,340 15,000
15,000 4,500 6,150 15,000 4,500 6,150
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