Chapter 3 — Accounts of Partnership Firms — Fundamentals: Exercise Solutions Guide
How to Use This Page
Study the textbook chapter thoroughly before consulting this guide. Attempt all exercise questions on your own first. For calculation-heavy problems (interest on capital, profit appropriation), write every step — board examiners award marks for working notes. Pay special attention to the distinction between "fixed" and "fluctuating" capital methods, and memorise the default provisions of the Indian Partnership Act when there is no deed.
Key Concepts (Quick Recap)
- Partnership: An association of two or more persons carrying on a business to share profits. Governed by the Indian Partnership Act, 1932.
- Partnership Deed: A written agreement among partners covering profit-sharing ratio, interest on capital, salary, commission, drawings, etc.
- Default Provisions (no deed): Profit shared equally; no interest on capital; no salary/commission; no interest on drawings; 6% p.a. interest on partner's loan.
- Interest on Capital:
IOC = Capital × Rate × Time. Always credited to the partner and debited to P&L Appropriation. - Interest on Drawings:
IOD = Drawings × Rate × Time. Debited to partner and credited to P&L Appropriation. Product method or average period method may be used. - Fixed Capital Method: Two accounts per partner — Capital Account (fixed, changes only with additional capital/withdrawal of capital) and Current Account (all other adjustments).
- Fluctuating Capital Method: Single account per partner — all items (capital, interest, salary, drawings, share of profit) in one account.
- Profit Appropriation: After charging interest on loan, the net profit is distributed: first charge interest on capital, salary, commission; then credit interest on drawings; finally distribute remaining profit in ratio.
- P&L Appropriation Account: Prepared after the P&L Account to show how profit is appropriated among partners.
I. Choose the Best Answer (MCQs)
1. In the absence of a partnership deed, profit is shared: (a) In the ratio of capital (b) Equally ✓ (c) In the ratio of time devoted (d) As decided by the senior partner
ExplanationUnder Section 13 of the Indian Partnership Act, if there is no agreement, profits are shared equally regardless of capital contribution.
2. In the absence of a partnership deed, interest on a partner's loan is: (a) 5% p.a. (b) 6% p.a. ✓ (c) 12% p.a. (d) Not allowed
ExplanationEven without a deed, a partner who has given a loan to the firm is entitled to interest at 6% p.a. This is a charge against profit, not an appropriation.
3. Interest on capital is allowed only when: (a) The partnership deed provides for it ✓ (b) The partner demands it (c) There is sufficient profit (d) Both (a) and (c)
ExplanationInterest on capital is allowed only if the partnership deed expressly provides for it. Even then, it is payable only if there is sufficient profit (it is an appropriation, not a charge).
4. A partner's current account shows a debit balance. This means: (a) The partner is entitled to withdraw more (b) The partner has drawn more than their share ✓ (c) The firm owes the partner (d) The capital is insufficient
ExplanationA debit balance in the current account indicates that the partner's drawings and debits exceed credits, meaning the partner has drawn more than their entitlement.
5. In the fixed capital method, interest on capital is credited to the: (a) Capital Account (b) Current Account ✓ (c) P&L Account (d) P&L Appropriation Account
ExplanationUnder the fixed capital method, the capital account remains fixed. All adjustments including interest on capital, salary, share of profit are recorded in the Current Account.
6. When the partnership deed is silent on interest on drawings: (a) 6% interest is charged (b) No interest is charged ✓ (c) 12% interest is charged (d) RBI rate is charged
ExplanationInterest on drawings is charged only if the partnership deed expressly provides for it. In its absence, no interest is charged.
7. The P&L Appropriation Account is prepared: (a) Before the P&L Account (b) After the P&L Account ✓ (c) Instead of the P&L Account (d) Before the Balance Sheet only
ExplanationThe P&L Appropriation Account is prepared after the P&L Account to show how the net profit is distributed among partners.
