Partnership and LLP Accounts for CA Foundation
Partnership accounts: fixed and fluctuating capitals, the Profit and Loss Appropriation Account, interest on capital and drawings, goodwill, and the changes on admission and retirement.
AccountingPaper 112 MCQs2 lessons2 flashcards3 memory tricks
Practise Partnership and LLP Accounts free
What you'll learn
- Capital accounts and appropriation
Prepare the appropriation account and partners' capital or current accounts. - Goodwill, admission and retirement
Value goodwill and compute new, sacrificing and gaining ratios.
Key formulas
| Deed silent: profit sharing | Equal |
|---|---|
| Interest on capital (silent) | Nil |
| Interest on partner's loan (silent) | 6% p.a. (charge, not appropriation) |
| Interest on drawings, evenly | Drawings × rate × 6/12 |
| Salary/commission (silent) | Nil |
| Average profit method | Average profit × years' purchase |
| Super profit method | (Average profit − normal profit) × years' purchase |
| Sacrificing ratio (admission) | Old share − new share |
Concepts explained
Appropriation of profit and capital accounts
Net profit is distributed through the P&L Appropriation Account: interest on capital, salaries, commission, then the balance in the profit-sharing ratio.
What it means
- Fixed capital: adjustments through current accounts; fluctuating: through capital accounts.
- Deed silent: equal sharing; no interest on capital or salary; 6% on loans.
- Interest on partner's loan is a charge (P&L), not an appropriation.
- Interest on drawings: evenly spread → 6 months average.
- ₹24,000 evenly at 10%
Answer: ₹1,200
- Profit 1,00,000; interest 30,000; salary 20,000
Answer: ₹50,000 left to share
Related terms
- Guarantee of minimum profit: deficiency borne by guarantor partners
- Past adjustments: correcting omitted appropriations
Exam tip: Charges first (P&L), appropriations next (Appropriation A/c), balance last.
New, sacrificing and gaining ratios
On admission, old partners give up shares (sacrificing ratio = old − new); on retirement, continuing partners gain (gaining ratio = new − old).
What it means
- New ratio when the newcomer's share comes in the old ratio: multiply the remainder by the old ratio.
- Sacrificing ratio decides how the premium for goodwill is shared.
- Gaining ratio decides who compensates the retiring partner.
- Revaluation profit/loss and reserves go to old partners in the old ratio.
- A : B = 3 : 2; C gets 1/5
Answer: 12 : 8 : 5
- Old 3/5; new 12/25
Answer: A sacrifices 3/25
Related terms
- Hidden goodwill: when capital brought exceeds the implied share
- Death of a partner: like retirement; executors are paid
Exam tip: Write each partner's old and new share as fractions with the same denominator, then subtract.
Valuation and treatment of goodwill
Goodwill is the value of a firm's reputation and earning power. It's valued by average profit or super profit and paid to partners who sacrifice their share.
What it means
- Average profit method: average profit × years' purchase.
- Super profit method: (average − normal profit) × years' purchase; normal profit = capital employed × normal rate.
- Premium brought in cash goes to old partners in the sacrificing ratio.
- AS 26: no goodwill account for self-generated goodwill.
- 50,000 × 3
Answer: ₹1,50,000
- (60,000 − 40,000) × 2
Answer: ₹40,000
Related terms
- Capitalisation method: capitalise average or super profit at the normal rate
- Purchased goodwill: paid for when buying a business
Exam tip: Super profit is the profit above what an ordinary firm with the same capital would earn.
Memory tricks
Deed silent: equal sharing; no salary or interest on capital; 6% on loans.
Admission: sacrificing ratio; retirement: gaining ratio.
Revaluation and reserves go to old partners in the old ratio.
Try 3 CA Foundation-style questions
Q1. Average profit ₹60,000; normal profit ₹40,000. Goodwill at 2 years' purchase of super profit is
- ₹1,20,000
- ₹20,000
- ₹2,00,000
- ₹40,000
Show answer
Answer: (4) ₹40,000
Super profit = 60,000 − 40,000 = 20,000; goodwill = 20,000 × 2 = ₹40,000.
Q2. If the partnership deed is silent, profits are shared
- equally
- in the capital ratio
- in the ratio of experience
- according to time devoted
Show answer
Answer: (1) equally
Section 13(b): in the absence of agreement, partners share profits and losses equally.
Q3. Goodwill brought in cash by a new partner (premium) is
- shared by the old partners in their sacrificing ratio
- credited only to the new partner
- added to the firm's assets as goodwill
- shared equally by all partners including the new one
Show answer
Answer: (1) shared by the old partners in their sacrificing ratio
The old partners sacrifice part of their share, so they get the premium in the sacrificing ratio. (AS 26: no goodwill account is raised.)
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