Book 1 · T.S. Grewal — Double Entry Book Keeping

Partnership Quick Reference

Sections of the Indian Partnership Act 1932, P&L Appropriation A/c structure, Goodwill methods, Admission/Retirement/Death journal entries and Dissolution rules — all on one page.

IPA defaults Partnership Deed Capital methods P&L Appropriation Interest on Capital/Drawings Goodwill methods Sacrificing/Gaining Ratios Admission entries Retirement entries Death entries Dissolution

Indian Partnership Act 1932 — defaults Ch 1

When the partnership deed is silent on any matter, these statutory rules apply automatically.

Matter	Default rule	Section
Profit-sharing ratio	Equal	Sec 13(b)
Interest on Capital	NOT allowed	Sec 13(c)
Interest on Drawings	NOT chargeable	Sec 13(c)
Salary / Commission to partner	NOT payable	Sec 13(a)
Interest on partner's loan to firm	6% p.a. (charge against profit, paid even on losses)	Sec 13(d)

Section 4: "Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all." 5 essentials = agreement · two or more persons · lawful business · profit-sharing intent · mutual agency.

Partnership Deed — what to include Ch 1

Capital contribution

Each partner's contribution; whether fixed or fluctuating.

Profit-sharing ratio

For profits AND losses (often the same).

Interest on Capital / Drawings

Rate and method (simple, product, average period).

Salary / Commission

If any, to which partner and how computed.

Admission / Retirement procedure

New ratio, goodwill treatment, capital adjustment.

Dissolution + dispute settlement

Arbitration clause, valuation method.

Capital A/c — Fixed vs Fluctuating Ch 1

Aspect	Fixed Capital	Fluctuating Capital
Number of A/cs per partner	2 — Capital A/c + Current A/c	1 — Capital A/c only
Capital A/c balance	Never changes (only fresh capital / withdrawal of capital)	Fluctuates each year
Where do appropriations post?	Current A/c	Capital A/c
Current A/c balance	Can be Dr or Cr	—
Default in T.S. Grewal	—	✓ unless deed says Fixed

P&L Appropriation A/c — order of items Ch 1

Appropriations are distributions of profit (after the trading P&L), not business expenses. They are debited only AFTER the firm has earned profit (interest on partner's loan is the exception — that's a charge, not appropriation).

Dr side	₹	Cr side	₹
To Interest on Capital A/c	xxx	By Profit and Loss A/c	xxx
To Salary to Partner A/c	xxx	By Interest on Drawings A/c	xxx
To Commission to Partner A/c	xxx
To General Reserve A/c (transfer)	xxx
To Partners' Capital A/cs (Profit)	xxx

Order memorise: Net Profit b/d → less Interest on Capital → less Salary → less Commission → less Reserve → plus Interest on Drawings → distributed Profit in PSR.

Interest on Capital + Drawings Ch 1

Interest on Capital

IoC = Opening Capital × Rate × Period

If capital is added/withdrawn during the year, compute proportionately. Allowed only if deed permits. Treated as appropriation by default; deed can make it a charge (paid even on losses).

Interest on Drawings — Average Period method

When are equal monthly drawings made?	Average period	Formula
Beginning of every month	(12+1)/2 = 6.5 months	Total Dr × Rate × 6.5/12
End of every month	(11+0)/2 = 5.5 months	Total Dr × Rate × 5.5/12
Middle of every month	6.0 months	Total Dr × Rate × 6/12
Quarterly — Beginning of qtr	7.5 months	Total Dr × Rate × 7.5/12
Quarterly — End of qtr	4.5 months	Total Dr × Rate × 4.5/12
Quarterly — Middle of qtr	6.0 months	Total Dr × Rate × 6/12

Interest on Drawings — Product method (irregular)

Interest = (Σ Drawings × months remaining) × Rate ÷ 12 ÷ 100

Use when amounts or dates of drawings vary. Compute the product of each drawing × remaining months, sum the products, then apply rate.

Goodwill — 5 valuation methods Ch 2

1. Average Profit Method (simple)

Goodwill = Average Profit × No. of years' purchase

Average over 3-5 past years, after adjustments for abnormal items.

2. Super Profit Method

Super Profit = Average Profit − Normal Profit

Normal Profit = Capital Employed × Normal Rate of Return ÷ 100

Goodwill = Super Profit × No. of years' purchase

3. Capitalisation of Average Profit

Capitalised Value = Average Profit × 100 ÷ NRR

Goodwill = Capitalised Value − Capital Employed (Net Assets)

4. Capitalisation of Super Profit

Goodwill = Super Profit × 100 ÷ NRR

5. Weighted Average Profit Method

Weighted Avg Profit = Σ(Profit × Weight) ÷ Σ Weights

Most-recent year gets highest weight (e.g. 1, 2, 3, 4). Useful when profits show a clear upward/downward trend.

Adjustments to past profits before averaging: ADD back abnormal losses (loss by fire, theft) · DEDUCT abnormal gains (insurance claim received) · CHARGE manager's reasonable salary if not already charged · EXCLUDE non-recurring incomes/expenses.

Capital Employed (CE): Total Assets (excl. Goodwill, Fictitious Assets, Non-trade Investments) − Outside Liabilities. Or: Partners' Capital + Reserves − Fictitious Assets.

