Is drawings recorded in partners current account?

Table of contents

1. How do drawings affect your financial statements?
2. How do you record drawings in accounting?
3. Where do drawings go on a balance sheet?
4. Are drawings assets or expenses?
5. What counts as a drawing?
6. We can help

A drawing account is not actually a bank account in itself. The meaning of drawing in accounts is the record kept by a business owner or accountant that shows how much money has been withdrawn by business owners. These are withdrawals made for personal use rather than company use – although they’re treated slightly differently to employee wages.

It’s essential to keep accurate records of these withdrawals because they need to be offset against the owner’s equity. Having a separate drawing account makes it easier to keep track of these transactions and to balance the books at the end of each

How do drawings affect your financial statements?

Drawings in accounting terms represent withdrawals taken by the owner. As such, it will impact the company’s financial statement by showing a decrease in the assets equivalent to the amount that is withdrawn. It will also represent a decrease in the owner’s equity as the owner is, essentially, cashing in on a small piece of their entitlement to the company.

Drawings will also show up on a statement of cash flows as they represent a type of financial activity and so need to be accurately recorded by the company’s account departments.

How do you record drawings in accounting?

On your balance sheet, you would typically record an owner withdrawal as a debit. If the withdrawal is made in cash, this can easily be quantified at the exact amount withdrawn. If the withdrawal is of goods or similar, the amount recorded would typically be a cost value.

Drawings accounts are temporary documents and these need to be balanced at the end of a financial year or period. This can be cleared in several different ways, including through repayment by the owner or a reduction in the owner’s salary to compensate for the amount withdrawn.

Where do drawings go on a balance sheet?

The balance sheet is also known as a statement of financial position, and it is an essential document for assessing and demonstrating your business’s economic position. A typical balance sheet records your business’s assets and liabilities as well as shareholder equities. As a result, the placement of drawings within the balance sheet depends on how it is categorised. 

Are drawings assets or expenses?

Drawings from business accounts may involve the owner taking cash or goods out of the business – but it is not categorised as an ordinary business expense. It is also not treated as a liability, despite involving a withdrawal from the company account, because this is offset against the owner’s liability. This is why it’s so important to keep a drawings account, which needs to be closed at the end of the financial year, ensuring that your books aren’t disrupted by this financial transition while also maintaining a clear record of all the moving parts of your business.

What counts as a drawing?

A drawing acts similarly to a wage but is applied to sole traders or partners. A drawing in accounting terms includes any money that is taken from the business account for personal use. This can be the equivalent of a salary, or it can be as simple as lunch paid for with your company credit card.

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Table of Contents

1. Meaning and Definition of Partnership

1.1 Meaning of partnership

1.2 Features or Characteristics of Partnership

1.3 Nature of Partnership firm

1.4 Partners, Firm and Firm Name

1.5 Accounting Procedure of Partnership Firm

1.6 These are the additional points

2. Partnership Deed

2.1 The Partnership Deed covers following details.

3. Profit and Loss Appropriation Account

4. Partners’ Capital Account & Interest on Capitals

4.1 Fluctuating Capital method

4.2 Fixed Capital method

4.3 Interest on capital

4.4 When Capital is fixed

4.5 When Capital is Fluctuating

5. Interest on Drawings

5.1 Calculation of Interest on Drawings

6. Interest on Partners Loan

6.1 Rate of Interest

6.2 Nature of Interest

6.3 Accounting Treatment

7. Salary or Commission to a Partner

7.1 When to Allow

7.2 Nature of Payment

7.3 Calculation

7.4 Important Points

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1. Meaning and Definition of Partnership

1.1 Meaning of partnership

According to Sec. 4 of the Indian Partnership Act, 1932, “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all.

1.2 Features or Characteristics of Partnership

After analyzing the above definition the following are the essential Characteristics of Partnership:-

1. 1. Association of two or more persons: The minimum number of partners in a firm can be two. Maximum number is guided by Companies Act. According to section 464 of the Indian Companies Act 2013, the number of partners in any association shall not exceed 100. However, the Rules given under the Companies (Miscellaneous) Rules, 2014 restrict the present limit to 50. If this limit is exceed it becomes illegal association
   2. Agreement: There must be an agreement between all partners who are involved in that business.
   3. Business: The agreement should be for the purpose of carrying business between the partners.
   4. Profit sharing Ratio: There must be sharing of profits and loss of business between partners.
   5. Agency Relationship: A partner is both (an agent and the principal) of his own business .A partner is an agent of his own business in the sense that he can bind new partners by his acts and a partner is a principal of his own business in the sense that he can be bound by the acts of other partners of business.
   6. Liability of Partners: Each partner is liable jointly and individually third party for all the acts of the firm done while he is a partner. It means his private assets can also be used for paying off the firm’s debts.

