Chapter 1. Accounting For Partnership Firms Class 12 Accounts Notes BBA, B.COM & MBA Accounts Notes

 ACCOUNTING FOR PARTNERSHIP FIRMS - FUNDAMENTALS

Partnership Association of two or more persons who agree to do business carried by all or any of them and share its profits and losses. Partner: Members of Partnership. Firm: All members combined together to form a partnership is collectively known as Firm. Firm Name- The name under which Partnership Business is carried on. Partnership Deed: A written agreement signed by all partners, that contains terms and conditions of Partnership such as, Description of Partners, Description of Firm Nature of Business, Address of Firm Interest Rate on Partners’ Loan Interest Rate on Capital & Drawing Capital Contribution of Each Partner Profit Sharing Ratio Provisions related to Admission, retirement & Death of Partner Remuneration to Partners etc. Provisions of Partnership Act, 1932 in Absence of Partnership Deed Particulars Provisions of Indian Partnership Act, 1932 1. Sharing of profit/Losses Equal 2. Interest on Capital No Interest 3. Interest on Drawings No Interest Charged 4. Remuneration (Salary, Commission & others) No remuneration 5. Interest on Loan By a Partner 6 % Per Annum (even firm suffers loss as Interest on Partner’s Loan is a charge against Profit)

Accounting Treatment for Interest on Partner’s Loan: Interest on Partners’ Loan is a charge against Profit and debited in P&L A/C. 1. To Provide for Interest on Partner’s Loan Interest on Partners’ Loan A/C………..Dr To Partners’ Loan A/C 2. To Close the Interest on Partners’ Loan A/C P&L A/C……………………Dr To Interest on Partner’s Loan A/C When Profit is less than Interest on Partner’s Loan, then also we debit it in P&L A/C and Losses are distributed among partners in Profit Sharing Ratio. Rent Paid to Partner Rent paid to Partner is a charge against Profit and not an appropriation of Profit. It is payable even Firm has incurred losses. Journal Entry for Rent Paid to partner: P&L A/C…………………………Dr To Rent Payable A/C

Profit & Loss Appropriation A/C: It is an extension of P&L A/C which is credited with Net Profit transferred from P&L A/C and Interest on Drawings of Partners and debited with expenses incurred by firm in disposing obligations towards Partners. Profit & Loss Appropriation A/C For the year ended………………. Particulars Amount Particulars Amount To Transfer to General Reserve from Net Profit To Interest on Capitals: X Y Z To Partners’ Salary To partners’ Commission **To Profit transferred to (in Profit Sharing Ratio): X’s Capital A/C (under Fluctuating Capital Method) or To X’s Current A/C under Fixed Capital Method) Y’s Capital A/C (under Fluctuating Capital Method) or To Y’s Current A/C under Fixed Capital Method) Z’s Capital A/C (under Fluctuating Capital Method) or To Z’s Current A/C under Fixed Capital Method) By P&L A/C (Net Profit transferred from P& L A/C) By Interest on Drawings X Y Z **By Loss transferred to (in Profit Sharing Ratio): X’s Capital A/C (under Fluctuating Capital Method) or To X’s Current A/C under Fixed Capital Method) Y’s Capital A/C (under Fluctuating Capital Method) or To Y’s Current A/C under Fixed Capital Method) Z’s Capital A/C (under Fluctuating Capital Method) or To Z’s Current A/C under Fixed Capital Method) ** Either Profit or Loss entry will be passed. Both can not come together. Firm can have either Profit or Loss after appropriation. According to the information provided and results arrived, we have to write either Profit or Loss entry.

