1. BASIC CONCEPTS

PARTNERSHIP ACCOUNTS – QUICK REVISION NOTES

(Designed for JKSSB Accounts Assistant (Finance) – Accountancy & Book Keeping)

Partnership – Relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all (Section 4, Indian Partnership Act, 1932).
Partnership Deed – Written agreement containing:
Name of firm & partners
Nature & place of business
Capital contribution of each partner
Profit‑sharing ratio (PSR)
Interest on capital & drawings
Salary/commission/bonus to partners
Procedures for admission, retirement, death & dissolution
Method of valuation of goodwill & assets
Key Accounting Principle – Partners’ capital accounts may be Fixed or Fluctuating (see table below).

Feature	Fixed Capital Method	Fluctuating Capital Method
Capital A/c	Remains constant (except additional capital/withdrawal)	Changes with every transaction (profit, drawings, interest, etc.)
Drawings A/c	Separate Drawings A/c maintained	Drawings deducted directly from Capital A/c
Interest on Capital/Drawings	Credited/Debited to Partner’s Current A/c	Credited/Debited directly to Capital A/c
Profit/Loss Allocation	Posted to Partner’s Current A/c	Posted directly to Capital A/c
Preferred when	Large firms, many transactions	Small firms, simplicity desired

2. PROFIT‑SHARING RATIO (PSR) & ADJUSTMENTS

2.1 Calculation of New PSR on Admission / Retirement / Death

Old Ratio – Given in deed.
Sacrificing Ratio (on admission) = Old Ratio – New Ratio of existing partners.
Gaining Ratio (on retirement/death) = New Ratio – Old Ratio of continuing partners.

Mnemonic: SACRIFICE = OLD – NEW (for existing partners)

GAIN = NEW – OLD (for continuing partners)

2.2 Adjustment of Goodwill

Situation	Treatment of Goodwill
Admission (new partner brings goodwill)	Goodwill credited to Old Partners’ Capital/Current A/c in their sacrificing ratio. New partner’s capital A/c debited (if goodwill not paid in cash).
Retirement/Death (retiring partner’s share of goodwill)	Goodwill debited to Continuing Partners’ Capital/Current A/c in their gaining ratio. Retiring partner’s capital A/c credited.
Change in PSR (no admission/retirement)	Goodwill adjusted similarly: partners gaining share debit goodwill; partners sacrificing share credit goodwill.

Quick Rule: Credit the sacrificing/gaining partner, Debit the gaining/sacrificing partner (depending on whether goodwill is being given or received).

2.3 Interest on Capital & Drawings

Interest on Capital = Capital × Rate × Time (usually for the whole year unless otherwise specified).
Interest on Drawings = (Sum of Drawings × Rate) / 12 × Months outstanding (or use product method).
Accounting Entry:
Interest on Capital: Dr. Interest on Capital A/c → Cr. Partner’s Capital/Current A/c
Interest on Drawings: Dr. Partner’s Capital/Current A/c → Cr. Interest on Drawings A/c

Mnemonic: “CAPITAL earns, DRAWINGS cost” – Capital → Credit (income); Drawings → Debit (expense).

3. PARTNERS’ REMUNERATION (SALARY, COMMISSION, BONUS)

Item	When Allowed	How Treated in P&L Appropriation
Salary	Fixed amount per month/year (as per deed)	Debit Profit & Loss Appropriation A/c → Credit Partner’s Capital/Current A/c
Commission	Either a % of net profit before commission or after commission	• Before commission: Commission = Net Profit × Rate% • After commission: Commission = (Net Profit – Commission) × Rate% → Solve: Commission = Net Profit × Rate / (100 + Rate)
Bonus	Often a % of net profit after all other appropriations	Same as commission but applied after salary, interest, etc.

