This GSEB Class 12 Commerce Accounts Notes Part 1 Chapter 2 Final Accounts (Financial Statements) of Partnership Firm covers all the important topics and concepts as mentioned in the chapter.

Final Accounts (Financial Statements) of Partnership Firm Class 12 GSEB Notes

We studied final accounts of ownership concerns in standard XI. Similar to that in the partnership concerns final accounts are also prepare. Here, final accounts are prepare with an intention to get idea/ distribution of profit and loss among partners. With these accounts one can know profit or loss of the firm and financial status of the business.

To prepare final accounts of partnership firm, one has to take help of trial balance and has to consider the given adjustments at the end of financial year.

In the final accounts of partnership to know gross profit or gross loss Trading A/c, to know net profit or net loss Profit and Loss A/c, an account showing distribution of profit and loss among partners Profit and Loss Appropriation A/c and to know financial position of the business, Balance Sheet are to be prepared. Moreover to record accounting transactions of the partners with firm, partners’ Capital Accounts or Current Accounts are also to be prepared. In detail we will study above things in this chapter.

→ While preparing final accounts of partnership firm, Trading A/c, Profit and Loss A/c. Profit and Loss Appropriation A/c’s are prepare for the year ending on date means, they are prepared at the end of the financial year. While Balance Sheet of the firm is prepare for the year as on date Remember balance sheet is not an account, it is a statement.

→ Many a times, it is not clearly mentioned that account has debit balance or credit balance. In this situation considering these kind of balances as debit balance, give the effects e.g. Interest, Dalali, Commission, Rent, Discount, Allowance etc.

→ Pass only one effect for the balances given in the trial balance and at least two effects for every adjustments.

→ Pass only one effect for the following particulars shown in the trial balance

• Closing stock – On Asset – Receivable side of balance sheet
• Stationery stock – On Asset – Receivable side of balance sheet
• Prepaid expenses – On Asset – Receivable side of balance sheet
• Receivable incomes – On Asset – Receivable side of balance sheet
• Unpaid expenses- On Capital – Liability side of balance sheet
• Pre-received income On Capital – Liability side of balance sheet
• Depreciation fund – On Capital – Liability side of balance sheet
• Pre-received apprentice premium – On Capital – Liability side of balance sheet
• Depreciation on Asset – On Debit side of Profit and Loss Account
• Goods goes out by any means – On debit side of Trading A/c. Subtract it from Purchase A/c.

→ If closing stock value is given in the trial balance, then it implied that result of Trading A/c is given in the trial balance or corrected Trading A/c is to be prepare.

→ When Adjusted purchase is given in the trial balance then closing stock of goods given in the trial balance is to be shown on Asset-Receivables’ side of Balance sheet.
Remember, Adjusted Purchase = Opening stock of goods + Net purchase – Closing stock of goods

→ Consider closing stock of goods at cost price or market price whichever is less.

→ In the trial balance when balance is given with date or percentage (%), then it suggest hidden adjustment related with that balance.

→ If ‘Salary and wages’ is given in the trial balance write it on debit side of profit and loss A/c and if ‘Wages and Salary’ is given, write it on debit side of Trading A/c.

→ ‘Trading expense’ given in the trial balance, is to be recorded on debit side of profit and loss account. But when ‘Trading expense’ and ‘Office expense’ both are given in the trial balance then write Trading expense on debit side of Trading A/c and office expense on debit side of profit and loss A/c.

→ While calculating amount for interest on capital, Interest on drawings, depreciation on assets, insurance premium, Lease hold assets, Apprentice premium etc. consider the date factor. If specific date is not given then calculate the amount from the starting date of accounting period.

→ Goods return – debit means purchase return. It has always credit balance.

• Goods return – credit means sales return. It has always debit balance.
• Irrecoverable amount means bad debts which has always debit balance Provision for doubtful debts or Bad debts reserve has always credit balance.
• Discount fund-debit means Discount reserve on debtors, which has always credit balance. Discount fund-credit means Discount reserve on creditors, which has always debit balance.

→ Providend fund is a liability for the business, and it is to be shown on Capital – Liability side of Balance sheet.
Investment of Providend fund is an asset for the business and it is to be shown on Asset side of Balance sheet.
Interest on investment of Providend fund will be added in the balance of Providend fund on capital liability side of balance sheet.

→ Contribution to Providend fund is an expense for the business, and is to be shown on debit side of profit and loss account.

→ While calculating depreciation on asset, remember,

• Calculate depreciation on the opening balance of an asset.
• During the year, if there is an increase in the asset, then calculate depreciation from the date of purchase of asset to the last date of financial year. Similarly, if there is decrease in the asset then calculate depreciation from the first date of the accounting year to the date of asset decreased. And on remaining asset calculate depreciation for the full year.
• When depreciation amount is given in the trial balance, write it on debit side of profit and loss account. Do not try to subtract it from the concern asset on the asset- receivable side of balance sheet .
• When asset is revalued then difference between original value and revalued value will be considered as depreciation.
• To get written off value/depreciation amount for leasehold asset, divide the given value by number of years for which asset is taken on lease.
• When depreciation on asset is to be calculated by straight line method or equal installment method, calculate it on cost price of an asset. Here, amount of depreciation remains same for every year. But if depreciation on asset is to be calculated by diminishing balance method or by reducing balance method. Calculate it on book value of an asset i.e. opening balance of an asset. Here, amount of depreciation changes every year.

