The following is the Balance Sheet of Gupta and Sharma as on March 31, 2017: **Balance Sheet of Gupta and Shar

Numerical Questions · Q18

The following is the Balance Sheet of Gupta and Sharma as on March 31, 2017:

Balance Sheet of Gupta and Sharma as on March 31, 2017

Liabilities	Amount (₹)	Assets	Amount (₹)
Sundry Creditors	38,000	Cash at bank	12,500
Mrs. Gupta's loan	20,000	Sundry Debtors	55,000
Mrs. Sharma's loan	30,000	Stock	44,000
General Reserve	6,000	Bills receivable	19,000
Provision for doubtful debts	4,000	Machinery	52,000
Capital:		Investment	38,500
Gupta	90,000	Fixtures	27,000
Sharma	60,000
Total	2,48,000	Total	2,48,000

The firm was dissolved on December 31, 2017 and assets were realised and liabilities settled as follows:

The realisation of the assets was as follows: Sundry Debtors ₹52,000; Stock ₹42,000; Bills receivable ₹16,000; Machinery ₹49,000; Fixtures ₹20,000.
Investment was taken over by Gupta at an agreed value of ₹36,000 and he agreed to pay off Mrs. Gupta's loan.
The Sundry Creditors were paid off less 3% discount.
The realisation expenses incurred amounted to ₹1,200. Journalise the entries to be made on the dissolution and prepare Realisation Account, Bank Account and Partners' Capital Accounts.

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Concept understanding — Partnership Accounting

Partnership Accounting — Your First Look

Think of a partnership as a group of friends starting a food stall together. One brings the money, another brings the cooking skills, a third brings the location. They agree to share the profits — but not necessarily equally. They also agree that if the stall loses money, they'll share the loss too.

That's the everyday intuition. Now let's make it precise.

What is a Partnership?

According to the Indian Partnership Act, 1932, a partnership is 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. The NCERT Class-12 textbook defines it as a business owned and run by two or more persons (maximum 50, as per Companies Act, 2013) who contribute capital and share profits/losses in an agreed ratio.

The key features are:

Two or more persons — minimum 2, maximum 50
Agreement — written (partnership deed) or oral
Profit-sharing — the core purpose
Unlimited liability — each partner is personally liable for the firm's debts
Mutual agency — each partner can bind the firm and other partners

Why Does Partnership Accounting Matter?

A sole proprietor has one owner — simple. A company has many shareholders — complex but structured. A partnership sits in between. The accounting challenge is: how do we track each partner's claim on the business?

The business is separate from the partners for accounting purposes, but the partners are personally involved. We need to record:

What each partner brings in (capital)
What each partner takes out (drawings)
What each partner earns (interest, salary, commission, share of profit)
What happens when a partner joins or leaves

The Two Key Accounts

1. Capital Account

This records the permanent investment of each partner. There are two methods:

Fixed Capital Method — Capital remains constant unless partners decide to change it. All other transactions go to a separate Current Account.

Fluctuating Capital Method — Capital changes with every transaction (drawings, interest, salary, share of profit/loss). Only one account per partner.

NCERT recommends the Fixed Capital Method for clarity. Here's the format:

Partner's Capital Account (Fixed Capital Method) | Particulars | A (₹) | B (₹) | | Particulars | A (₹) | B (₹) | |---|---|---|---|---|---| | To Balance c/d | 50,000 | 30,000 | | By Balance b/d | 50,000 | 30,000 | | | | | | By Bank (additional capital) | — | — | | Total | 50,000 | 30,000 | | Total | 50,000 | 30,000 |

The opening balance is the capital brought in. The closing balance is the same unless additional capital is introduced or capital is withdrawn permanently.

2. Current Account

This records everything else — drawings, interest on capital, interest on drawings, salary, commission, and share of profit/loss.