8. Salary to a partner is: (a) Debited to P&L Account (b) Debited to P&L Appropriation Account ✓ (c) Credited to P&L Account (d) Shown in the Balance Sheet
ExplanationSalary to a partner is an appropriation of profit, not a charge. It is debited to the P&L Appropriation Account and credited to the partner's Current Account.
9. If profit is ₹50,000 and interest on capital is ₹60,000, the interest payable is: (a) ₹60,000 (b) ₹50,000 ✓ (c) ₹30,000 (d) Nil
ExplanationInterest on capital is an appropriation of profit. If profit is insufficient, interest is paid proportionately or as per the deed. If the deed is silent on proportionate payment, it is limited to available profit — ₹50,000 in this case.
10. Commission to a partner is: (a) A charge against profit (b) An appropriation of profit ✓ (c) Not allowed at all (d) Shown as a liability
ExplanationCommission to a partner, like salary and interest on capital, is an appropriation of profit (unless it is a charge as per the deed). It is debited to the P&L Appropriation Account.
II. Fill in the Blanks
1. In the absence of a partnership deed, profits are shared equally by the partners. 2. In the absence of a partnership deed, interest on a partner's loan is 6% p.a. 3. Interest on capital is an appropriation of profit, not a charge. 4. Interest on drawings is debited to the partner's account and credited to the P&L Appropriation Account. 5. Under the fixed capital method, two accounts are maintained for each partner. 6. Under the fluctuating capital method, all adjustments are made in a single capital account. 7. The P&L Appropriation Account shows the distribution of profit among partners. 8. A debit balance in a partner's current account indicates that the partner has withdrawn more than entitled. 9. When the deed provides for interest on capital but profit is insufficient, interest is paid proportionately or limited to available profit. 10. Salary to a partner is debited to the P&L Appropriation Account.
III. True or False
1. In the absence of a deed, interest on capital is allowed at 6% p.a. ✗ False — No interest on capital is allowed in the absence of a partnership deed.
2. Interest on a partner's loan is a charge against profit, not an appropriation. ✓ True — Interest on loan is payable even if there is a loss. It is charged before calculating net profit.
3. Under the fluctuating capital method, the capital account balance changes frequently. ✓ True — All items (interest, salary, drawings, profit share) are recorded in the capital account itself, causing frequent changes.
4. Profit and Loss Appropriation Account is prepared before the Profit and Loss Account. ✗ False — It is prepared after the P&L Account, to show how the net profit is distributed.
5. A partner can be both a debtor and a creditor of the firm simultaneously. ✓ True — If the current account has a debit balance, the partner is a debtor. If the capital account has a credit balance, the partner is a creditor.
6. Drawings by a partner reduce the partner's capital under the fixed capital method. ✗ False — Under the fixed capital method, drawings are recorded in the Current Account, not the Capital Account.
7. Commission to a partner is always a fixed percentage of profit. ✗ False — Commission may be a fixed amount, a percentage of profit, or a percentage of turnover, depending on the partnership deed.
IV. Match the Following
| Column A | Column B |
|---|
| 1. No partnership deed | (c) Equal profit sharing |
| 2. Interest on partner's loan | (f) 6% p.a. (charge) |
| 3. Interest on capital | (e) Appropriation of profit |
| 4. Fixed capital method | (a) Capital A/c + Current A/c |
| 5. Fluctuating capital method | (b) Single capital A/c |
| 6. P&L Appropriation A/c | (d) Distribution of profit |
V. Answer Briefly
1. What is a partnership deed? State its contents.
Answer
A partnership deed is a written agreement among partners that defines the terms and conditions of the partnership. It typically includes: (i) Name and address of the firm, (ii) Names and addresses of partners, (iii) Nature of business, (iv) Capital contribution by each partner, (v) Profit-sharing ratio, (vi) Rate of interest on capital, drawings, and loans, (vii) Salary and commission to partners, (viii) Method of valuation of goodwill, (ix) Rules regarding admission, retirement, and dissolution, (x) Accounting period and method.
