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ACC 251

Accounting for Business

TU BBS · Fourth Year · Four-year BBS curriculum

Requirement
elective
Full marks
100
Study Guide
13 units available

Chapter notes

Authoritative study guide across 13 syllabus units

Open a unit to read its study notes.

Unit 1: Accounting for Partnership· 9 LHs· ~7 marks

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Core Concepts and Terminology: Accounting for Partnership

  • Partnership: 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 under the Nepal Partnership Act 2020.
  • Partnership Deed: A written legal agreement among partners setting out capital contributions, profit-sharing ratios, interest rates, salary entitlements, and dispute settlement mechanisms.
  • Profit and Loss Appropriation Account: An extension of the Profit and Loss Account prepared to distribute divisible net profits among partners In standard academic theory (deed), provisions.

Structural Frameworks and Analytical Models: Accounting for Partnership

Financial Statement Analysis Framework

Financial Statement Analysis Framework
Financial Statement Analysis Framework

1. Rules in Absence of Partnership Deed (Nepal Partnership Act / General Rule)

No Partnership Deed Exists

  1. Profit & Loss Sharing: Shared EQUALLY regardless of capital contributed.
  2. Interest on Capital: NO interest on capital is allowed.
  3. Interest on Drawings: NO interest on drawings is charged.
  4. Partner Salary / Remuneration: NO salary or commission is payable.
  • -- 5. Interest on Partner Loan: Payable at 6% per annum (or statutory rate).

2. Fixed vs Fluctuating Capital Architecture

  • Fixed Capital Method: Two accounts per partner are maintained:
    1. Partner Capital Account (records initial capital and permanent additions/withdrawals only).
    2. Partner Current Account (records drawings, interest on capital, interest on drawings, share of profit).
  • Fluctuating Capital Method: Only one account (Partner Capital Account) records all transactions; balance changes continuously.

Comparative Analysis and Structural Distinctions: Accounting for Partnership

Basis of Comparison Fixed Capital Method Fluctuating Capital Method
Number of Accounts Two accounts per partner (Capital A/c and Current A/c). Only one account per partner (Capital A/c).
Balance Stability Capital balance remains unchanged unless permanent capital added/withdrawn. Capital balance fluctuates continually with every profit, drawing, or interest entry.
Negative Balance Capital Account balance is always credit; Current A/c may show debit. Capital Account balance can occasionally turn debit (negative equity).

Solved Examination Archetypes and Practical Applications: Accounting for Partnership

Calculation of Interest on Drawings

When drawings are made in regular monthly intervals:

Interest on Drawings=Total Annual Drawings×Rate×Average Period12\text{Interest on Drawings} = \text{Total Annual Drawings} \times \text{Rate} \times \frac{\text{Average Period}}{12}

  • Drawn at beginning of each month: Average Period=12+12=6.5 months\text{Average Period} = \frac{12 + 1}{2} = 6.5\text{ months}.
  • Drawn at middle of each month: Average Period=122=6.0 months\text{Average Period} = \frac{12}{2} = 6.0\text{ months}.
  • Drawn at end of each month: Average Period=12−12=5.5 months\text{Average Period} = \frac{12 - 1}{2} = 5.5\text{ months}.

Accounting Application Note: If the date of drawings is not specified, interest on drawings must be calculated for an average period of 6 months!

Statutory Rules Under Nepal Partnership Act 2020 in the Absence of Partnership Deed

When partners fail to execute a formal written Partnership Deed (or when the deed is silent on specific points), the provisions of the Nepal Partnership Act 2020 govern:

  1. Profit and Loss Sharing: Profits and losses must be shared equally among all partners, regardless of unequal capital contributions.
  2. Interest on Capital: No partner is legally entitled to receive interest on capital invested.
  3. Interest on Drawings: No interest shall be charged on drawings made by partners for personal use.
  4. Partner’s Remuneration: No partner is entitled to any salary, commission, or operational remuneration for managing the business.
  5. Interest on Partner’s Loan: If a partner advances an emergency loan to the firm beyond their agreed capital, they are entitled to interest at the statutory rate of 6.00% per annum.

