II. Very short answer questions

Question 1.
Define partnership.
Answer:
According to section 4 of the Indian Partnership Act, 1932, the partnership is defined as, “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.

Question 2.
What is a partnership deed?
Answer:
A partnership deed is a document in writing that contains the terms of the agreement among the partners. It is not compulsory for a partnership to have a partnership deed as per the Indian Partnership Act, 1932. But, it is desirable to have a partnership deed as it serves as evidence of the terms of the agreement among the partners.

Question 3.

What is meant by the fixed capital method?
Answer:
Under the fixed capital method, the capital of the partners is not altered and it remains generally fixed. Two accounts are maintained for each partner namely

  • Capital account
  • Current account.

The transactions relating to initial capital introduced, additional capital introduced, and capital permanently withdrawn are entered in the capital account and all other transactions are recorded in the current account.

Question 4.
What is the journal entry to be passed for providing interest on capital to a partner?
Answer:
(a) For providing interest on capital]

           Interest on capital a/c  Dr. 

                      To Partner's Capital a/c

(b) For closing interest on capital account

             Profit & Loss Appropriation a/c  Dr. 

                            To Partner's Capital a/c

Question 5.
Why is the Profit and loss appropriation account prepared?
Answer:
The profit and loss appropriation account is an extension of the profit and loss account prepared for the purpose of adjusting the transactions relating to amounts due to and amounts due from partners. It is a nominal account in nature. It is credited with net profit, interest on drawings and it is debited with interest on capital, salary, and other remuneration to the partners. The balance being the profit or loss is transferred to the partners’ capital or current account in the profit-sharing ratio.

III. Short answer questions

Question 1.
State the features of a partnership.
Answer:

  1. A partnership is an association of two or more persons. The maximum number of partners is limited to 50.
  2. There should be an agreement among the persons to share the profit or loss of the business. The agreement may be oral or written or implied.
  3. The agreement must be to carry on a business and to share the profits of the business.
  4. The business may be carried on by all the partners or any of them acting for all.

Question 2.

State any six contents of a partnership deed.
Answer:
The contents of the partnership deed are:

  1. The name of the firm and nature and place of business.
  2. Date of commencement and duration of business.
  3. Names and addresses of all partners.
  4. Capital contributed by each partner.
  5. Profit-sharing ratio.
  6. Amount of drawings allowed to each partner.

Question 3.
State the differences between the fixed capital method and the fluctuating capital method.
Answer: Solution given in Pg.No - 90 and 91

Question 4.
Write a brief note on the applications of the provisions of the Indian Partnership Act, 1932 in the absence of a partnership deed.
Answer:

  1. Remuneration to partners: No salary or remuneration is allowed to any partner; op [ Section 13 (a)]
  2. Profit-sharing ratio: Profits and losses are to be shared by the partners equally. [ Section 13 (b)]
  3. Interest on capital: No interest is allowed on the capital. Where a partner is entitled to interest on capital contributed as per partnership deed, such interest on capital will be payable only out of profits. [ Section 13 (c)]
  4. Interest on loans advanced by partners to the firm: Interest on the loan is to be allowed at the rate of 6 percent per annum. [ Section 13 (d)]
  5. Interest on drawings: No interest is charged on the drawings of the partners.

Question 5.
Jayaraman is a partner who withdrew ₹ 10,000 regularly in the middle of every month. Interest is charged on the drawings at 6% per annum. Calculate interest on drawings for the year ended 31st December 2018.
Answer:
Jayaraman:
Interest on drawings: 10,000 × 1224 ×  6100 × 12 = ₹ 3600

IV. Exercises

Question 1.
Akash, Bala, Chandru, and Daniel are partners in a firm. There is no partnership deed. How will you deal with the following?

  1. Akash has contributed maximum capital. He demands interest on capital at 10% per annum.
  2. Bala has withdrawn ₹ 3,000 per month. Other partners ask Bala to pay interest on drawings @ 8% per annum to the firm. But, Bala did not agree to it.
  3. Akash demands the profit to be shared in the capital ratio. But, others do not agree.
  4. Daniel demands a salary at the rate of ₹ 10,000 per month as he spends full time for the business.
  5. The loan advanced by Chandru to the firm is ₹ 50,000. He demands interest on loan @ 12% per annum.

Answer:

  1. No interest on capital is payable to any partner.
  2. No interest is charged on the drawing made by the partner.
  3. Profit should be distributed equally.
  4. No remuneration is payable to any partner.
  5. Interest on the loan is payable at 6% per annum.

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