Journal Example (Salary):

Dr. Profit & Loss Appropriation A/c

Cr. Partner’s Capital/Current A/c (Salary)

4. PREPARATION OF PROFIT & LOSS APPROPRIATION ACCOUNT

Profit & Loss Appropriation A/c Dr. Cr. To Interest on Capital xxx By Net Profit b/d xxx To Partner’s Salary xxx By Interest on Drawings xxx To Partner’s Commission xxx … To Transfer to Reserve xxx To Balance c/d (Profit share) xxx

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Balance c/d is split among partners in their profit‑sharing ratio and transferred to each partner’s Capital/Current A/c.
If a guarantee of profit exists, any shortfall is borne by the guaranteeing partner(s) in the agreed ratio.

5. GUARANTEE OF PROFIT

Guarantee to a Partner: The firm promises a minimum profit share to a partner; any deficiency is made good by other partner(s).
Steps:

Calculate each partner’s actual share (based on PSR).
Compare with guaranteed amount.
If actual < guaranteed → Deficit = Guaranteed – Actual.
Deficit is debited to the guaranteeing partner(s)’ Capital/Current A/c in their agreed ratio and credited to the guaranteed partner’s A/c.

Mnemonic: “GIVE” – Guarantee → Identify Deficit → Transfer from Guarantor(s) to Guaranteed.

6. ADMISSION OF A PARTNER

Adjustments Required:

Revaluation of Assets & Liabilities (if any).
Treatment of Goodwill (as per 2.2).
Adjustment of Capitals (to make them proportionate to new PSR, if agreed).
Distribution of Reserves & Accumulated Profits/Losses (credited to old partners in old PSR).

Journal Entries (Summary):

Transaction	Dr.	Cr.
Revaluation Profit	Revaluation A/c	To Assets (increase) / Liabilities (decrease)
Revaluation Loss	Assets (decrease) / Liabilities (increase)	Revaluation A/c
Transfer Revaluation Profit/Loss to Partners	Revaluation A/c	To Old Partners’ Capital/Current A/c (old PSR)
Goodwill brought in by new partner	Cash/Bank A/c	To Goodwill A/c
Goodwill written off (if not paid)	Old Partners’ Capital/Current A/c (sacrificing ratio)	To Goodwill A/c
Adjustment of Capitals (if required)	Partners’ Capital/Current A/c (excess)	To Cash/Bank A/c or To Partners’ Capital/Current A/c (deficit)
Transfer of Reserves	Reserves A/c	To Old Partners’ Capital/Current A/c (old PSR)
Admission of new partner’s capital	Cash/Bank A/c	To New Partner’s Capital A/c

7. RETIREMENT / DEATH OF A PARTNER

Adjustments Required: Same as admission but in reverse.

Revaluation of Assets & Liabilities (if agreed).
Treatment of Goodwill (credited to retiring/deceased partner, debited to continuing partners in gaining ratio).
Payment to retiring/deceased partner – may be lump sum, installments, or transfer to loan account.
Adjustment of Capitals (to make them proportionate to new PSR, if desired).
Transfer of Reserves & Accumulated Profits/Losses (to continuing partners in old PSR).

Journal Entries (Summary):

Transaction	Dr.	Cr.
Revaluation Profit/Loss	As in admission (reverse)
Goodwill adjustment	Continuing Partners’ Capital/Current A/c (gaining ratio)	To Retiring/Deceased Partner’s Capital A/c
Payment to retiring partner	Retiring Partner’s Capital A/c	To Bank/Cash A/c (or Loan A/c)
Transfer of Reserves	Reserves A/c	To Continuing Partners’ Capital/Current A/c (old PSR)
Adjustment of Capitals (if needed)	Partners’ Capital/Current A/c (excess/deficit)	To/From Cash/Bank or Partner’s A/c

Special Note on Death:

Executor’s Loan A/c is opened for the amount due to the deceased partner’s estate.
Interest on Executor’s Loan is allowed as per agreement (usually 6% p.a.).

Mnemonic: “RETIRE” – Revaluate, Earn Goodwill, Transfer Income, Repay, Adjust Capital, Settle Estate.

