Lesson Notes By Weeks and Term - Senior Secondary 2

Term: 2^nd Term

Week: 3

Class: Senior Secondary School 2

Age: 16 years

Duration: 40 minutes of 2 periods each

Date:       

Subject:      Financial accounting

Topic:-       Partnership account III

SPECIFIC OBJECTIVES: At the end of the lesson, pupils should be able to

1. Identify current account
2. Explain the different terminologies used in partner’s current account
3. Describe the format and prepare balance sheet of partners

INSTRUCTIONAL TECHNIQUES: Identification, explanation, questions and answers, demonstration, videos from source

INSTRUCTIONAL MATERIALS: Videos, loud speaker, textbook, pictures

INSTRUCTIONAL PROCEDURES

PERIOD 1-2

NOTE

PARTNERSHIP CURRENT ACCOUNT

In one sense, there is no difference. A partner’s total capital is the sum of the balances on their capital account and their current account.

In practice, however, it is convenient to separate the amount invested by the partner (the capital account) from the amount they have earned through the trading activities of the partnership (the current account). Therefore, the capital account is usually fixed, while the current account is the current total of appropriations and the share of residual profit or loss, less drawings.

Remember that a partner’s drawings will be a debit entry in the partner’s current account.      

FIXED CAPITAL ACCOUNT

Fixed Partner’s Capital Accounts Method is the method of maintaining capital accounts of a firm under which the amount of capital of each partner is fixed and only changes in case of a permanent increase or permanent decrease in the capital. There is an increase in capital when additional capital is introduced into the firm by the partner and a permanent decrease in the capital when the concerned partner withdraws from his capital. Under this method, two accounts are maintained:

1. Partner’s Capital Account
2. Partner’s Current Account

• Capital Account: The Capital Account records only those transactions that are related to capital or change in the capital (Additional Capital and Drawings). In the capital account, the capital brought in by the partner is credited, and any drawing is debited.
• Current Account: A separate account known as a Current Account or Drawings Account is opened to record all the other transactions related to partners, such as Interest on capital, Interest on drawings, salary, Profit/loss share, etc. Any income or profit of the partner is credited, and any expense or loss is debited to the current account.

Steps of Fixed Capital Method

Step 1: Capital Balance of the old partners is brought down on the credit side.

Step 2: Capital brought in by the new partner is credited to his capital account.

Step 3: Cash/Bank is debited(when capital is withdrawn) or credited (on introduction of capital) on adjustment of old partners capital account.

Step 4: Balance of the capital accounts(difference between credit and debit side) of each partner is carried forward. 

Step 5: Balance of the Current A/c is bought down and written on the debit side (if it has a debit balance) or on the credit side (if it has a credit balance). 

Step 6: Premium for Goodwill brought in by the new partner admitted is credited to the old partner’s capital account in sacrificing ratio.

Step 7: Revaluation balance is credited (on profit ) or debited (on loss) to the old partner’s capital account in the old profit-sharing ratio.

Step 8: Accumulated profit and reserves are credited, and accumulated loss and deferred expenditure are debited to the old partner’s capital account in the old profit-sharing ratio.

Step 9: Calculate the total of both sides, and the difference between the debit and credit sides is carried forward as the Current A/c balance of all the partners, respectively.

Format of Fixed Capital Method:

** denotes that the balance of the Current A/c can be either Debited or Credited.

Illustration: 

X and Y are partners in the firm, sharing profit and loss in the ratio of 2:1. The Balance Sheet of the firm on 31st March 2022 was as follows:

M was admitted into partnership on 1st April 2022 for share in the firm on the following basis:

1. ₹45,000 will be brought in by M as his share of capital.
2. M will bring his share in Goodwill which is valued at ₹27,000 on the date of admission of M.
3. Plant and Machinery will be depreciated by 10%, and Building will be appreciated by 15%.
4. Provision on Debtors to be created to ₹1,445 on debtors.
5. There is a liability of ₹3,500 included in Sundry Creditors that will not arise.
6. Half of the Investment is taken over by G.
7. An outstanding Salary of ₹1,800 and accrued income of ₹1,200 are to be brought into books of accounts.

Prepare Revaluation Account, Partner’s Capital Account(under Fixed Capital Method), Balance Sheet of the Firm after the above adjustment on the date of admission of the new partner.   

Solution:

Working Notes:

1. The amount of Goodwill already appearing in the Balance Sheet will be written off in the old profit-sharing ratio by old partners.
2. Calculation of New profit sharing ratio and sacrificing ratio:

Let, the total profit = 1

Share of M =  share

Remaining Share of G and H = 

G’s new share =  

=

H’s new share = 

= 

EVALUATION:    1. Identify a current account

2. Discuss how to prepare the partners current account
3. Outline how to prepare the partners’ balance sheet

CLASSWORK: As in evaluation

CONCLUSION: The teacher commends the students positively