Journal Entries related to Profit & Loss Appropriation A/C: 1. For Interest on Capital: Being Interest on Capital Allowed Interest on Capital A/C……………….Dr To Partners’ Capital A/C or Current A/C Being Interest on Capital allowed to P&L Appropriation A/C P&L Appropriation A/C……………………..Dr To Interest on Capital A/C Alternatively, a combined entry may be passed as: P&L Appropriation A/C…………Dr To Partner’s Capital A/C (Individually) 2. For Charging Interest on Drawings: Being Interest on Drawing Charged Partners’ Capital A/C or Current A/C……………….Dr To Interest on Drawing A/C Being Interest on Drawing  transferred  to P&L Appropriation A/C Interest on Drawing  A/C……………………..Dr To P&L Appropriation A/C Alternatively, a combined entry may be passed as: Partner’s Capital A/C/ Current A/C………..Dr To P&L Appropriation A/C 3. For Partners’ Remuneration (Salary, Commission etc) Being Commission / Salary allowed to Partners Commission A/C / Salary A/C…………..Dr To Partners’ Capital A/C / Current A/C Being Commission / Salary transferred to Partners’ Capital A/C P&L Appropriation A/C……………Dr To Commission A/C / Salary A/C Alternatively, a combined entry may be passed as: P&L Appropriation A/C……………Dr To Partner’s Capital / Current A/C 4. For transfer to Reserve out of Profit P&L Appropriation A/C……….Dr To Reserve A/C 5. For Transfer of Balance of Profit P & L Appropriation A/C……..Dr To Partners’ Capital A/C Or For transfer of Balance of Loss Partners’ Capital A/C…………Dr To P & L Appropriation A/C

When Appropriations are more than available Profit In this case, Profit available for Distribution among partners is distributed in ratio of apportion to be made. For Example Profit of the Firm is Rs. 10000. Salary Payable to Mr. A is Rs. 80000, Commission Rs. 40000 and interest on capital to Mr. B is 120000. Profit Sharing Ratio is 5: 3. Since Appropriation amount (Rs. 80000 + Rs. 40000 + Rs. 120000) is greater than Profit (Rs 100000) In this case amount to be distributed among both Partners Mr. A & B will be as follows: Total amount Payable to Mr. A = Rs. 80000 + Rs. 40000 = Rs. 120000. Total amount payable to Mr. B = Rs. 120000. Ratio in which Profit of Rs. 100000 will be distributed is = 120000: 120000 =1 : 1. Amount that will be Credited to Mr. A’s Capital A/C will be = 1/2 × Rs. 100000 = Rs. 50000. Amount that will be Credited to Mr. B’s Capital A/C will be = 1/2 × Rs. 100000 = Rs. 50000.

Partners‘ Capital A/C There are two methods of preparing partners’ Capital A/C. 1. Fixed Capital Accounts Method 2. Fluctuating Capital Accounts Method 1. Fixed Capital Account Method: In this, two accounts are prepared: A. Capital A/C Under this A/C, capital of each partner remains fixed and not altered unless additional capital or drawing out of capital is done. Partners’ Capital A/C Particulars A B C Particulars A B C By Balance B/D To Cash / Bank A/C (Withdrawal of Capital) By Cash / Bank A/C (Additional Capital introduced) To Balance C/D B. Current A/C This Account includes all transactions of partners with in ordinary course of business. This method should be followed if question is silent with regard to methods of preparation of Partners’ Capital A/C. Partners’ Current A/C Particulars A B C Particulars A B C *To Balance B/D (in case of Debit Opening Balance) *By Balance B/D (In Case of Credit Opening Balance) To Drawings A/C (Withdrawal out of Profit of Firm) By Interest on capital To Interest on Drawings By Commission A/C To Profit & Loss A/C (Loss on Appropriation) By Partners’ Salary A/C To Balance C/D* By P & L App. A/C (Gain on Appropriation) By Balance C/D* 2. Fluctuating Capital Accounts Method Only one Ledger Account is prepared. All transactions of partners with Firm are recorded in it. Partners’ Capital A/C Particulars A B C Particulars A B C *To Balance B/D (in case of Debit Opening Balance) *By Balance B/D (In Case of Credit Opening Balance) To cash / Bank A/C (withdrawal out of capital) By Cash / Bank A/C (Additional Capital introduced) To Drawings A/C (Withdrawal out of Profit of Firm) By Interest on capital To Interest on Drawings By Commission A/C To Profit & Loss A/C (Loss on Appropriation) By Partners’ Salary A/C To Balance C/D* By P & L App. A/C (Gain on Appropriation) By Balance C/D*

2. Remuneration (Salary or Commission) to Partners Salary or Commission payable to Partners is an appropriation of Profit which means it will be allowed only if Partnership Deed allows it and Firm earns profit. Commission payable to a Partner is stated as Percentage of Profit in two ways which we have studied in Class XI. 1. Percentage of Net Profit before Charging Commission = Net Profit (Before Commission) × Rate of Commission /100 2. Percentage of Net Profit after Charging Commission = Net Profit (Before Commission) × (Rate of Commission /100 + Rate of Commission) Accounting Treatment of salary & Commission is as follows: 1. On Allowing Salary / Commission Partners’ Salary or Commission A/C …………….Dr To Partners’ Capital A/C 2. On Closure of Salary or Commission A/C P&L Appropriation A/C…………………Dr To Partners’ Salary or Commission A/C

