Understanding Partnership Accounting with an Example

Example:-

Mr. Ram and Mr. Krishna contributed 20 lakhs rupees and 30 lakhs rupees as capital to start a business. The two partners agreed to share the profit of the business in the ratio of 40 percent and 60 per cent, respectively. The firm made a total sales of 300 lakhs and incurred expenses,including taxes, to the extent of Rs 250 lakhs.Let's assume all sales are cash sales and all expenses are paid. Partners withdraw some amount periodically for personal expenses, and all such drawings are charged at an interest rate of 12 per cent per year. Ram withdrew 5 lakh rupees during the year, and Krishna withdrew 10 lakh rupees during the year.They withdrew the amount at different points during the year. Accountant estimates the interest chargeable for Ram's drawing is 30, 000 rupees and interest on Krishna's drawing is 50, 000 rupees. In addition to the capital account of the partners, the accountant maintains a separate current account of the partners for each partner to record the drawings and the interest on drawings.

Following observations must be noted:-

1. We calculated the profit by = Total Sales - Total Expenses= Profit (300.8-250= 50.8)
2. The profit is distributed in the ratio 40%:60% i.e. 2:3
3. Ram's profit= 50.8 * 40% = 20.32
4. Krishna's profit = 50.8 * 60% = 30.48
5. This will be added back to their equity which will then be represented in Balance sheet.