1.3 Nature of Partnership firm

From legal point of view a partnership firm has no separate legal entity apart from the partners constituting it but from accounting point of view, Partnership is a separate business entity. Under section 2(3) of the Income-tax Act, 1961 a partnership firm is a Separate person.

1.4 Partners, Firm and Firm Name

The persons who have entered into a partnership are individually called as ‘partner’ of the firm and together they are refer as ‘firm’, the name under which the business of the firm is carried on is called the ‘firm name’.

1.5 Accounting Procedure of Partnership Firm

The Final Accounts of a Partnership Firm is prepared in same manner in which Final Accounts of sole proprietors is prepared. Because in case of Partnership two or more partners are involve so the Net Profit of the Firm is distributed by Partners in their agreed Ratio. The account which shows the distribution of Profits or loss among the Partners is called “Profit and Loss Appropriation A/c”. It is an extension of Profit and Loss Account.

1.6 These are the additional points

1. 1. Partnership Deed
   2. Profit and Loss Appropriation Account
   3. Partners’ Capital Accounts
   4. Interest on Partners Drawings
   5. Interest on Partners Capital
   6. Salary or Commission to Partners
   7. Interest on Partners Loan
   8. Adjustments after closing of partnership Accounts.

2. Partnership Deed

• • Partnership deed is not compulsory documents, it is Voluntary documents
  • A partnership deed is based on an agreement among the partners.
  • It contains the terms and condition of partnership as agreed among the partners.
  • The partnership agreement can be either oral or written but when it is in writing, it is called ‘Partnership Deed’. The deed should be properly drafted and prepared as per the provisions of the ‘Stamp Act’ and preferably registered with the Registrar of Firms.

2.1 The Partnership Deed covers following details.

1. 1. Name of Firm and the partners.
   2. Commencement and duration of business.
   3. Amount of Capital contributed by each partner.
   4. Amount to be allowed to each partner as drawings and the timing of such drawings.
   5. Rate of Interest to be allowed to each partner on his capital and on his loan to the firm and to be charged on his drawings.
   6. Ratio in which profit or Losses are to be shared.
   7. Whether a partner will be allowed to draw any salary.
   8. Any Variation in the mutual rights and duties of partners.
   9. Method of valuing goodwill on the occasion of changes in the constitution of the firm.
   10. Procedure by which a partner may retire and the method of payment of his dues.
   11. Basis of the determination of the executors of a deceased partner and the method of payment.
   12. Treatment of losses arising out of the insolvency of a Partner.
   13. Procedure to be followed for settlement of dispute among partners.
   14. Preparation of accounts and their audit.

If there is no partnership deed and if partnership deed is available but it is silent on any matter, then the relevant provisions of the Indian Partnership Act, 1932, would be applicable. Some of the provisions of the Act :-

(a) Sharing of Profits & Losses – Profits & Losses are to be shared equally according to section [Sec. 13(b)]

(b) Interest on Capital – No Interest is to be allowed on Capital according to section [Sec. 13(c)]

(c) Interest on Loan & Advances by a partner – Interest @ 6% p.a. is to be allowed on Advances & Loans, according to section [Sec. 13(d)].

(d) Interest on Drawings – No Interest is to be charged on Drawings.

(e) Salary to a partner – No remuneration for taking part in the conduct of business is to be allowed to any partner according to section [Sec. 13(a)]

3. Profit and Loss Appropriation Account

This account is prepared to distribute profit or loss among the partners. It is the extension of Profit and Loss Account. This account show what amount of profit is transferred to partner’s capital Account.

Profit and Loss Appropriation A/c

For the year Ended on ………………..