2. State the provisions of the Indian Partnership Act applicable in the absence of a partnership deed.
Answer
Under Section 13 of the Indian Partnership Act, 1932, when there is no partnership deed (or the deed is silent): (i) Profits and losses are shared equally, regardless of capital. (ii) No interest on capital is allowed. (iii) No salary or commission is allowed to any partner. (iv) No interest on drawings is charged. (v) Interest on a partner's loan to the firm is allowed at 6% p.a. (charge against profit). (vi) Every partner has a right to participate in business. (vii) No partner can be admitted without the consent of all partners.
3. Distinguish between fixed capital method and fluctuating capital method.
Answer
| Basis | Fixed Capital Method | Fluctuating Capital Method | |---|---|---| | Accounts | Two per partner: Capital A/c and Current A/c | One per partner: Capital A/c only | | Capital balance | Remains unchanged (only changes with additional capital or capital withdrawal) | Changes frequently with every transaction | | Adjustments | Recorded in Current A/c | Recorded in Capital A/c | | Items in Capital A/c | Opening balance, additional capital, capital withdrawal | All items including interest, salary, drawings, profit | | Items in Current A/c | Interest on capital, salary, commission, drawings, share of profit | Not applicable | | Complexity | More detailed | Simpler |
4. How is interest on drawings calculated using the product method?
Answer
Under the product method: 1. Calculate the product for each withdrawal: Product = Amount × Number of months remaining in the year 2. Find the total of all products. 3. Interest = Total Products × Rate / 12 This method is used when drawings are made at different dates during the year and interest is calculated for the period each drawing remains with the firm.
5. What is the P&L Appropriation Account? How is it prepared?
Answer
The P&L Appropriation Account is a nominal account that shows how the net profit of the firm is distributed among partners. It is prepared after the P&L Account. Debit side: Interest on capital, salary, commission to partners, share of profit/loss transferred to partners, transfer to reserves. Credit side: Net profit (from P&L Account), interest on drawings. The balance (if any) is transferred to partners' capital/current accounts.
6. What is the guarantee of minimum profit to a partner?
Answer
A partner may be guaranteed a minimum share of profit by one or more partners or by the firm. If the partner's actual share is less than the guaranteed amount, the deficiency is borne by the guaranteeing partner(s). For example, if A is guaranteed ₹20,000 and earns only ₹15,000, the shortfall of ₹5,000 is contributed by the guaranteeing partner(s).
7. How is interest on capital calculated when capital changes during the year?
Answer
When a partner introduces additional capital or withdraws capital during the year, interest is calculated separately for each period: Interest = (Capital × Rate × Months/12) + (Additional Capital × Rate × Months/12) Each amount of capital earns interest for only the period it was actually in the business.
8. Write a note on interest on a partner's loan.
Answer
Interest on a partner's loan is a charge against profit, not an appropriation. It is payable even if the firm incurs a loss. In the absence of a partnership deed, interest is allowed at 6% p.a. It is calculated on the loan amount for the period it was outstanding. It is debited to the P&L Account (as a charge) and credited to the partner's loan account.
VI. Answer in Detail
1. A and B are partners sharing profits in the ratio 3:2. Their capitals are ₹2,00,000 and ₹1,00,000 respectively. The partnership deed provides for interest on capital at 10% p.a., salary to B ₹15,000 p.a., and commission to A ₹10,000. Net profit before appropriations is ₹1,00,000. Prepare the P&L Appropriation Account and Partners' Capital Accounts (fluctuating method).
