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Partner's drawings - accounting treatment

Sidhardh (Sr. Manager - Accounts) (178 Points)

02 August 2011

Two Partner introduced Rs.3 lac & Rs.2 lac at the beginning of Partnership firm in October Month 2010.

The business is making profits and the first partner withdrawn amounts like 2lcas, 3lacs, 2lacs, 1lac, 3lcas and 4lacs in 6months by way of cheque [ transfer to their personal accounts].

Since, the profits can be apportioned to partners only at the end of the Financial year, what is the CORRECT treatment of above with drawals for accounting?

And how to adjust those withdrawals with partner's apportioned profits at the end of year?

Is showing the withdrawals as unsecured loans to partner's will attract any interest on loan & TDS on interest?

Please clarify. Thanx in advance.

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2 Replies

Vignesh Killur (Articled Assistant) (1666 Points)
Replied 09 August 2011

There are two methods of Accounting for Partners Drawings:

1. Fixed Capital Method

2. Fluctuating Capital Method

Under Fixed Capital method, the capital introduced initially by the partners remains the same. Any drawings made by the partners in anticipation profits gets debited to a seperate account called Partners Current A/c. Other items like remuneration payable, Interest on Capital, Current Account Balance gets credited to this account.

Consider this example: Mr X initially introduces a capital of10,00,000 in to the partnership firm. During the year he withdraws300,000 in anticipation of profits. He gets50,000 as remuneration,75,000 as interest on Capital A/c and at the end of the year he gets a profit of350,000. Now you have to pass the following entries:

1) Drawings A/c Dr 300,000

To Bank A/c 300.000

2) Partners Current A/c Dr 300,000

To Drawings A/c 300,000

His Current A/c appears somewhat like this:

X'S CURRENT A/C

To Drawings 300,000 By Remumeration Payable 50,000

By Int. on Capital A/c 75,000

To Balance 175,000 By P&L A/c (Sh. of Profit) 350,000

475,000 475000

Please Note that under fixed Capital method the balance in the Capital A/c does not change. Under flucuating Capital all these are credited/debited to their respective capital A/c's and the balance keeps fluctuating.

Cheers,

Viggi

Nupur Sharma (CA) (426 Points)
Replied 06 December 2014

I have a query to ask here. What if the partnership firm is based on a slightly different business model? Like in case there are 3 partners and they undertake IT projects from overseas clients. Suppose, Project A has been undertaken by first partner and project B by the second partner, Project C by the third partner and a Project D on which first and second partners are working. Now first partner will get all the income generated from project A plus 50 % from Project D and similarly second partner will get all income generated from Project B plus 50% from Project D.

Will limits of section 40(b) apply here as well? But under what head? This is not salary. Should all this sharing of income from projects be simply treated as sharing of profits because this cannot be treated as remuneration in my opinion.

I would really appreciate if somebody could guide me on this. Quite a technical issue for me.

Thanks in advance