Note: –

1. 1. Partners Commission:- If Partners commission is allowed on Turnover (Sales) or Purchase of goods it is item of Profit and Loss Account but when Partners allowed commission on Profit it becomes item of Profit and Loss Appropriation A/c

• • Interest on Partner’s Loan and advance
  • Manager Commission
  • Rent Paid to a partner

 Profit and Loss A/c

For the year Ended on ………………..

4. Partners’ Capital Account & Interest on Capitals

Partners Capital Accounts:

Methods of Maintaining Capital Accounts of Partners

The partner’s Capital Account may be maintained in two ways.

1. 1. Fluctuating Capital method
   2. Fixed Capital method

4.1 Fluctuating Capital method

When capital is fluctuating a single Account is prepared that is called Partners Capital Account. In this account amount of capital is change from opening figure to closing figure. All entries such as, Interest on capital, Drawings, Interest on Drawings, Salary of partner, Commission of partner, Share of Profit or Loss and additional / fresh capital introduced by partners are recorded in Partner Capital A/c

Note:- Interest on Loan and Advance to Partners are not recorded in Partners Capital A/c When Partners Capital A/c is fluctuating. In this case it may be recorded in separate account “Accrued Interest A/c”

4.2 Fixed Capital method

When capital is fixed two Accounts are prepared

1. 1. Partners’ Capital Account
   2. Partners’ Current Account

1. Partners’ Capital Account: – In this account only additional capital introduced and withdrawn from existing capital is shown and no other transactions are recorded.

2. Partners’ Current Account:- In this account all entries such as, Interest on capital, Drawings, Interest on Drawings, Salary of partner, Commission of partner, Share of Profit or Loss are recorded.

4.3 Interest on capital

Calculation of Interest on Capital: Interest on capital is calculated at the pre-defined rate with period for which capital has been used in the business. Interest on capital will be calculated on opening balance of capital account. Interest on capital is also allowed if any capital is introduced during the year.

Certain times closing capital is given then for the purpose of calculating “interest on capital” opening capital will find out

4.4 When Capital is fixed

Calculation of Capital at the Beginning

4.5 When Capital is Fluctuating

Calculation of Capital at the Beginning

 Accounting Treatment of Interest on Capital

1. 1. In case of Loss: – No Interest on Capital is allowed.
   2. If there is Sufficient Profit, it means total interest on capital is allowed out of profit :- Interest on capital is allowed
   3. If there is no sufficient Profit, it means total interest on capital can not allowed out of profit :- Interest on capital is allowed only to the extent of profit “in the ratio of capital of each partner”

5. Interest on Drawings

When company Charge Interest on Drawing – Interest on Drawings will be charged from the partners if the partnership agreement provides for the same. If partnership deed is silent about charging interest on drawings, No interest on Drawings will charge.

5.1 Calculation of Interest on Drawings

⇒ By Product Method :- Basic method of calculating Interest on Drawings

Interest on Drawings = Sum of Product × Rate of Interest × Time

⇒ By average period Method :- Short cut method of calculating Interest on Drawings

Average Period Method should be used only when

(i) The amount of Drawings is uniform; and

(ii) The time interval between the two consecutive drawings is uniform.

Timing of Drawings

Each month for whole year

3 months

4 and ½ month

Accounting Treatment – Interest on drawings is profit or gain to the Firm and credited to the Profit& Loss Appropriation Account. On the other hand, interest on drawings is a loss to the partner and debits to his Current/Capitals Account.

6. Interest on Partners Loan

6.1 Rate of Interest

In case of any partner gave loan to his firm, that partner is entitled to an interest on that given loan at a pre-decided rate of interest. If there is no agreement for the rate of interest on loan, the partner is entitled to Interest on loan @ 6% p.a. under section [Sec 13(d)].

6.2 Nature of Interest

The interest is to be allowed whether there is profit or loss in the business. It is given out of Loss because it is Charge against the Profit

6.3 Accounting Treatment

It can be noted that such interest on loan being a charged against the profit shell be transferred to be debit of profit and loss a/c and not to be debit profit and loss appropriate.

7. Salary or Commission to a Partner

7.1 When to Allow

Salary or Commission to a partner will be allowed if the partnership agreement is said.

7.2 Nature of Payment

Salary or commission to a partner is an appropriation out of profits and not in charge against the profit. We can say that it is to be allowed only there are profit in the business.

7.3 Calculation

Commission may be allowed as percentage on Net Profit before charging this commission or after charging this commission.