Solved Examination Archetypes and Practical Applications: Accounting for Partnership

Problem 1: Profit and Loss Appropriation Account and Capital Accounts

Problem Statement: A, B, and C entered into partnership on Shrawan 1, 2080 contributing capitals of NPR 400,000, NPR 300,000, and NPR 200,000 respectively. The Partnership Deed specifies:

  • Profit-sharing ratio of 3:2:1.
  • Interest on capital is allowed at 8.00% per annum.
  • Interest on drawings is charged at 10.00% per annum.
  • B is entitled to a salary of NPR 5,000 per month.
  • C is entitled to a sales commission of 2.00% on total annual net sales of NPR 3,000,000.
  • During the year, drawings were: A = NPR 60,000, B = NPR 40,000, C = NPR 30,000 (drawn evenly throughout the year, calculate interest for 6 months).
  • The firm earned a net profit of NPR 350,000 before the above adjustments.

Prepare the Profit and Loss Appropriation Account for the year ending Ashad 31, 2081.

Step-by-Step Solution:

Step 1: Calculate Interest on Capital

  • Partner A: 400,000×8%=NPR 32,000400,000 \times 8\% = \text{NPR } 32,000
  • Partner B: 300,000×8%=NPR 24,000300,000 \times 8\% = \text{NPR } 24,000
  • Partner C: 200,000×8%=NPR 16,000200,000 \times 8\% = \text{NPR } 16,000
    Total Interest on Capital=32,000+24,000+16,000=NPR 72,000\text{Total Interest on Capital} = 32,000 + 24,000 + 16,000 = \text{NPR } 72,000

Step 2: Calculate Interest on Drawings (Average Period = 6 Months)

  • Partner A: 60,000×10%×612=NPR 3,00060,000 \times 10\% \times \frac{6}{12} = \text{NPR } 3,000
  • Partner B: 40,000×10%×612=NPR 2,00040,000 \times 10\% \times \frac{6}{12} = \text{NPR } 2,000
  • Partner C: 30,000×10%×612=NPR 1,50030,000 \times 10\% \times \frac{6}{12} = \text{NPR } 1,500
    Total Interest on Drawings=3,000+2,000+1,500=NPR 6,500\text{Total Interest on Drawings} = 3,000 + 2,000 + 1,500 = \text{NPR } 6,500

Step 3: Calculate Remuneration and Commission

  • B’s Annual Salary: 5,000×12=NPR 60,0005,000 \times 12 = \text{NPR } 60,000
  • C’s Commission: 3,000,000×2%=NPR 60,0003,000,000 \times 2\% = \text{NPR } 60,000

Step 4: Calculate Divisible Profit and Allocation (3:2:1 Ratio)

Total Credit Side=Net Profit(350,000)+Interest on Drawings(6,500)=NPR 356,500\text{Total Credit Side} = \text{Net Profit} (350,000) + \text{Interest on Drawings} (6,500) = \text{NPR } 356,500
Total Debit Allocations=Interest on Capital(72,000)+Salary(60,000)+Commission(60,000)=NPR 192,000\text{Total Debit Allocations} = \text{Interest on Capital} (72,000) + \text{Salary} (60,000) + \text{Commission} (60,000) = \text{NPR } 192,000
Divisible Profit=356,500−192,000=NPR 164,500\text{Divisible Profit} = 356,500 - 192,000 = \text{NPR } 164,500

  • Partner A’s Share (3/6): 164,500×36=NPR 82,250164,500 \times \frac{3}{6} = \text{NPR } 82,250
  • Partner B’s Share (2/6): 164,500×26=NPR 54,833.33≈NPR 54,833164,500 \times \frac{2}{6} = \text{NPR } 54,833.33 \approx \text{NPR } 54,833
  • Partner C’s Share (1/6): 164,500×16=NPR 27,416.67≈NPR 27,417164,500 \times \frac{1}{6} = \text{NPR } 27,416.67 \approx \text{NPR } 27,417 Verification: 82,250+54,833+27,417=164,50082,250 + 54,833 + 27,417 = 164,500.

Paper Khoj independent study notes — unreviewed draft, not affiliated with Tribhuvan University.