Interest on Partners’ Drawings Drawings can be of two types: 1. Drawings out of capital – it means withdrawal of Part of Capital by partners for their personal use. Always remember, Interest on Drawings out of Capital is not calculated or charged by Firm. However, Drawing out of Capital will be adjusted / subtracted to calculate Interest on Capital. 2. Drawings out of Profit – It means drawing has been done from profit of the firm and Firm charges interest on it at an Interest rate mentioned in Partnership Deed. Interest on Drawings out of Profit is credited to P&L Appropriation A/C. Calculation of Interest on Drawings Out of Profit There are two methods to calculate Interest on Drawings: I. Product Method When Unequal amount is withdrawn at different periods, we use Simple or Product Method to calculate Interest on Drawings. 1. Simple Method: Amount of drawing is multiplied with number of months or number of days left of that financial year from date of withdrawal and Interest rate. Formula for this method is: Interest on Drawings = (amount of Drawing × number of months left or days left ) × (Interest rate / 100) × (number of months left or  days left / 12 or 365) 2. Product Method: Amount of drawing is multiplied with number of months or number of days left of that financial year from date of withdrawal and then we total product and calculate interest using following formula. Interest on Drawings = Total of Product × (Interest rate / 100) × 1/12 (or 1 /365) For example: Drawings made by a partner on 1 june 2018 are Rs. 6000 and on 30 September 2019 is Rs.12000. And Rate of Interest is 10 % then in this case calculation will be – Under Simple Method: Date Amount Number of Months left up to 31 March 2020 Interest @10 % 1 June 2019 6000 10 Rs. 6000 × 10/100 × 10/12 = Rs.500 30 September 2019 12000 6 Rs. 12000 × 10 /100 × 6/12 = Rs.600 Total Interest on Drawings Rs. 1100 Under Product Method: Date Amount Number of Months left up to 31 March 2020 Product of Amount × number of months left 1 June 2019 6000 10 Rs. 60000 30 September 2019 12000 6 Rs. 72000 Total Product Rs. 132000 Interest on Drawing = Rs. 132000 × 10 /100 × 1/12 = Rs. 1100 II. Average Method This method is used amount of Drawings as well interval between two Drawings is same & uniform. Interest on Drawings = Total drawings × Rate of Interest / 100 × Average Period /12. Average Period = (Months Left After First Drawings + Months Left after Last Drawings)/2 Different Situation of Withdrawal under this Method: Situation I: If Partner withdraws fixed amount every month. Three Cases arise Case I. In the Beginning of Every Month = Total drawings × Rate of Interest / 100 × Average Period /12. Average Period in this case = (12 + 1) /2 = 6.5 Months Time left after first withdrawal on April 1, 2018 (Year 2018 - 19) = 12 Months Time left after Last withdrawal on March 1, 2019 (Year 2018 - 19) = 1 Month. Case II. In the Middle of Every Month = Total drawings × Rate of Interest / 100 × Average Period /12. Average Period in this case = (11.5 + .5) /2 = 6 Months Time left after first withdrawal on April 15, 2018 (Year 2018 - 19) = 11.5 Months Time left after Last withdrawal on March 15, 2019 (Year 2018 - 19) = 0.5 Month. Case III. In the End of Every Month = Total drawings × Rate of Interest / 100 × Average Period /12. Average Period in this case = (11 + 0) /2 = 5.5 Months Time left after first withdrawal on April 30, 2018 (Year 2018 - 19) = 11 Months Time left after Last withdrawal on March 31, 2019 (Year 2018 - 19) = 0 Month. Situation II: If Partner withdraws fixed amount every quarte. Three Cases arise Case I. In the Beginning of Every quarter = Total drawings × Rate of Interest / 100 × Average Period /12. Average Period in this case = (12 + 3) /2 = 7.5 Months Time left after first withdrawal on April 1, 2018 (Year 2018 - 19) = 12 Months Time left after Last withdrawal on January 1, 2019 (Year 2018 - 19) = 3 Month. Case II. In the Middle of Every Quarter = Total drawings × Rate of Interest / 100 × Average Period /12. Average Period in this case = (10.5 + 1.5) /2 = 6 Months Time left after first withdrawal on May 15, 2018 (Year 2018 - 19) = 10.5 Months Time left after Last withdrawal on Feb 15, 2019 (Year 2018 - 19) = 1.5 Month. Case III. In the End of Every Quarter = Total drawings × Rate of Interest / 100 × Average Period /12. Average Period in this case = (9 + 0) /2 = 4.5 Months Time left after first withdrawal on June 30, 2018 (Year 2018 - 19) = 9 Months Time left after Last withdrawal on March 31, 2019 (Year 2018 - 19) = 0 Month. Situation III. If Fixed amount is withdrawn during 6 Months: Case I. In the Beginning of Each Month = Total drawings × Rate of Interest / 100 × Average Period /12. Average Period in this case = (6 + 1) /2 = 3.5 Months Time left after first withdrawal on April 1, 2018 (Year 2018 – 19 Half year) = 6 Months Time left after Last withdrawal on September 1, 2018 (Year 2018 – 19 Half year) = 1 Month. Case II. In the Middle of Each Month = Total drawings × Rate of Interest / 100 × Average Period /12. Average Period in this case = (5.5 + 0.5) /2 = 3 Months Time left after first withdrawal on April 15, 2018 (Year 2018 – 19 Half year) = 5.5 Months Time left after Last withdrawal on September 15, 2018 (Year 2018 – 19 Half year) = 0.5 Month. Case III. In the End of Each Month = Total drawings × Rate of Interest / 100 × Average Period /12. Average Period in this case = (5 + 0) /2 = 2.5 Months Time left after first withdrawal on April 30, 2018 (Year 2018 – 19 Half year) = 5 Months Time left after Last withdrawal on September 30, 2018 (Year 2018 – 19 Half year) = 0 Month. Situation IV. If Date of Withdrawal is not given, in that case Interest on Total Drawing for the year is calculated for six Months on Average Basis. Interest on Drawing = Total drawings × Rate of Interest / 100 × 6 /12 Situation V. When Rate of Interest is given without the word “Per Annum”, Interest is charged without considering the time factor. Interest on Drawing = Total drawings × Rate of Interest / 100 Journal Entries to Record Interest on Drawings Being Interest charged on Drawings Partners’ Capital A/C / Current A/C………..Dr To Interest on Drawings A/C For transfer of Interest on Drawing to P&L Appropriation A/C Interest on Drawings A/C……………………Dr To P&L Appropriation A/C Alternatively, we can pass a single Journal Entry For Interest charged on Drawings: Partners’ Current / Capital A/C…………..Dr To P&L Appropriation A/C

