Q4.A partnership provides services or sells products in pursuit of profit. These
ID: 2596623 • Letter: Q
Question
Q4.A partnership provides services or sells products in pursuit of profit. These transactions are recorded in the appropriate journals and ledger accounts. Many partnerships use accrual accounting and generally accepted accounting principles to maintain their books because GAAP results in better measures of income over time. The partnership may maintain several accounts for each partner in its accounting records. If you are in a partnership business, what type of account will you maintain and why? Discuss in detail
Explanation / Answer
Partnership Firms are required to maintain books of accounts as per Tax laws, can maintain books of accounts on Cash or Mercantile basis. Fundamental Accounting Assumptions -1) Going Concern, 2) consistency, 3)Accrual has to follow. Statement of Receipt & Expenditure. A record of the assets and liabilities of the limited Liability Partnership. Statement of recognized gains & Losses. Statement of cost of goods purchased, inventories, work –in-progress, finished goods and cost of goods sold; and Any other particulars, which the partners may decide. Partnership Firms have to follow the complete accounting cycle from Journals, Ledgers, Cash Book, Bank book, Trial balance, Profit & Loss account and finally, a Balance Sheet which gives the financial position of the business at the end of the period. Few more records need to maintained are specifically mentioned below: Partners Capital Account: Fluctuating Capital Method and Fixed Capital Method (Partners Capital Account & Partners Current Account) Profit & Loss Appropriation Account: The net profit as shown by the profit and loss account of partnership firm needs certain adjustments with regard to interest on capitals, interest on drawings, salary, commission to the partners, if provided, under the agreement. For this purpose, ‘Profit and Loss Appropriation Account’ maybe prepared. Calculation of Interest on Capital: Interest @12 % pa is deductible as per Tax Act. Calculation of Interest on Drawings Past Adjustments: Past Adjustments relate to the interest on capital, interest on drawings, salary to partners, etc that have been omitted by mistake or have been wrongly treated. In such a situation, necessary adjustments have to be made in the partners’ capital account through an account called Profit and Loss Adjustment Account. Goodwill (Intangible Assets) Valuations: Following methods can be used for Goodwill Valuation: Average Profits Method: Weighted Average Profit method Super profit Method, Capitalization Method, Present value of Super Profits
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