8. DISSOLUTION OF PARTNERSHIP

Modes:

By Agreement (all partners consent).
By Notice (any partner may give notice).
By Contingency (expiry of term, completion of venture, death/insolvency of a partner).
By Court (unsound mind, permanent incapacity, misconduct, persistent loss, etc.).

Steps in Dissolution Accounting:

Realisation Account – Records sale of assets and payment of liabilities.
Partners’ Loan Accounts – Settled before capital accounts.
Partners’ Capital Accounts – Final balances after realization & loan settlement.
Cash/Bank Account – Balances off to zero.

Journal Entries (Key):

Transaction	Dr.	Cr.
Transfer of Assets to Realisation A/c	Realisation A/c	To Individual Asset A/c (at book value)
Transfer of Liabilities to Realisation A/c	Individual Liability A/c	To Realisation A/c
Sale of Asset	Bank/Cash A/c	To Realisation A/c (sale price)
Payment of Liability	Realisation A/c	To Bank/Cash A/c
Realisation Profit/Loss	Realisation A/c	To Partners’ Capital/Current A/c (PSR)
Partners’ Loan Repayment	Partners’ Loan A/c	To Bank/Cash A/c
Final Settlement of Capital	Partners’ Capital/Current A/c	To Bank/Cash A/c (if credit)
Bank/Cash A/c	To Partners’Capital/Current A/c (if debit)

Mnemonic: “REALISE” – Realise Assets, Pay Liabilities, Income/Expense, Settle Loans, Equalise Capital.

9. TREATMENT OF SPECIFIC ITEMS

Item	Accounting Treatment in Partnership
Workmen’s Compensation Reserve	Shown under Liabilities; on dissolution, transferred to Realisation A/c (if any surplus after paying claims, transferred to Partners’ Capital A/c in PSR).
Investment Fluctuation Reserve	Adjusted against investment value; on dissolution, transferred to Realisation A/c.
Capital Reserve	Not distributable as profit; remains in Balance Sheet; on dissolution, transferred to Realisation A/c only if realised.
Revaluation Reserve	Created on revaluation of assets; on admission/retirement, transferred to Partners’ Capital A/c (old PSR).
Secret Reserve	Not shown in books; disclosed only if required by law; on dissolution, any amount realised is credited to Partners’ Capital A/c (PSR).
Joint Life Policy (JLP)	Premium paid debited to JLP A/c; on death, policy amount received credited to JLP A/c; balance transferred to Partners’ Capital A/c (PSR).
Annual Premium Policy	Premium treated as expense (charged to P&L); surrender value on dissolution credited to Partners’ Capital A/c (PSR).

10. MNEMONICS FOR QUICK RECALL

Concept	Mnemonic	Meaning
Profit Sharing Ratio Adjustment	SACRIFICE = OLD – NEW (for existing partners) GAIN = NEW – OLD (for continuing partners)	Helps compute sacrificing/gaining ratio.
Interest on Capital vs Drawings	CAPITAL earns, DRAWINGS cost	Capital → Credit (income); Drawings → Debit (expense).
Goodwill on Admission	CREDIT the Sacrificing, DEBIT the Giving (new partner)	Old partners (sacrificing) get credit; new partner’s capital debited if goodwill not paid in cash.
Goodwill on Retirement/Death	DEBIT the Gaining, CREDIT the Leaving	Continuing partners (gaining) debit; retiring/deceased partner’s capital credited.
Guarantee of Profit	GIVE – Guarantee → Identify Deficit → Transfer from Guarantor(s) to Guaranteed	Simple flow for guarantee adjustments.
Admission/Retirement Journal Flow	REVAL → GOODWILL → RESERVES → CAPITAL ADJUST → CASH/BANK	Sequence of adjustments.
Dissolution Steps	REALISE – Realise Assets, Pay Liabilities, Income/Expense, Settle Loans, Equalise Capital	Order of preparing Realisation A/c and settling accounts.
Treatment of JLP on Death	PREMIUM PAID → POLICY RECEIVED → BALANCE TO PARTNERS (PSR)	Recall steps for joint life policy.