Interest On Partners’ Capital A/C Interest on Capital is calculated on Opening balance of Partners’ Capital. If additional Capital is introduced during the year, interest will calculated on it for the period it has remained in Business. If any amount is withdrawn from partner out of Capital, No interest will be charged and calculated on the same. For Example Opening Capital on April 1, 2019 is Rs. 100000. Partner introduced Rs. 50000 on 30 September 2019. He also withdrew out of Capital Rs. 30000 on January 1, 2020 .Rate of interest on Capital is 10 %. In this Case, Interest on Capital will be calculated as follows: From April 1 to September 30, 2019 (For 6 months) = Rs. 100000 × 10/100 × 6/12 = Rs. 5000. From September 30, 2019 to January 1, 2020 (For 3 Months) = Rs. 150000 × 10/100 × 3/12 = Rs. 3750. From January 1, 2020 to March 31, 2020 (Rs. 150000 – Rs. 30000) (For 3 Months) = Rs. 120000 × 10/100 × 3/12 = Rs. 3000. Hence Total Interest on Capital = Rs. 5000 + Rs. 3750 + Rs. 3000 =Rs. 11750 Provisions relating to Interest on Capital (IOC) We can understand provisions of Interest on Capital with the help of three cases. Case I. When Partnership Deed does not exist or No Clause in Partnership Deed with regard to IOC No Interest on Capital allowed. Case II. When Partnership Deed provides for IOC but is silent as to whether it is a Charge against Profit or Appropriation to Profit IOC will be always an appropriation to Profit. IOC is payable only when Firm earns Profit. Three possible situations that can pop up. 1. In Case of Loss – No IOC. 2. Profit before Interest is equal to or more than Interest – IOC at agreed Rate of Interest 3. In Case Profit before Interest is less Than Interest – Interest is allowed only to the extent of Profit available. (As we studied when Appropriation is more than Profit ) Case III. When Partnership Deed says that IOC is a charge against Profit  IOC will be allowed in case of Loss also. It will be written in P &L A/C not in P&L Appropriation A/C. Journal Entry for Interest on Capital: Being Interest on Capital Allowed Interest on Capital A/C……………….Dr To Partners’ Capital A/C or Current A/C Being Interest on Capital allowed to P&L Appropriation A/C P&L Appropriation A/C……………………..Dr To Interest on Capital A/C Alternatively, a combined entry may be passed as: P&L Appropriation A/C…………Dr To Partner’s Capital A/C (Individually) Calculation of Opening Capital Calculation of Opening Capital In case of Fixed Capital Method Particulars Amount Closing Capital (Capital at the end of the year) Add: Withdrawals out of Capital Less: Capital introduced during the year Opening Capital (Capital in the beginning of the year) Calculation of Opening Capital In case of Fluctuating Capital Method Particulars Amount Closing Capital (Capital at the end of the year) Add: Withdrawal out of Capital Drawings out of Profit Interest on Drawings out of Profit Share of Loss for the year, if any Less: Capital introduced during the year Partners’ Salary / Commission Interest on Capital Share of Profit for the year, if any Opening Capital (Capital in the beginning of the year) Calculation of Interest on Capital: Interest On Opening Capital Add: Interest on Additional Capital Less Interest on Capital Withdrawn Total Interest on Capital Note: Interest on Drawings out of Capital is not charged by firm and hence No entry in P&L Appropriation & Partners’ Capital A/C. However, Interest on Drawing out of Capital will be adjusted / subtracted to calculate Interest on Capital.