(a) Commission as % of Net Profit before charging this Commission

(b) Commission as % of Net Profit after charging this Commission

Accounting Treatment Salary or commission to a partner being an appropriation of profit so transferred to the debit side of the Profit and Loss Appropriation account and not in Profit and Loss Account.

7.4 Important Points

• • The law relating to Partnership Firm is contained in “The Indian Partnership Act, 1932
  • The Indian Partnership Act came in to force on 1st day of October in 1932 or 1/10/1932
  • A partnership cannot be formed with a minor partner but after the formation of partnership a minor may be admitted in the Partnership. (All the persons entering into partnership must be “competent to contract” at the time of formation of partnership)
  • A partnership can be formed for carrying Business as well as Profession but it cannot be formed for carrying on a “Charitable Activities”.
  • The maximum number of partners is mentioned in section 464 of the Indian Companies Act 2013, the number of partners in any association shall not exceed 100. However, the Rules given under the Companies (Miscellaneous) Rules, 2014 restrict the present limit to 50
  • Mutual Agency is conclusive evidence of Partnership
  • Sharing of Profit is Prima facie evidence of Partnership.
  • Registration of Partnership Firm is optional
  • An unregistered Firm cannot claim Set off in excess of ` 100
  • In the absence of any agreement, partners are liable to receive interest on their Loans & Advances @ 6 % p.a. [Section 13(d)]
  • A partner’s act as agent for a Firm
  • Partnership Deed and Partnership agreement: – Partnership deed is registered in Court of law it means it is properly stamped where as partnership agreement is not registered
  • Interest on capital will be paid to the partners if provided for in the agreement but only from Current Profits.
  • The balance of Partner Current A/c and Partners Capital Account (in Case of Fluctuating capital) may be Debit balance as well as credit balance. But the Balance of Fixed capital is always Credit Balance.
  • A partnership firm not a person in the eyes of Law except under section 2(3) of the Income-tax Act, 1961
  • Partnership Deed is not necessary. In the lack of Partnership Deed the provision of the Indian Partnership Act, 1932 would be Applicable.
  • The partnership Deed is must be signed by all partners.
  • A Firm is the collective name under which partners carries its business.
  • A Firm does not have a legal existence, apart from its member.
  • Registration of Firm can be affected on or after formation of a Firm.
  • A minor can be admitted to the benefits of partnership in an Existing Firm with the Consent of Majority of a Partnership.
  • Agreement to Share profits does not necessarily mean an agreement to share Losses.
  • Rent paid to a Partner and “Interest Allowed on Loan and Advance” to a partner is charge against the profit so it is recorded in Profit and Loss A/c and not Profit and Loss Appropriation A/c. (Rent paid to a partner is an expenses incurred towards use of property. It is charge of Profit)
  • In the absence of an agreement, partners are entitling only to “Interest on Loan and Advance” and share Profit and Loss Equally.
  • In case of Partnership an addition Account apart from Profit and Loss A/c is prepared which is called Profit and Loss Appropriation A/c. It is an extension of Profit and Loss A/c. In case of sole Proprietorship Profit and Loss Appropriation A/c is not prepared.
  • Profit and Loss Appropriation A/c is prepared for distributing Profit among Partners.
  • Interests on Drawing are allowed to partners only when it is provided by an Agreement or agreed by all partners.
  • Balance of Partners Drawings A/c is transferred to Credit side of either Partners Current A/c or Partners Capital A/c. When partner Drawings A/c is closed its balance is transferred to Credit side of either Partners Current A/c or Partners Capital A/c.
  • The liability of All Partners is jointly and severely unlimited. In case of Loss partners are personally as well collectively liable for bear “loss of the firm”
  • In the absence of an agreement “Interest on Capital” is allowed only from “Current Profit” or not from Accumulated profits or past profits.
  • Where the “Partnership Deed” is silent on any point the provision of Partnership Act, 1932 will apply.
  • Guarantee is always given for Profit When Guarantee is given to any partner it means in case of loss or insufficient profit guaranteed partner must withdraw minimum guarantee amount.
  • Unless otherwise provided, it is presumed that all the existing partners have given such guarantee in their existing Profit Sharing Ratio.
  • In the absence of any instructions, the partners’ capital A/c should be prepared on the basis of Fluctuating Capital Method

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