Fixed and fluctuating capital
- Permanent addition or deduction of capital will be recorded in fixed capital.
- While interest on capital, interest on drawing, drawings, profit or loss for the year, remuneration of partners – regular nature transactions will be recorded in fluctuating capital account,
Interest on capital:
- If it is mentioned in deed then only it can be paid.
- In case of insufficient profit, available profit will be distributed in capital ratio.
- In case of loss if deed silent interest will not be paid.
- But specifically given in deed although there is a loss, interest on capital will be paid. It must be paid in loss also.
Interest on drawings :
- if mentioned in deed then only it will be paid.
- Beginning of month multiply 78/12
- End of month multiply 66/12
- Middle of month multiply 72/12
- If date of drawing is not given interest of 6 month will be paid.
Effective capital
- actual utilization period will be considered, product method can be used,
- Monthly or day product will be used.
A and B partners: capital as on 01.01.2010 1,00,000 and 2,00,000. introduce A 1.4.10 – 50.000 B 20,000
withdraw 1.10.10 A – 20,000 B 10,000
effective capital
A
To 1.1/ 3 months*100000 = 3,00,000
1.4 to 1.10 6 months*1,50,000 = 9,00,000
1.10 to 31.12 3months*1,30,000 = 3,90,000
Total 15,90,000
B
1.1 To 1.4 3 months*200000 = 6,00,000
1.4 to 1.10 6 months*2,20,000 = 13,20,000
1.10 to 31.12 3months*2,10,000 = 6,30,000
Total 25,50,000
Ratio 15,90,000 : 25,50,000 = 53 : 85
Guaranteed minimum profit:
If given by partner:
- Deficit will be deducted from partner giving the guarantee after distribution of profit.
If guarantee given by firm:
- First distribute profit of guaranteed partner, then balance will be given to other partners.
Unit 2 goodwill
- It is the reputation of firm due to which over and above normal profit, firm can earn.
- It arise due to location, service, patent name etc.
It is required to calculate in the following cases.
- Change in profit and loss ratio
- Admission of new partner
- Retirement of partner
- Dissolution of firm
Method of valuation
Average profit method:
- In case of increase or decrease trend in profit, weightage profit will be calculated otherwise simple average is used.
- Simple profit of 3 years 10000, 8000, 9000
- Average profit 10000+8000+9000/3 =9000
- If given goodwill is 3 years purchase
- Goodwill 9000*3 = 27,000
Weightage
- profit of 3 yrs 10000, 12000, 15000
- 10000 1 10000
- 12000 2 24000
- 15000 3 45000
- 6 79000
- Average profit = 79000/6
- = 13166.67
- If given goodwill is 3 years purchase
- Goodwill 13166.67*3 = 39500
Super profit:
Steps:
- Find capital invested
- Find adjusted average profit
- Normal profit = step1* normal rate of return
- Super profit = step 2- step 3
- Goodwill = super profit* no of years
Annuity method:
-
Under this method time value of money is considered.
-
Goodwill = annuity rate of Rs 1 for given years*super profit
Capitalization method:
Steps:
find
-
Normal rate of return
-
Adjusted Average profit
-
Capital invested
-
Capitalize value = step2/step1
-
Goodwill = step 4 – step 3