Questions
8–12 questions in commerce-based entrance papers
Difficulty
Medium-Hard
Importance
High yield for CUET and CA Foundation level exams
Overview
Partnership accounts cover the accounting treatment of entities owned by two or more individuals, focusing on the redistribution of profits, assets, and liabilities during changes in ownership structure. For competitive exams, mastery lies in understanding the impact of valuation adjustments on the balance sheet and the technical calculations involved in goodwill and capital adjustments.
Profit Sharing and Capital Accounts
This subtopic forms the foundation of partnership accounting, dealing with the distribution of profits via the P&L Appropriation Account. Aspirants must focus on interest on capital, interest on drawings, and the distinction between Fixed and Fluctuating capital accounts.
- P&L Appropriation is an extension of P&L Account
- Interest on drawings: Use product method for uneven dates
- Fixed capital method: Capital and Current accounts are separate
- Fluctuating capital method: All adjustments go into Capital account
Admission of a Partner
Admission involves the recalculation of profit-sharing ratios and the valuation of goodwill. The critical exam task is adjusting the new partner's share while simultaneously revaluing assets and liabilities through the Revaluation Account.
- New Profit Sharing Ratio = Old Ratio - Sacrificing Ratio
- Goodwill treatment: Premium for goodwill is shared by sacrificing partners
- Revaluation Account: Gains credit, losses debit
- Hidden Goodwill: Total value based on new partner's share minus net worth
Retirement and Death of a Partner
When a partner leaves, the firm must calculate the gaining ratio and settle the exiting partner's total interest. The death of a partner introduces time-based profit calculations from the start of the year until the date of death.
- Gaining Ratio = New Ratio - Old Ratio
- Settlement of dues: Transferred to Exiting Partner's Loan Account
- Profit to date of death is based on last year's profit or average profit
- Joint Life Policy is treated as an asset or reserve
Dissolution of Firm
Dissolution entails the formal closure of the firm, requiring the disposal of all assets and the discharge of all liabilities. Unlike other changes, the firm ceases to exist, making the Realization Account the focal point of the process.
- Realization Account: Used to calculate profit/loss on asset sale
- Order of payment: External liabilities, then partner's loans, then capital
- Garner vs Murray rule: Deficiency of insolvent partner borne by solvent partners in capital ratio
- Assets sold are credited to Realization Account
Formula Sheet
Sacrificing Ratio = Old Ratio - New Ratio
Gaining Ratio = New Ratio - Old Ratio
Interest on Drawings (Average Period) = Total Drawings x Rate/100 x (Average Period/12)
New Partner's Share = (Total Value - Net Worth) = Hidden Goodwill
Exam Tip
Always prepare the Revaluation Account first, as most subsequent balance sheet adjustments rely on its profit or loss figure.
Common Mistakes
- Confusing the treatment of 'Premium for Goodwill' with the 'Revaluation of Assets' during admission.
- Forgetting to calculate the time-apportioned profit for a deceased partner resulting in incorrect settlement.
- Applying the incorrect profit-sharing ratio (old vs gaining) when distributing reserves during retirement.
More Revision Notes
Ready to test yourself?
Play topic-wise Partnership Accounts questions in Aspirant Arcade — gamified MCQ practice.
Download Free