11. KEY HIGHLIGHTS (EXAM‑ORIENTED)

Capital Accounts: Fixed vs Fluctuating – know which method the question assumes; adjust journal entries accordingly.
Profit & Loss Appropriation: Always starts with Net Profit; ends with Profit transferred to Partners in PSR.
Interest on Drawings: Use product method when drawings are uneven; otherwise simple formula.
Guarantee: If a partner is guaranteed a minimum profit, the shortfall is borne by the guarantor(s) in the agreed ratio – never borne by the guaranteed partner.
Goodwill: Only recorded when paid in cash or agreed to be raised; otherwise, it’s adjusted through partners’ capital accounts.
Revaluation: Only assets & liabilities that are revalued affect the Revaluation A/c; unadjusted items remain at book value.
Reserves: General reserve, workmen’s compensation reserve, investment fluctuation reserve – transferred to partners in old PSR on admission/retirement; on dissolution, transferred to Realisation A/c (if realized).
Loan Accounts: Partners’ loans are outside capital; paid before settlement of capital accounts.
Executor’s Loan: On death, the amount due to the deceased partner’s estate goes to Executor’s Loan A/c; interest allowed as per agreement.
Dissolution: Ensure Realisation A/c balances to zero; any profit/loss goes to partners in PSR; cash/bank account also ends at zero after final settlement.

12. QUICK REFERENCE TABLES

12.1 Interest on Drawings – Product Method

Month	Drawings (₹)	Product (₹×Month)
April	5,000	5,000×12 = 60,000
May	3,000	3,000×11 = 33,000
June	7,000	7,000×10 = 70,000
…	…	…
Total Product	ΣProduct
Interest = Total Product × Rate / (100×12)

12.2 Commission Calculation

Basis	Formula
Before Commission	Commission = Net Profit × (Rate/100)
After Commission	Commission = Net Profit × Rate / (100 + Rate)
After Salary & Interest	First deduct salary & interest, then apply above formulas on the residual profit.

12.3 Revaluation A/c Format

Dr. (Loss)	Cr. (Gain)
Decrease in Assets	Increase in Assets
Increase in Liabilities	Decrease in Liabilities
Transfer to Partners’ Capital/Current A/c (old PSR)	Transfer to Partners’Capital/Current A/c (old PSR) (if gain)

13. SAMPLE QUESTIONS & SOLUTION OUTLINE (FOR SELF‑TEST)

Q1. A and B share profits 3:2. C is admitted for 1/5 share bringing ₹2,00,000 as capital and goodwill valued at ₹1,20,000. Old capitals: A ₹3,00,000, B ₹2,00,000. Interest on capital 6% p.a., salary to A ₹10,000 p.a. Show journal entries for goodwill and capital adjustment assuming capitals are made proportionate to new PSR.

Solution Outline:

New PSR: A = 3/5 × 4/5 = 12/25, B = 2/5 × 4/5 = 8/25, C = 1/5 = 5/25 → Ratio 12:8:5.
Sacrificing Ratio of A & B = Old – New = (3:2) – (12:8) → A: 3/5‑12/25 = 3/25, B: 2/5‑8/25 = 2/25 → Sacrificing ratio 3:2.
Goodwill treatment: Credit A & B in 3:2 (₹72,000 & ₹48,000); Debit Cash/Bank ₹1,20,000.
Total capital after admission = Old capitals + C’s capital + Goodwill (if not paid) = 3,00,000+2,00,000+2,00,000 = 7,00,000.
Proportionate capitals: A = 12/25×7,00,000 = 3,36,000; B = 8/25×7,00,000 = 2,24,000; C = 5/25×7,00,000 = 1,40,000.
Adjust via cash: A receives ₹36,000, B receives ₹24,000, C pays ₹60,000 (difference).

Q2. X, Y, Z share profits 5:3:2. Y retires. Goodwill of firm valued at ₹1,80,000. Y’s capital after revaluation is ₹1,50,000. Pay Y ₹2,00,000 in cash. Show journal entries for goodwill and payment.