Partner's Current Account (Fixed Capital Method) | Particulars | A (₹) | B (₹) | | Particulars | A (₹) | B (₹) | |---|---|---|---|---|---| | To Drawings | 5,000 | 4,000 | | By Balance b/d | 2,000 | 1,000 | | To Interest on Drawings | 250 | 200 | | By Interest on Capital | 3,000 | 1,800 | | To Balance c/d | 5,750 | 3,600 | | By Salary | 6,000 | — | | | | | | By Commission | — | 4,000 | | | | | | By Share of Profit | — | 1,000 | | Total | 11,000 | 7,800 | | Total | 11,000 | 7,800 |

The balance in the Current Account can be debit (overdrawn) or credit (undrawn profit).

The Profit and Loss Appropriation Account

This is the heart of partnership accounting. It shows how the net profit is distributed among partners — not how it is earned.

Important

The Profit and Loss Appropriation Account is an extension of the Profit and Loss Account. It starts with Net Profit (from the P&L Account) and then shows appropriations.

Format:

Profit and Loss Appropriation Account | Particulars | Amount (₹) | | Particulars | Amount (₹) | |---|---|---|---| | To Interest on Capital: | | | By Net Profit (transferred from P&L A/c) | 1,00,000 | | — A | 6,000 | | By Interest on Drawings: | | | — B | 4,000 | | — A | 500 | | To Partner's Salary: | | | — B | 300 | | — A | 12,000 | | | | | To Partner's Commission: | | | | | | — B | 8,000 | | | | | To Profit transferred to: | | | | | | — A's Current A/c (3/5) | 42,120 | | | | | — B's Current A/c (2/5) | 28,080 | | | | | Total | 1,00,800 | | Total | 1,00,800 |

Notice: The total on the debit side equals the total on the credit side. The net profit plus interest on drawings is the distributable profit. …

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On dissolution, all assets (except cash/bank) and all outside liabilities are transferred to the Realisation Account; the balancing figure is the profit or loss on realisation. No profit-sharing ratio is given, so under the Indian Partnership Act, 1932 the partners share equally, and the General Reserve of ₹6,000 is split ₹3,000 each. Debtors are transferred at gross ₹55,000 with the Provision for Doubtful Debts (₹4,000) taken to the credit of Realisation. Gupta takes over the Investment (₹36,000) and assumes Mrs. Gupta's loan (₹20,000); Mrs. Sharma's loan and the creditors (less 3% discount) are paid by the firm.

Realisation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Sundry Debtors	55,000	By Sundry Creditors	38,000
To Stock	44,000	By Mrs. Gupta's Loan	20,000
To Bills Receivable	19,000	By Mrs. Sharma's Loan	30,000
To Machinery	52,000	By Provision for Doubtful Debts	4,000
To Investment	38,500	By Bank A/c (assets realised)	1,79,000
To Fixtures	27,000	By Gupta's Capital A/c (Investment taken over)	36,000
To Gupta's Capital A/c (Mrs. Gupta's loan assumed)	20,000	By Loss transferred — Gupta 8,280, Sharma 8,280	16,560
To Bank A/c (Creditors paid, less 3%)	36,860
To Bank A/c (Mrs. Sharma's loan paid)	30,000
To Bank A/c (Realisation expenses)	1,200
Total	3,23,560	Total	3,23,560

Partners' Capital Accounts (summary)

	Gupta (₹)	Sharma (₹)
Balance b/d	90,000	60,000
Add: General Reserve	3,000	3,000
Add: Mrs. Gupta's loan assumed	20,000	—
Less: Investment taken over	(36,000)	—
Less: Loss on Realisation	(8,280)	(8,280)
Final payment (Bank)	68,720	54,720

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No profit-sharing ratio is given, so profits and losses are shared equally. The Realisation Account closes with a Loss on Realisation of ₹16,560 (Gupta ₹8,280, Sharma ₹8,280). Final settlement: Gupta ₹68,720 and Sharma ₹54,720; the Bank Account totals ₹1,91,500.

