P&L Account
Profit and Loss Appropriation Account
Profit & Loss Appropriation A\C- This account is prepared to show the distribution of net profit
between or among the partners.
Provisions of Partnership Acti.
No interest on capital is payable.
ii. No interest on drawing is chargeable.
iii. No any type of remuneration is payable to
the partners.
iv. Profit or loss is to be divided equally.
v. Interest @ 6% is payable on the loan provided
by the partners to the firm.
vi. No any new partner can be admitted to the
firm without the consent of all the partners.
Note- Above
provisions are applicable only if there are no agreements regarding all these.
Interest on monthly drawings:
1. If drawings are made at the beginning of each
month, interest is charged for 6.5 months.
2. If drawings are made in the middle of each
month, interest is charged for 6 months.
3. If drawings are made at the end of each month,
interest is charged for 5.5 months.
Note- If date
of drawing is not mentioned, interest is charged for 6 months.
Treatment For Goodwill
A) When Premium for goodwill is brought
i) For premium for goodwill brought by the new
partner
Bank A/C Dr.
To Premium for Goodwill (PFG)
(Being PFG brought by new partner)
ii) For PFG shared by the old partners
To Old Partners’ Capital A/Cs ( In sacrificing
ratio)
(Bing PFG credited to old partners’ capital
A/C)
iii) For amount of PFG withdrawn by the
partners
Old Partners’ capital
To Bank A/c
(Being amount of PFG withdrawn)
|
B) When PFG is not brought
i) For raising goodwill
Goodwill A/c Dr.
To Old Partners’ Capital A/Cs (In Old Ratio)
(Being goodwill raised crediting partners’
capital A/Cs)
ii) For writing off goodwill
All partners’ capital
To Goodwill A/C (In New Ratio)
(Being goodwill written off after admission of
new partner)
iii) For adjustment to be of made though
Capital A\Cs
New Partner’s Capital A/C Dr.
To Old Partners’ Capital A/Cs (In Sacrificing
Ratio)
(Being treatment for goodwill made through
capital A/Cs)
iv) For PFG not brought temporarily
New Partner’s Loan A/C Dr.
To Old Partners’ Capital A/Cs (In S/R) (Being
PFG due from new partner)
C For PFG paid privately – No Entry
|
Method of Calculating Goodwill
i) Average profit method= Average profit X No. of
years purchase
ii) Super profit method= Super profit X No. of
years purchase
NOTE- Super
profit = Avg. /Actual profit – Normal profit
Annuity method= Super profit X Annuity factor
Super profit capitalisation method= Super profit
x 100
Normal rate of return
Average Profit Capitalisation Method= Average
Profit X 100
Normal Rate of Return
What is Goodwill?
It is the reputation earned by the business by
establishing faith among the customers.
Premium for Goodwill – PFG is the amount brought by the incoming partner in addition to his
capital to be
shared by the old partners in sacrificing ratio
for the reputation or goodwill earned by them for the business.
Circumstances when goodwill need to be
valued.
i) At the time of admission of a partner.
ii) At the time of retirement of a partner.
iii) At the time of death of a partner.
iv) At the time of dissolution of the firm.
v) When profit sharing ratio among the partner
changes.
Admission of a partner
i) For capital brought by the new partner.
Bank A/c Dr.
To New Partner’s Capital A/c
ii) For transfer of retained earnings.
Profit & loss
Other Reserves &
To Old Partners’ Capital A/Cs
(Being transfer of retained earnings)
iii) For transfer of retained loss
Old Partners’
To Profit & Loss A/C
To Advertisement Suspense A/C
iv) For increase in value of eases
Assets
To Revaluation A/C
|
v) For decrease in value of assets
Revaluation A/C Dr.
To Assets A/C
vi) For increase in liabilities
Revaluation A/C Dr.
To Liabilities A/C
vii) For decrease in liabilities
Liabilities
To Revaluation A/C
viii) For loss on revaluation
Old partners’
To Revaluation A/C
ix) For profit on revaluation
Revaluation A/C Dr.
To Old Partners’ Capital A/Cs
|
Retirement or Death of a Partner
What does a retiring partner or deceased
partner takes away?
i. His capital
ii. His share of retained earnings or loss
iii. His share of goodwill
iv. His share in joint life policy
v. His share of profit up to the date of
retirement or death
NOTE- All the above entries (except no.
1) are same in case of retirement and death.
x) For share of profit up to the date of death or
retirement.
Profit & Loss Suspense A/C Dr.
