Partnership Drawing interest Calculation

Last post we discuss about Partnership Now we discuss most important topic in partnership. Yes Partner Drawing Calculation method differ form other interest calculation. Now we discuss how to calculate Drawing Interest.

Partners Drawing Interest Calculation Method

There are four latest method apply , if any body withdraws any fund or cash for personal use from his firm .

1. If any partner withdraws every month in the first day the he will pay to firm @ given rate for 6.5 months (month Drawing X R/100X6.5)
2. If any partner withdraws every month in the middle of month , he will pay interest on drawing @ given rate for 6 months  (month Drawing X R/100X6)
3. If any partner withdraws every month in the end of month , he will pay interest on drawing @ given rate for 5.5 months  (month Drawing X R/100X5.5)
4. 4.    If any partner does not withdraw every month then his withdrawing month usage product will be calculated

For Example

suppose if he withdraw Rs.5000 in first of march then will calculate product of 5000

after calculating product he calculate his payable interest on drawing @ given rate
= amount of product X R/100 X 1/12

 = 5000XR/100X10/12

Note went you calculate time period using this formula.

Sn=n/2(a+l)

For Example drawing in every starting of month

Sn=12/2(12+1)x1/12

    =12/2(13)X1/12

   =6.5

Middle of Month

Sn=12/2(11.5+0.5)X1/12

   = 6

First month half interest and also last month half Interest

Last day in month

Sn=1/2(11+0)X1/12

    = 5.5

Drawing in every two month and also begging

Sn=6/2(12+2)X1/12

    =42X1/12

    = 3.5

now you can try Middle , End of months any this problems conduct.

Other words Drawing Interest Calculation

There on two methods of calculating Interest on Drawings:-

1) Simple Method:-  Under this method, interest on drawing is calculated separately on each amount of drawings for the duration of time the amount of drawings has been used by the partner i.e. from the date of drawings till the close of accounting period.

    Interest on Drawings = Amount of Drawings X (Rate of Inerest/100) X (Months/12)

2) Product Method:- Under this method each amount of drawings is multiplied by its duration. Then all the products are added up and the interest is calculated on the total of products for one month.

    Interest on Drawings = Total of Products X ( Rate of Inerest/100 ) X ( 1/12)

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Introduction of Partnership

Today we discuss Partnership Accounting due to important sector in Accounting. First upon we find why partnership accounting arise already had Sole property Business.

Partnership arises due to enhance his business by person individually he can’t invest more his business and also manage that so seek some partners and adjoin starting his business with comment business agreement that is called Partnership.

Definition

A partnership has been defined as “The relation who subsists between persons carrying on a business with a common view of profit.

Partnership Act of 1890 (U.K)

The partnership business of Sri lanka are governed by this act in all respects.

   

Starting Partnership

Because ownership rights in a partnership are divided among two or more partners, separate capital and drawing accounts are maintained for each partner.

Ø  Investment of cash

If a partner invested cash in a partnership,

Cash account of the partnership Dr

           Partner's capital account Cr.

Capital account

Capital account of each partner represents his equity in the partnership.

Capital account of a partner is increased in the following situations:

§  The owner made additional investments during the year.

§  The owner received guaranteed payments from the partnership.

§  Partnership earned profits, and a share of profits was allocated to the partner.

§  The increase in the capital will record in credit side of the capital account.

Salary and interest allowances are guaranteed payments, discussed later.

Capital account of a partner is decreased when the owner makes withdrawals of cash or property

Guaranteed Payments

Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income. Compensation for services and capital are guaranteed payments.

A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. This treatment is for purposes of determining gross income and deductible business expenses only.

For other tax purposes, guaranteed payments are treated as a partner's distributive share of ordinary income. Guaranteed payments are not subject to income tax withholding.

Closing Process

Closing process at the end of the accounting period includes closing of all temporary accounts by making the following entries.

§  Close all revenues accounts to Income Summary.

§  Close all expenses accounts to Income Summary.

§  Close Income Summary by allocating each partner's share of net income or loss to the individual capital account.

§  Close each partner's drawing account to the individual capital accounts.

Admitting a new partner

A new partner may be admitted by agreement among the existing partners. When this happens, the old partnership is dissolved and a new partnership is created, with a new partnership agreement.

A new partner may buy into the business in three ways:

§  by purchasing an interest directly from existing partners

§  by making an investment in the business, or

§  by contributing assets from an existing business.

Death of a Partner

The death of a partner dissolves the partnership. On the date of death, the accounts are closed and the net income for the year to date is allocated to the partners' capital accounts. Most agreements call for an audit and revaluation of the assets at this time. The balance of the deceased partner's capital account is then transferred to a liability account with the deceased's estate.

The surviving partners may continue the business or liquidate. If the business continues, the procedures for settling with the estate are the same as those described earlier for the withdrawal of a partner.

Liquidation of a Partnership

Liquidation of a partnership generally means that the assets are sold, liabilities are paid, and the remaining cash or other assets are distributed to the partners.

When normal operations are discontinued, adjusting and closing entries are made. Thus, only the assets, liabilities and partners' equity accounts remain open.

If noncash assets are sold for more than their book value, a gain on the sale is recognized. The gain is allocated to the partners' capital accounts according to the partnership agreement.

If noncash assets are sold for less than their book value, a loss on the sale is recognized. The loss is allocated to the partners' capital accounts according to the partnership agreement.

As the assets are sold, the cash is applied first to the claims of creditors. Once all liabilities are paid, the remaining cash and other assets are distributed to the partners according to their ownership interests as indicated by their capital accounts.

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