Class 12 Accountancy Chapter 1 NCERT Solutions: Accounting for Partnership

Partnership accounting can be confusing when you have to remember the rules for profit-sharing, interest on capital, drawings, and partners' salaries. Questions may also ask you to prepare accounts or calculate interest for different withdrawal periods.

Class 12 Accountancy Chapter 1 NCERT Solutions help you understand these basic concepts through question-wise answers and worked examples. Use them to check your calculations, revise the rules under the Indian Partnership Act, 1932, and practise presenting answers clearly in your school examinations.

Class 12 Accountancy Chapter 1 NCERT Solutions

The following questions cover important concepts from Accounting for Partnership: Basic Concepts. Attempt each question before checking the answer to see which topics need more revision.

1. What is a partnership deed?

Answer:

A partnership deed is an agreement between partners that sets out the terms and conditions of their partnership. It may cover the firm's objectives, capital contributed by each partner, profit-sharing ratio, interest on capital, interest on drawings, salaries and other matters related to the business.

A written partnership deed helps partners understand their rights and responsibilities and reduces the chances of disputes.

2. Why is it considered desirable to make the partnership agreement in writing?

Answer:

A written partnership agreement records the terms accepted by all partners. It helps prevent misunderstandings about profit-sharing, capital contributions, interest and other arrangements. If a dispute arises, the written deed can serve as evidence, subject to applicable legal requirements.

3. List the items which may be debited or credited in capital accounts of the partners when: (i) Capitals are fixed. (ii) Capital are fluctuating.

Answer:

The entries depend on the capital method followed by the firm.

4. Give two circumstances under which the fixed capitals of partners may change.

Answer:

The fixed capitals of partners may change under the following two circumstances:

1. Additional capital introduced: When a partner brings additional capital into the business.

2. Permanent withdrawal of capital: When a partner permanently withdraws a part of their capital from the business.

5. Under what circumstances can fixed capital accounts change?

Answer:

Fixed capital accounts can change when:

• A partner introduces additional capital.

• A partner permanently withdraws part of their capital.

Such changes are generally made with the consent of the partners and according to the partnership agreement.

6. If a fixed amount is withdrawn on the first day of every quarter, for what period the interest on total amount withdrawn will be calculated? 

Answer:

When equal amounts are withdrawn at the beginning of each quarter throughout the year, the average period is 7.5 months.

This is because the four withdrawals remain outstanding for 12, 9, 6 and 3 months, respectively.

Average period = (12 + 9 + 6 + 3) ÷ 4 = 7.5 months.

7. In the absence of Partnership deed, specify the rules relating to the following : (i) Sharing of profits and losses. (ii) Interest on partner’s capital. (iii) Interest on Partner’s drawings. (iv) Interest on Partner’s loan (v) Salary to a partner.

Answer:

Under the Indian Partnership Act, 1932, the following rules generally apply when there is no agreement providing otherwise:

• Profit and loss sharing: Partners share profits and losses equally.

• Interest on capital: No interest on capital is allowed as a matter of right.

• Interest on drawings: No interest is charged on partners' drawings.

• Interest on a partner's loan: A partner who advances a loan beyond their agreed capital is entitled to interest at 6% per annum, subject to the Act.

• Salary or remuneration: A partner is not entitled to a salary or remuneration for participating in the firm's business.

8. What is partnership? Explain its main characteristics.

Answer:

Partnership is the relationship between people who agree to share the profits of a business carried on by all or any of them acting for all. The Indian Partnership Act, 1932, defines this relationship.

The main characteristics of partnership are:

• Agreement: Partnership arises from an agreement between the partners.

• Two or more persons: At least two people are required to form a partnership.

• Business activity: The relationship must relate to carrying on a business.

• Profit-sharing: Partners agree to share the profits of the business.

• Mutual agency: Each partner acts as an agent of the firm and the other partners for business activities within their authority.

• Unlimited liability: In a traditional partnership firm, partners may be personally liable for the firm's debts, subject to the applicable law.

9. Discuss the main provisions of the Indian Partnership Act 1932 that are relevant to partnership accounts if there is no partnership deed.

Answer:

When the partnership agreement does not specify certain terms, the relevant provisions of the Indian Partnership Act, 1932, apply. These include:

• Profit-sharing ratio: Partners share profits and losses equally.

• Interest on capital: Partners are not automatically entitled to interest on their capital.

• Interest on drawings: Interest is not charged on drawings in the absence of an agreement.