To Retiring / Deceased Partner’s Capital A/C
Settlement of Retiring or Deceased
Partner’s Dues
i. By payment of whole amount at the time of
retirement
ii. By transferring the full amount to Loan A\C
to be paid later
iii. Part payment at the time of retirement and
balance is transferred to Loan A\C to be paid later.
Joint Life Policy
Joint Life Policy- The partnership firm takes joint life policy on lives of the partners
sometimes jointly ii)
sometimes individually.
Joint Life Policy may be dealt with in the
following manner:
i) When LJP A\C is not maintained; ii) When JLP
A\C is maintained;
i. When JLP A\C is not maintained : Under this
method premium paid for the policy is treated as an expense of the business
thus debited to P\L A\C. No Joint Life Insurance Policy is shown in the balance
sheet.
Journal Entries
1. For payment of premium
To Bank A\C
2. For charging prm.
To JLP Prm. A\C
|
3. For JLP realized
Bank
To Partners’ Capital A\C
|
2. When JLP A\C is maintained
a. Joint Life Method- Under this method JLP is maintained at its surrender value.
1. For payment of prm.
To Bank A\C
2. For adjustment of book value of JLP with its
surrender value
To JLP A\C (if book value is higher than
surrender value)
To P\L A\C (if book value is lower than
surrender value)
3. For realization of JLP
Bank
Partners’ Capitals A\Cs (Being loss) Dr.
( If realized below book value)
To JLP A\C
To Partners’ Capital A\Cs (Being profit)
(if realized above book value)
|
b. JLP Reserve Method- Under this method a JLP Reserve A\C is maintained at surrender
value along with JLP A\C.
1. For payment of JLP prm.
To Bank A\C
2. For creation of JLP Reserve
To JLP Reserve A\C
3. For bringing down JLP to its surrender value
To JLP A\C (With the amount JLP A\C exceeds its
surrender value)
4. For realization of policy money
Bank
To JLP A\C
5. For transfer of credit balance of JLP
To JLP Reserve A\C
6. For transfer of balance of JLP Reserve
JLP Reserve A\C DrTo Partners’ Capital A\Cs
|
Final Accounts
Final Accounts- Accounts which are prepared at the end of the year to know the final
results (profit or loss) of the business are called Final Accounts. Final
Accounts consist of the following:
1. Manufacturing A\C (In case of manufacturing co. only) discloses cost of goods sold.
2. Trading A\C discloses us gross profit.
3. Profit & Loss A\C discloses net profit.
4. Profit & Loss Appropriation A\C (In case of partnership firm only) shows distribution of profit.
5. Balance Sheet discloses details of assets of liabilities.
Journal entries for some important
adjustments:
1. For outstanding expenses
Expenses
To Outstanding Expenses A\C
2. For prepaid Expenses
Prepaid expenses
To Expenses A\C
3. For Accrued Incomes
Accrued
To Incomes A\C
4. For Pre-received incomes
Incomes
To Pre-received Incomes A\C
5. Depreciation
Depreciation
To Assets A\C
6. For bad debts
To Debtors A\C
7. For provision for bad debts \ Discount
allowed
Profit & Loss A\C
To Provision for Bad Debts\ Discount Allowed
A\C
8. For provision for discount received
Provision for discount received
To Profit & Loss A\C
9. For goods drawn for personal expenses
Drawings A\C
To Purchases A\C
10. For goods distributed as free samples
Advertisement
To Purchases A\C
11. For writing off intangible assets
Profit &
To Intangible Assets A\C
|
12.For set off of due to creditors and due from
debtor
Creditors
To Debtors A\C
13. For closing stock
Closing
To Trading A\C
14. For cheque or Bill Receivable dishonored
Debtors
To Bank A\C\ Bills Receivable A\C
15. For goods destroyed by fire
Goods Destroyed by
Purchases A\C
16. For insurance claim foe above loss
Insurance Claim A\C ( if yet to be received)
Bank
Profit & Loss A\C (Amount of loss not
recovered)
To Goods Destroyed by Fire A\C
17. For life insurance premium included in
insurance
premium
Drawings
To Insurance Premium A\C
18. For Interest on capital
Interest on capital A\C
To Capital A\C
19. For Interest on drawings
Capital
To Interest on drawings A\C
20. For transfer to General Reserve
Profit & Loss (Appropriation)
To General Reserve A\C
21. For manager’s commission due
Manager’s Commission A\C
To Outstanding Manager’s Commission A\C
|
No comments:
Post a Comment