Accounting Treatment For Partner's Salary And Commission
Introduction
We all know that no partner can entertain any salary or commission unless it is provided by the partnership deed. The salary or commission to a partner could be allowed to her/him if she/he does the most of the work of the firm according to the agreement among the partners. The salaries or commission is paid to the partners for the sake of sacrificing their time and labor to the firm as an emolument.
Commission may be allowed to a partner as a percentage of net profit before charging such commission or after charging such commission. If it to be allowed as a percentage of net profit before charging such commission, it is calculated as:
Commission= Net profit before commission X Rate of commission/100
Commission= Net profit before commission X Rate of commission/100
If it is to be allowed as a percentage of net profit after charging such commission, it is computed as follows:
Net profit before commission X Rate of commission/100+Rate of commission
Net profit before commission X Rate of commission/100+Rate of commission
The salaries or commission to partners is a appropriation of profit rather than charge so it is debited to profit and loss appropriation account and shall be credited to respective partners' capital accounts if capitals are fluctuating and to be credited to partners current account if capitals are fixed in nature.
Salary/Commission ...........................Dr.
To Partners' capital/current A/c
Profit and loss appropriation A/C.......................Dr.
To Salary/Commission
Salary/Commission ...........................Dr.
To Partners' capital/current A/c
Profit and loss appropriation A/C.......................Dr.
To Salary/Commission
Accounting Treatment For Partners' Interest On Capitals
Interest on capital is allowable only if there is enough profits to cover it up otherwise not as well as it should be cleared to all that partners shall not be entitled any interest on capital, unless specifically given or written in the partnership agreement. Interest on capital introduced by the partners is calculated on the basis of time of contribution and it should also be considered the introduction of fresh capital by any partner as well as drawings made by the partners.
It is important to note here that, the interest on capital provided to a partner is a compensation given to him for his/her investment in the firm foregoing the alternative risk free/risky investment available with even higher return.
Interest on capital is necessary to partners because they always not share the profit on the basis of capital contribution ratio rather sometime equally even through the capital contribution is unequal. So, it equalizes the weight to maintain a parity the interest on capital plays a vital role among partners.
The interest on capital is an appropriation of profits, so, it is charge to profit and loss appropriation account and credited to respective partners' capital account or current account.
Interest on capital......................Dr.
To partners' capital A/C
Profit and loss appropriation A/C ...............Dr.
To Interest on capital A/C
Interest on capital......................Dr.
To partners' capital A/C
Profit and loss appropriation A/C ...............Dr.
To Interest on capital A/C
Partners' Drawing Accounts With Interest On Drawing
Whenever partners withdraw money from the partnership firm for their private purpose it could be termed as drawings. The drawings could be of following nature:
1. Drawings against salary or commission
2. Drawings against interest on capital
3. Drawing against share of profits etc.
It should be noted that the provisions of drawings must be laid down in the partnership deed. When any partner withdraws money then that amount will be debited to his/her drawings account or current account and is credited to cash/bank account.
1. Drawings against salary or commission
2. Drawings against interest on capital
3. Drawing against share of profits etc.
It should be noted that the provisions of drawings must be laid down in the partnership deed. When any partner withdraws money then that amount will be debited to his/her drawings account or current account and is credited to cash/bank account.
To close the partners drawing account, they are transferred to partners capital account or partners current account at the end of the year by passing the following entry:
Fluctuating Capital Method
Partners' capital A/C................Dr.
To Partners drawings A/C
Fixed Capital Method
Partners' current A/C...............Dr.
To partners' drawings A/C
Interest On Drawings
Interest on drawing is an income of the partnership firm and is credited to profit and loss appropriation account.
On charging interest on drawings
Partners' capital A/C...................Dr.
To interest on drawings A/C
To close the interest on drawings
Interest on drawings A/C......................Dr.
To profit and loss appropriation A/C
Fluctuating Capital Method
Partners' capital A/C................Dr.
To Partners drawings A/C
Fixed Capital Method
Partners' current A/C...............Dr.
To partners' drawings A/C
Interest On Drawings
Interest on drawing is an income of the partnership firm and is credited to profit and loss appropriation account.
On charging interest on drawings
Partners' capital A/C...................Dr.
To interest on drawings A/C
To close the interest on drawings
Interest on drawings A/C......................Dr.
To profit and loss appropriation A/C
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