• Interest on loans: A partner who advances a loan beyond their agreed capital is entitled to interest at 6% per annum, subject to the Act.

• Remuneration: Partners are not automatically entitled to salaries or commissions for conducting the firm's business.

The Act also contains provisions dealing with benefits gained by partners from transactions connected with the firm and profits from competing businesses. These rules help protect the interests of the partnership and its members.

10. Explain why it is considered better to make a partnership agreement in writing.

Answer:

A written partnership deed records the terms agreed upon by the partners. It provides clarity about capital contributions, profit-sharing ratios, interest, remuneration and other business arrangements.

An oral agreement may also form a partnership agreement, but proving its exact terms can be difficult when a disagreement arises. A written deed provides a clear record that can help settle disputes and reduce confusion.

11. Illustrate how interest on drawings will be calculated under various situations.

Answer:

Interest on drawings is calculated according to the amount withdrawn, the date of withdrawal, the applicable rate and the period for which the money remains withdrawn. The partnership agreement determines whether interest is charged.

Case 1: Equal monthly drawings

• Beginning of each month: Average period is 6.5 months.

• Middle of each month: Average period is 6 months.

• End of each month: Average period is 5.5 months.

The formula is:

Interest on Drawings = Total Drawings × Rate of Interest × Average Period ÷ 12

Case 2: Equal quarterly drawings

• Beginning of each quarter: Average period is 7.5 months.

• End of each quarter: Average period is 4.5 months.

For example, if a partner withdraws ₹30,000 at the beginning of each quarter and interest is charged at 8% per annum:

Total drawings = ₹30,000 × 4 = ₹1,20,000

Interest = ₹1,20,000 × 8/100 × 7.5/12

Interest on drawings = ₹6,000

Case 3: Different amounts withdrawn on different dates

When the amounts and dates vary, use the product method. Multiply each withdrawal by the number of months it remains outstanding, add the products and apply the interest rate.

Interest on drawings = Total of products × Rate of interest ÷ 100 × 1/12

Case 4: Dates of withdrawal are not given

When the dates are not specified and withdrawals are assumed to be made evenly throughout the year, the average period is generally taken as six months.

For example, if total drawings are ₹60,000 and interest is charged at 8% per annum:

Interest = ₹60,000 × 8/100 × 6/12 = ₹2,400

12. How will you deal with a change in profit sharing ratio among existing partners? Take imaginary figures to illustrate your answer.

Answer:

When existing partners change their profit-sharing ratio, some partners may gain a larger share of future profits while others sacrifice part of their share. The adjustment should account for the rights and interests of all partners.

The main steps include:

1. Calculate the old and new profit-sharing ratios.

2. Determine the gaining and sacrificing ratios.

3. Adjust goodwill, where required.

4. Distribute accumulated profits and reserves among the partners in their old profit-sharing ratio.

5. Record revaluation gains or losses in the old profit-sharing ratio.

6. Pass the necessary adjustment entries in the partners' capital accounts.

These adjustments help ensure that the change in the profit-sharing ratio is recorded correctly.

How Can Class 12 Accountancy Chapter 1 NCERT Solutions Help You?

These solutions can help you revise the basic rules of partnership accounting and practise the types of questions asked in school examinations.

• Check calculations: Compare your answers for interest on drawings and other numerical questions.

• Revise key rules: Remember the provisions that apply when there is no partnership deed.

• Understand capital accounts: Learn the difference between fixed and fluctuating capital methods.

• Practise journal entries: Review how partnership transactions and adjustments are recorded.

• Improve answer writing: Present definitions, explanations and calculations clearly.

• Find weak areas: Reattempt questions where the concept or calculation is unclear.

Class 12 Accountancy Chapter 1 NCERT Solutions help you revise partnership deeds, capital accounts, profit appropriation, interest on drawings and changes in the profit-sharing ratio. Practise the questions independently before checking the answers, and pay attention to the steps used in each calculation. Regular practice can help you understand the rules and write clearer answers in your Class 12 Accountancy examinations.

Related Resources: 

• Class 12 Accountancy Goodwill Valuation NCERT Solutions: Chapter 2

• Class 12 Accountancy Chapter 3 NCERT Solutions: Retirement of a Partner

• Class 12 Accountancy Chapter 4 NCERT Solutions: Dissolution of Partnership Firm

For further study, explore Class 12 Accountancy resources on PW to continue revising the subject chapter by chapter.