→ When depreciation fund on asset is given in the sum, then amount of depreciation on asset will be recorded on debit side of Profit and Loss A/c and will be added in depreciation fund amount on capital-liability side of balance sheet. In this situation, asset is shown in the balance sheet at its cost price only.

→ When depreciation amount is given in the trial balance for some asset and as per adjustment, depreciation is required to be increased. Then add depreciation amount given in the trial balance to the depreciated value of asset and then calculate depreciation (new) as per given percentage in the adjustment. Show this new depreciation amount on the debit side of Profit and Loss A/c and subtract this new depreciation amount from the total amount of asset.

→ If depreciation is required to be decreased then add depreciation amount given in the trial balance to the depreciated value of asset and then calculate depreciation (new) as per given percentage in the adjustment. Show this new deprecation amount on the debit side of Profit and Loss A/c and subtract this new depreciation amount from the total amount of asset.

→ From the debtors subtract bad debts, bad debts reserve and discount reserve on debtors respectively and show these amounts on the debit side of Profit and Loss A/c (As per format). Write net amount in the outer column. If answer of the format comes to negative (-) then show this amount on the credit side of Profit and Loss A/c. Remember that bad debts reserve is to be calculated always on goods debtors, not on doubtful debts.

→ When bad debts reserve is given in the trial balance only and during the accounting year if bad debts is not incurred and in the adjustments also if bad debts reserve adjustment is not given then B.D.R.(old) shown in the trial balance will be deducted from the debtors amount on asset- receivable side of balance sheet. If bad debts reserve amount is given in the trial balance only and in the adjustments, it is given that ‘Bad debts reserve is not required now’ then write B.D.R. (Old) on the credit side of profit and loss account.

→ After giving effects of all adjustments related to debtors, give the effects of Bad debts (A), B.D.R. (A) and Discount reserve on debtors [D.R.D. (A)] respectively.

→ When there is difference in the total of two sides of trial balance then write difference amount to ‘suspense Account’.
If suspense account has debit balance, show it to Asset-Receivable side of Balance sheet and if it has credit balance, show it to capital-liability side of Balance sheet. If ‘suspense account’ balance is given in the trial balance, then also follow the same process.

→ Sales Tax amount-write it on debit side of Profit and Loss A/c. While Income Tax amount consider it as a partner’s drawings.
If income tax refund is there transfer that amount to partner’s capital A/c.
If Partners Current account is given, write income tax refund amount on the credit side of partners’ Current account.

→ In the trial balance when opening stock of stationery and purchase of stationery is given and in the adjustments closing stock of stationery stock is given then, (1) Show the amount of consumption of stationery on the debit side of profit and loss A/c. Where consumption of stationery = Opening stock of stationery + purchase of stationery – closing stock of stationery. (2) Show the amount of closing stock of stationery on the Asset- receivable side of Balance sheet.

→ While giving the effects of adjustment for rectification then pass first effect of wrong things done and then only pass the effect for correct things.

→ When it is not clearly mention for the preparation of profit and loss appropriation A/c, then particulars of Profit and Loss Appropriation A/c is to be shown in the profit and loss A/c and transfer divisible profit or loss amount to Partners’ Capital/Current A/c.

→ In the sum when Partners’ Capital Accounts are only given then prepare partners’ capital accounts and give effects of transaction of partners with the firm in the partners’ capital accounts only. Final balance of these partners’ capital accounts are shown on the capital liability side of balance sheet.

→ In the sum when Partners’ Capital accounts and Current accounts both are given, then show capital account balance directly in the balance sheet as capital of partners and in current account give the effects of transactions of partners with the firm in the current account and final balance of current account will be shown in the Balance sheet.

When partners current account shows credit balance then show it on the capital = liability side of balance sheet and if it shows debit balance then show it on the asset- receivable side of balance sheet.

→ When rate of interest on loan of partner is not clearly mention then calculate it at 6% p.a. and show interest on loan on debit side of profit and loss account considering it as an expense for the business.

→ When partner of a firm is to be paid commission on net profit after charging such commission, then calculate it by using following formula.
Partner’s commission = Net Profit (Before commission) × (frac{% text { of Commission }}{100+% text { of Commission }})

→ In the partnership final accounts, show the capitals, drawings, current account balance etc. of every partner with their name only. E.g. Akash’s capital, Alap’s salary, Alap’s drawings

Adjustment, Adjustment Entry and Its Effects in Annual Accounts