Past Adjustments for Past Errors after Closing Books Of Accounts Errors and Omissions in Books of Accounts of Earlier years are rectified by adjusting Capital Accounts of the affected Partners by either passing Adjustment Entries. 1.  When Single Adjustment Entry is passed. We can understand it with the help of an example. Suppose Capital of A, B & C after making all adjustments are Rs. 80000, Rs.60000 & Rs.40000 respectively. Interest on Drawing and Interest on capital has been omitted. Drawings during the year were Rs. 20000, Rs. 15000 and Rs.9000 of A, B & C respectively. Interests on Drawings were Rs.500, Rs. 360 & Rs. Rs. 200 of A, B & C respectively.Net Profit during the year is Rs. Rs. 120000. Profit Sharing Ratio is 3:2:1. In this Example, We have to calculate Opening Capital and Interest on Opening Capital of each Partner. Particulars A (Rs.) B (Rs.) C (Rs.) Closing Capital (Capital at the end of the year) Add: Withdrawals out of Capital Less: Capital introduced during the year Opening Capital (Capital in the beginning of the year) 80000 20000 (60000) 40000 60000 15000 (40000) 35000 40000 9000 (20000) 29000 Statement for Adjustments to be made Particulars A (Rs.) B (Rs.) C (Rs.) Rs. 4140 Distributed in 3:2:1 in PSR earlier 2070 1380 690 However, interest on Capital of Each partner to be credited 1500 1390 1250 Those who got extra earlier their Capital A/C will be debited by extra amount and who gets less earlier their Capital A/C will be credited to remove omissions 570 (Dr) 10 (Cr) 560 (Cr) Calculation of Interest on Capital: A (Rs.) B (Rs.) C (Rs.) Interest On Opening Capital 2000 1750 1450 Add: Interest on Additional Capital 0 0 0 Less Interest on Capital Withdrawn (500) (360) (200) Total Interest on Capital = 1500 +1390+1250 = Rs. 4140 1500 1390 1250 Journal Entry to be passed in this case will be: A’s Capital A/C…………………………………..Dr  570 To B’s Capital A/C                                                     10 To C’s Capital A/C                                                      560 2. When Adjustment Journal Entries are passed In this case, Journal entries are passed for each error or omission by debiting or Crediting P&L Adjustment A/C. i. Adjustment Entry for items which are to be credited to Partners’ Capital A/C. P&L Adjustment A/C………..Dr To Partners’ Capital/ Current A/C ii. Adjustment Entry for items which are to be debited to Partners’ Capital A/C. Partners’ Capital/ Current A/C…………………………..Dr To P&L Adjustment A/C iii. For Net Loss / Profit due to above adjustments On Profit credited to Partners’ Capital A/C P&L Adjustment A/C………..Dr To Partners’ Capital/ Current A/C On Loss credited to Partners’ Capital A/C Partners’ Capital/ Current A/C…………………………..Dr To P&L Adjustment A/C