Answer
P&L Appropriation Account | Dr. | ₹ | Cr. | ₹ | |---|---|---|---| | Interest on Capital: | | Net Profit | 1,00,000 | | A (2,00,000 × 10%) | 20,000 | | | | B (1,00,000 × 10%) | 10,000 | | | | Salary to B | 15,000 | | | | Commission to A | 10,000 | | | | Share of Profit: | | | | | A (45,000 × 3/5) | 27,000 | | | | B (45,000 × 2/5) | 18,000 | | | | Total | 1,00,000 | Total | 1,00,000 | Verification: 20,000 + 10,000 + 15,000 + 10,000 = 55,000 (appropriations). Remaining profit = 1,00,000 − 55,000 = 45,000. A's share = 45,000 × 3/5 = 27,000. B's share = 45,000 × 2/5 = 18,000. Partners' Capital Accounts (Fluctuating Method) | Dr. | A (₹) | B (₹) | Cr. | A (₹) | B (₹) | |---|---|---|---|---|---| | Balance c/d | 2,57,000 | 1,43,000 | Balance b/d | 2,00,000 | 1,00,000 | | | | | Interest on Capital | 20,000 | 10,000 | | | | | Salary | — | 15,000 | | | | | Commission | 10,000 | — | | | | | Share of Profit | 27,000 | 18,000 | | Total | 2,57,000 | 1,43,000 | Total | 2,57,000 | 1,43,000 |
2. X and Y are partners with capitals of ₹3,00,000 and ₹2,00,000 respectively, sharing profits equally. The partnership deed provides for interest on capital at 8% p.a. and interest on drawings at 6% p.a. X withdrew ₹24,000 at the beginning of each quarter and Y withdrew ₹12,000 at the end of each quarter. Net profit before appropriations is ₹1,20,000. Prepare the P&L Appropriation Account and Partners' Current Accounts (fixed capital method).
Answer
Interest on Capital: - X: 3,00,000 × 8% = ₹24,000 - Y: 2,00,000 × 8% = ₹16,000 Interest on Drawings: - X withdrew ₹24,000 at the beginning of each quarter (4 quarters): - Average period = (12 + 3) / 2 = 7.5 months (using beginning of quarter) - Alternatively by product method: - 24,000 × 12 = 2,88,000 - 24,000 × 9 = 2,16,000 - 24,000 × 6 = 1,44,000 - 24,000 × 3 = 72,000 - Total products = 7,20,000 - Interest = 7,20,000 × 6% / 12 = ₹3,600 - Y withdrew ₹12,000 at the end of each quarter (4 quarters): - Product method: - 12,000 × 9 = 1,08,000 - 12,000 × 6 = 72,000 - 12,000 × 3 = 36,000 - 12,000 × 0 = 0 - Total products = 2,16,000 - Interest = 2,16,000 × 6% / 12 = ₹1,080 P&L Appropriation Account | Dr. | ₹ | Cr. | ₹ | |---|---|---|---| | Interest on Capital: | | Net Profit | 1,20,000 | | X | 24,000 | Interest on Drawings: | | | Y | 16,000 | X | 3,600 | | Share of Profit: | | Y | 1,080 | | X (42,340 × 1/2) | 42,340 | | | | Y (42,340 × 1/2) | 42,340 | | | | Total | 1,24,680 | Total | 1,24,680 | Partners' Current Accounts | Dr. | X (₹) | Y (₹) | Cr. | X (₹) | Y (₹) | |---|---|---|---|---|---| | Interest on Drawings | 3,600 | 1,080 | Interest on Capital | 24,000 | 16,000 | | Drawings | 96,000 | 48,000 | Share of Profit | 42,340 | 42,340 | | Balance c/d | — | 9,260 | | | | | | | | Balance b/d | — | 9,260 | X: Credits = 24,000 + 42,340 = 66,340; Debits = 3,600 + 96,000 = 99,600 → Debit exceeds by 33,260 (debit balance) Y: Credits = 16,000 + 42,340 = 58,340; Debits = 1,080 + 48,000 = 49,080 → Credit exceeds by 9,260
3. A, B, and C are partners sharing profits in the ratio 5:3:2. Their capitals are ₹5,00,000, ₹3,00,000, and ₹2,00,000 respectively. The deed provides: interest on capital at 8% p.a., salary to B ₹20,000 p.a., and commission to the manager at 10% of net profit after charging such commission. Net profit before appropriations is ₹2,50,000. Prepare P&L Appropriation Account.