Concept and treatment

Profit-sharing ratio. The balance sheet gives no ratio, so under the Indian Partnership Act, 1932 the partners share equally (1 : 1). The General Reserve of ₹6,000 is therefore split ₹3,000 : ₹3,000.
Provision for Doubtful Debts ₹4,000 is an item against the debtors; it is transferred to the credit of Realisation, and the debtors go in at their gross book value of ₹55,000.
Investment is taken over by Gupta at ₹36,000 — credit Realisation, debit Gupta's Capital.
Mrs. Gupta's loan ₹20,000 is an outside liability that Gupta agrees to pay. It is transferred to the credit of Realisation as a liability, and then assumed by Gupta (Realisation debited, Gupta's Capital credited) at the same ₹20,000, so it is not paid out of the firm's Bank and adds nothing to the loss.
Mrs. Sharma's loan ₹30,000 is paid by the firm through the Bank.
Creditors ₹38,000 are paid at a 3% discount = ₹36,860 (a gain of ₹1,140 to the firm).

Journal Entries

Particulars	Dr. (₹)	Cr. (₹)
Realisation A/c ...Dr.	2,35,500
To Sundry Debtors A/c		55,000
To Stock A/c		44,000
To Bills Receivable A/c		19,000
To Machinery A/c		52,000
To Investment A/c		38,500
To Fixtures A/c		27,000
(Assets transferred to Realisation at book value)
Sundry Creditors A/c ...Dr.	38,000
Mrs. Gupta's Loan A/c ...Dr.	20,000
Mrs. Sharma's Loan A/c ...Dr.	30,000
Provision for Doubtful Debts A/c ...Dr.	4,000
To Realisation A/c		92,000
(External liabilities and the provision transferred to Realisation)
Bank A/c ...Dr.	1,79,000
To Realisation A/c		1,79,000
(Assets realised: Debtors 52,000 + Stock 42,000 + B/R 16,000 + Machinery 49,000 + Fixtures 20,000)
Gupta's Capital A/c ...Dr.	36,000
To Realisation A/c		36,000
(Investment taken over by Gupta at agreed value)
Realisation A/c ...Dr.	20,000
To Gupta's Capital A/c		20,000
(Mrs. Gupta's loan taken over by Gupta)
Realisation A/c ...Dr.	36,860
To Bank A/c		36,860
(Creditors paid ₹38,000 less 3% discount)
Realisation A/c ...Dr.	30,000
To Bank A/c		30,000
(Mrs. Sharma's loan paid)
Realisation A/c ...Dr.	1,200
To Bank A/c		1,200
(Realisation expenses paid)
General Reserve A/c ...Dr.	6,000
To Gupta's Capital A/c		3,000
To Sharma's Capital A/c		3,000
(General Reserve distributed equally)
Gupta's Capital A/c ...Dr.	8,280
Sharma's Capital A/c ...Dr.	8,280
To Realisation A/c		16,560
(Loss on Realisation transferred equally)
Gupta's Capital A/c ...Dr.	68,720
Sharma's Capital A/c ...Dr.	54,720
To Bank A/c		1,23,440
(Final payment to partners)

Realisation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Sundry Debtors	55,000	By Sundry Creditors	38,000
To Stock	44,000	By Mrs. Gupta's Loan	20,000
To Bills Receivable	19,000	By Mrs. Sharma's Loan	30,000
To Machinery	52,000	By Provision for Doubtful Debts	4,000
To Investment	38,500	By Bank A/c (assets realised)	1,79,000
To Fixtures	27,000	By Gupta's Capital A/c (Investment taken over)	36,000
To Gupta's Capital A/c (Mrs. Gupta's loan assumed)	20,000
To Bank A/c (Creditors paid)	36,860
To Bank A/c (Mrs. Sharma's loan paid)	30,000
To Bank A/c (Realisation expenses)	1,200
		By Loss transferred to Capital A/cs:
		Gupta (1/2)	8,280
		Sharma (1/2)	8,280
Total	3,23,560	Total	3,23,560

Partners' Capital Accounts …

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Concept and treatment

Journal Entries

Realisation Account

Partners' Capital Accounts …

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