Sacrificing & Gaining Ratios Ch 3, 4, 5

Sacrificing Ratio

Sacrificing Ratio = Old Ratio − New Ratio

Used on Admission (and Change in PSR). The partner whose share goes DOWN sacrifices.

Gaining Ratio

Gaining Ratio = New Ratio − Old Ratio

Used on Retirement / Death (and Change in PSR). The partner whose share goes UP gains.

AS-26 (Intangible Assets): Goodwill cannot be raised in the books unless purchased. So instead of Dr Goodwill A/c on reconstitution, pass an adjustment entry via Capital A/cs in sacrificing/gaining ratio.

Admission of a Partner — key entries Ch 4

Premium for Goodwill brought in (cash)

Cash A/c Dr.	xxx
To Premium for Goodwill A/c	xxx
(Premium brought in by new partner)

Premium for Goodwill A/c Dr.	xxx
To Sacrificing Partners' Capital A/cs (in sacrificing ratio)	xxx
(Premium credited to sacrificing partners)

Premium not brought in (adjustment entry)

New Partner's Capital A/c Dr. (his share × full goodwill)	xxx
To Sacrificing Partners' Capital A/cs (in sacrificing ratio)	xxx

Hidden Goodwill (premium not stated separately)

Hidden Goodwill = (New Partner's Capital × Reciprocal of his share) − Total Adjusted Capital of all partners

Revaluation A/c (admission)

Dr side: Decrease in Assets · Increase in Liabilities · Unrecorded Liabilities. Cr side: Increase in Assets · Decrease in Liabilities · Unrecorded Assets. Profit/Loss → OLD partners' Capital A/cs in OLD ratio (new partner does not share).

Reserves & Accumulated Profits/Losses: distributed to OLD partners in OLD ratio. New partner gets nothing.

Retirement of a Partner — key entries Ch 5

Goodwill adjustment (no raising of goodwill)

Continuing Partners' Capital A/cs Dr. (in gaining ratio)	xxx
To Retiring Partner's Capital A/c (his share × full goodwill)	xxx

Settlement of retiring partner's claim

Compute total claim

Capital + share of Reserve + share of Revaluation + share of Goodwill + Interest on capital till date − Drawings.

Settlement options

(a) Immediate cash payment, OR (b) Transfer to Retiring Partner's Loan A/c (interest 6% p.a. by default, Sec 13(d)), OR (c) Instalments with interest.

Continuing partners' capitals

Bring into NEW PSR — surplus paid out / shortfall brought in / transferred to Current A/c.

Revaluation + Reserves (retirement)

Profit/Loss on Revaluation A/c and accumulated Reserves go to ALL partners (including retiring) in OLD ratio.

Death of a Partner — profit till date Ch 6

Profit till Date of Death — Time Basis

Profit = Last Year's Profit × (months elapsed ÷ 12) × Deceased's PSR

Use average of last 2-3 years if specified by deed.

Profit till Date of Death — Sales / Turnover Basis

Profit = (Last Year's Profit ÷ Last Year's Sales) × Sales till date × Deceased's PSR

Journal entry — profit till date

Profit and Loss Suspense A/c Dr.	xxx
To Deceased Partner's Capital A/c	xxx

Executor's A/c

Total claim of deceased partner is transferred from his Capital A/c to Executor's A/c. Settlement: cash, instalments + interest, or kept as a loan. Default 6% p.a. on Executor's loan (Sec 13(d) IPA).

Dissolution of Firm Ch 7

5 Modes of Dissolution (IPA Sections 39-44)

Mode	Section	Trigger
By Agreement	40	All partners agree
Compulsory	41	Business becomes unlawful or all/all-but-one partners insolvent
On Contingency	42	Expiry of fixed term · completion of venture · death · insolvency
By Notice	43	Any partner gives notice (in partnership-at-will only)
By Court Order	44	Insanity · permanent incapacity · misconduct · persistent breach · transfer of interest · perpetual losses · just & equitable

Section 48 — Order of Payment on Dissolution

External liabilities first

Creditors, bills payable, bank loan, outstanding expenses.

Partner's loan to firm

After all outsiders are paid.

Partners' Capital balances

As per the final balance after all adjustments.

Surplus distributed in PSR

Any balance after all of the above.

Realisation A/c structure

Dr side	₹	Cr side	₹
To Sundry Assets A/c (BV transferred)	xxx	By Sundry Liabilities A/c (BV transferred)	xxx
To Cash A/c (liabilities paid)	xxx	By Cash A/c (assets sold)	xxx
To Cash A/c (Realisation Expenses)	xxx	By Cash A/c (Unrecorded Assets sold)	xxx
To Partners' Capital A/cs (Profit)	xxx	By Partners' Capital A/cs (Loss)	xxx

Garner v Murray Rule

When a partner is insolvent and unable to pay his deficiency on dissolution, the deficiency is borne by the solvent partners in their capital ratio (last agreed capital balances), NOT in profit-sharing ratio. For Fluctuating Capital, use the last agreed fixed capital figures.

Treatment of unrecorded items. Unrecorded asset realised → Cash A/c Dr; To Realisation A/c. Unrecorded liability paid → Realisation A/c Dr; To Cash A/c.