Answer
Interest on Capital: - A: 5,00,000 × 8% = ₹40,000 - B: 3,00,000 × 8% = ₹24,000 - C: 2,00,000 × 8% = ₹16,000 - Total IOC = ₹80,000 Manager's Commission: - Commission = Net Profit × Rate / (100 + Rate) = 2,50,000 × 10/110 = ₹22,727 (approx.) P&L Appropriation Account | Dr. | ₹ | Cr. | ₹ | |---|---|---|---| | Interest on Capital: | | Net Profit | 2,50,000 | | A | 40,000 | | | | B | 24,000 | | | | C | 16,000 | | | | Salary to B | 20,000 | | | | Manager's Commission | 22,727 | | | | Share of Profit: | | | | | A (1,27,273 × 5/10) | 63,637 | | | | B (1,27,273 × 3/10) | 38,182 | | | | C (1,27,273 × 2/10) | 25,454 | | | | Total | 2,50,000 | Total | 2,50,000 | Verification: 80,000 + 20,000 + 22,727 = 1,22,727. Remaining = 2,50,000 − 1,22,727 = 1,27,273. A: 1,27,273 × 5/10 = 63,637 | B: 1,27,273 × 3/10 = 38,182 | C: 1,27,273 × 2/10 = 25,454
4. Explain the guarantee of minimum profit to a partner with a worked example.
Answer
When a partner is guaranteed a minimum amount of profit, and their actual share falls short, the deficiency is borne by the guaranteeing partner(s). Worked Example: A, B, and C share profits in the ratio 3:2:1. C is guaranteed a minimum profit of ₹30,000 by A. Net profit is ₹1,20,000. Step 1: Calculate each partner's share - A: 1,20,000 × 3/6 = ₹60,000 - B: 1,20,000 × 2/6 = ₹40,000 - C: 1,20,000 × 1/6 = ₹20,000 Step 2: Check guarantee - C's share = ₹20,000, but guaranteed = ₹30,000 - Deficiency = ₹30,000 − ₹20,000 = ₹10,000 - This deficiency is borne by A (who gave the guarantee) Step 3: Final distribution - A: 60,000 − 10,000 = ₹50,000 - B: ₹40,000 (no change) - C: 20,000 + 10,000 = ₹30,000 - Total = 50,000 + 40,000 + 30,000 = ₹1,20,000 ✓ Journal Entries: `` Profit & Loss Appropriation A/c Dr. 1,20,000 To A's Capital/Current A/c 50,000 To B's Capital/Current A/c 40,000 To C's Capital/Current A/c 30,000 `` If the guarantee is given by both A and B equally, then the ₹10,000 deficiency is shared by A and B in their mutual ratio (3:2 or equally, as specified): - A bears: 10,000 × 3/5 = ₹6,000 - B bears: 10,000 × 2/5 = ₹4,000 Final distribution: - A: 60,000 − 6,000 = ₹54,000 - B: 40,000 − 4,000 = ₹36,000 - C: 20,000 + 10,000 = ₹30,000
5. Explain interest on drawings with the product method using a worked example.
Answer
When drawings are made at irregular intervals, the product method is used to calculate interest. Each drawing is multiplied by the number of months remaining until the end of the financial year. Worked Example: Partner X makes the following drawings during the year ended 31.3.2026: | Date | Amount (₹) | Months remaining | Product (₹) | |---|---|---|---| | 1.5.2025 | 10,000 | 11 | 1,10,000 | | 1.8.2025 | 8,000 | 8 | 64,000 | | 1.11.2025 | 12,000 | 5 | 60,000 | | 1.2.2026 | 6,000 | 2 | 12,000 | | Total | 36,000 | | 2,46,000 | Interest on drawings @ 9% p.a.: `` Interest = Total Products × Rate / 12 = 2,46,000 × 9% / 12 = 2,46,000 × 9 / 1200 = ₹1,845 ``
6. From the following information, prepare P&L Appropriation Account and Partners' Capital Accounts. A and B are partners sharing profits 3:2. Capitals: A ₹4,00,000, B ₹2,50,000. Deed provides: IOC @ 10% p.a., salary to B ₹25,000 p.a., IOD @ 12% p.a. Drawings: A ₹30,000 on 1.10.2025, B ₹20,000 on 1.1.2026. Net profit ₹2,00,000.