Past Adjustment when Manager is treated as Partner of Firm with Retrospective effect In this case, we can adjust net affect by passing a single entry. 1. Calculate total amount paid to Manager as remuneration 2. Calculate amount to be paid to manager as a partner 3. Calculate Difference of above two (1 – 2). If Difference is Positive means Managers’ remuneration is greater than amount paid as a Partner to Him/her, and then S/he has to pay extra amount to other partners’ in Old Profit Sharing Ratio. Managers’ Capital A/C………………..Dr To Partners’ Capital A/C (In Old Profit Sharing Ratio) If Difference is negative, means Managers’ remuneration is smaller than amount paid as a Partner to Him/her and then S/he will get extra amount from other partners’ in Old Profit Sharing Ratio. To Partners’ Capital A/C (In Old Profit Sharing Ratio)……………………..Dr To Managers’ Capital A/C

Guarantee of Profit A new partner may be admitted in the Firm with Minimum Guaranteed Profit. Guaranteed Partner can get Share of profit higher than Guaranteed amount but never less than what is guaranteed. Three cases can exist for Guarantee given to a Partner: 1. Guarantee of Profit by all Partners In this case, all remaining Partners will pay Deficiency amount (Minimum Guaranteed Profit – Share of Guaranteed Partner’s Profit) to Guaranteed Partner in their profit sharing ratio or in the ratio given in the question. Journal Entries: I. On Distributing the Profit without considering Guarantee: P&L Appropriation A/C………………………Dr To All Partners’ Capital A/C 2. For transferring Deficiency amount to Guaranteed partner by all partners (All Partners)Guaranteeing Partner’s Capital A/C………………Dr To Guaranteed Partner’s Capital A/C 2. Guarantee of Profit by one or more of Existing or Old Partners In this case, Partners taking Guarantee will pay Deficiency (Minimum Guaranteed Profit – Share of Guaranteed Partner’s Profit) to Guaranteed Partner in their profit sharing ratio or in the ratio given in the question. If only one Partner is taking Guarantee, then total Deficiency amount will be borne by him/her. Journal Entries: I. On Distributing the Profit without considering Guarantee: P&L Appropriation A/C………………………Dr To All Partners’ Capital A/C 2. For transferring Deficiency amount to Guaranteed partner by Partner/s who have taken Guarantee Guaranteeing Partner/s Capital A/C………………Dr To Guaranteed Partner’s Capital A/C 3. Guarantee of Profit by the Firm In this case, Guarantee Profit amount is First Distributed to guaranteed Partner/s. Remaining Balance of Profit is then shared among other Partners (Excluding guaranteed Partner/s) in Profit Sharing Ratio. In case, Firm incurs Loss and a Partner is guaranteed Profit, then in this scenario total Loss will become Loss of the Firm + Amount Guaranteed to Partner. This whole loss will be borne by all Partners excluding Guaranteed Partner in their Profit Sharing ratio. Guaranteed partner will get Guaranteed Profit amount credited to his Capital A/C. Journal Entries: I. On Distributing Guaranteed Profit to Guaranteed Partner/s P&L Appropriation A/C………………………Dr To Guaranteed Partner/s Capital A/C On Distributing Remaining Profit to other partners in their Profit Sharing ratio P&L Appropriation A/C………………………Dr To All Partners’ Capital A/C In Case Firm incurs Loss, First Entry will remain same. Second Entry will become: All Partners’ Capital A/C……….Dr (Loss of the Firm + Amount Guaranteed to Partner) To P&L Appropriation A/C

Minimum Earnings Guaranteed by a Partner Partner/s can guarantee minimum earning to the Firm. In case of Shortfall in Earnings of Partner/s guaranteed minimum earnings, Shortfall amount is debited to their Capital / Current A/c.  Journal Entry passed will be Partner/s Capital A/C…………….Dr (Who has Guaranteed Minimum Earnings) To P&L Appropriation A/C  (With Shortfall Amount) Net Profit versus Divisible Profit Net Profit means Profit to be transferred to P&L Appropriation A/C. Divisible Profit refers to that Profit left with the Firm after Appropriation, which is to be distributed among Partners in Profit Sharing Ratio.