Answer
Interest on Capital: - A: 4,00,000 × 10% = ₹40,000 - B: 2,50,000 × 10% = ₹25,000 - Total IOC = ₹65,000 Interest on Drawings: - A: 30,000 × 12% × 6/12 = ₹1,800 (6 months from 1.10.2025 to 31.3.2026) - B: 20,000 × 12% × 3/12 = ₹600 (3 months from 1.1.2026 to 31.3.2026) - Total IOD = ₹2,400 P&L Appropriation Account | Dr. | ₹ | Cr. | ₹ | |---|---|---|---| | Interest on Capital: | | Net Profit | 2,00,000 | | A | 40,000 | Interest on Drawings: | | | B | 25,000 | A | 1,800 | | Salary to B | 25,000 | B | 600 | | Share of Profit: | | | | | A (1,11,800 × 3/5) | 67,080 | | | | B (1,11,800 × 2/5) | 44,720 | | | | Total | 2,01,800 | Total | 2,01,800 | Partners' Capital Accounts (Fluctuating Method) | Dr. | A (₹) | B (₹) | Cr. | A (₹) | B (₹) | |---|---|---|---|---|---| | Drawings | 30,000 | 20,000 | Balance b/d | 4,00,000 | 2,50,000 | | Interest on Drawings | 1,800 | 600 | Interest on Capital | 40,000 | 25,000 | | Balance c/d | 4,75,280 | 3,24,120 | Salary | — | 25,000 | | | | | Share of Profit | 67,080 | 44,720 | | Total | 5,07,080 | 3,44,720 | Total | 5,07,080 | 3,44,720 | (Verify: A = 4,00,000 + 40,000 + 67,080 − 30,000 − 1,800 = 4,75,280 ✓) (Verify: B = 2,50,000 + 25,000 + 25,000 + 44,720 − 20,000 − 600 = 3,24,120 ✓)
Common Mistakes to Avoid
1. Charging interest on capital when there is no partnership deed — Without a deed, NO interest on capital, salary, or commission is allowed. Only interest on partner's loan at 6% p.a. 2. Treating interest on capital as a charge instead of an appropriation — Interest on capital is an appropriation, payable only if there is sufficient profit. Interest on a partner's loan is a charge, payable even in loss. 3. Calculating interest on drawings using the wrong period — Use the product method when drawings are at irregular dates. For uniform drawings, use the average period method. 4. Forgetting to add interest on drawings to the credit side of P&L Appropriation — Interest on drawings increases the available profit for distribution. 5. Not maintaining separate Capital and Current accounts under the fixed method — Under the fixed capital method, all appropriations go to the Current Account. Mixing them up leads to wrong balances. 6. Guarantee of minimum profit — When a partner's share is less than the guaranteed amount, the deficiency must be borne by the guaranteeing partner(s), not the firm.
Exam Checklist
- [ ] I know the default provisions of the Indian Partnership Act (no deed scenario)
- [ ] I can calculate interest on capital (with and without capital changes during the year)
- [ ] I can calculate interest on drawings using both the product method and average period method
- [ ] I can prepare a P&L Appropriation Account with all adjustments
- [ ] I can prepare Partners' Capital Accounts (both fixed and fluctuating methods)
- [ ] I can prepare Partners' Current Accounts under the fixed capital method
- [ ] I can handle guarantee of minimum profit to a partner
- [ ] I can handle manager's commission (before/after charging)
- [ ] I understand the difference between charge and appropriation items
