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Mark up on Capital

Mark up on Capital. A partner may be given markup on the capital invested by him. Markup can be calculated on the whole amount or an amount exceeding a specific limit depending upon the terms of the agreement. Mark up on Drawings.

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Mark up on Capital

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  1. Mark up on Capital • A partner may be given markup on the capital invested by him. • Markup can be calculated on the whole amount or an amount exceeding a specific limit depending upon the terms of the agreement.

  2. Mark up on Drawings • Markup may also be charged on drawings, depending upon the partnership agreement.

  3. Markup on capital and drawing do not become part of Profit and Loss Account. They are treated in the appropriation account.

  4. Recording • Mark up on Capital Debit Profit and Loss Appropriation Account Credit Partner A’s Current Account Credit Partner B’s Current Account Credit Partner C’s Current Account

  5. Recording • Mark up on Drawings Debit Partner A’s Current Account Debit Partner B’s Current Account Debit Partner C’s Current Account Credit Profit and Loss Appropriation Account

  6. Calculation – Mark up on Capital EXAMPLE • Mr. Ali is a partner in AB Partnership. • He is given mark up on capital @ 5 % on the proportionate amount of capital invested during the year. • The details of his capital account are as follows: • Opening balance as on July 01, Rs. 150,000 • Further capital invested on December 01, Rs. 75,000 • Calculate the markup on his capital.

  7. Calculation – Mark up on Capital SOLUTION • From July 1 to November 30 capital was Rs. 150,000 and From December 1 to June 30 it increased to Rs. 225,000. • Markup will be calculated as follows: 150,000 x 5% = 7,500 x 5 / 12 = 3,125.00 225,000 x 5% = 11,250 x 7 / 12 = 6,562.50 TOTAL 9,687.50

  8. Calculation – Mark up on Drawings EXAMPLE • Mr. Umer is a partner in a partnership firm. He drew following amounts during the year: • August 1 Rs. 2000 • October 1 Rs. 2500 • November 1 Rs. 1500 • March 1 Rs. 2000 • June 1 Rs. 3000 • Calculate the markup on his drawing if the rate is 5%. • Consider a financial year from July to June.

  9. Calculation – Mark up on Drawings SOLUTION Aug 1 Rs. 2,000 x 5% = 100 x 11 / 12 = 91.67 Oct 1 Rs. 2,500 x 5% = 125 x 9 / 12 = 93.75 Nov 1 Rs. 1,500 x 5% = 75 x 8 / 12 = 50.00 Mar 1 Rs. 2,000 x 5% = 100 x 4 / 12 = 33.33 Jun 1 Rs. 3,000 x 5% = 150 x 1 / 12 = 12.50 TOTAL 281.25

  10. QUESTION • A, B and C are three partners sharing profits in the ratio 40%, 30% and 30% respectively. • You are required to prepare profit and loss appropriation account and extract from balance sheet, showing partners capital and current accounts from the following information:

  11. Net profit for the year Rs. 667,700 • Opening balance of Capital accounts A Rs. 880,000, B Rs. 660,000, C Rs. 396,000 • Opening balance of Current Account A Rs. 40,920, B Rs. 20,812, C Rs. 15,774 • Drawings during the year A Rs. 202,400, B Rs. 156,200, C Rs. 151,800 • Salaries to be credited B Rs. 44,000, C Rs. 77,000 • Mark up on Capital @ 5% and drawings A Rs. 5,280, B Rs. 3,960 and C Rs. 2,860

  12. Solution This slide will be split in 2 parts

  13. Parts 1

  14. Part 2

  15. Solution Extract from Balance Sheet

  16. Notes • (1) Interest on Capital • A = 880,000 x 5% = 44,000 • B = 660,000 x 5% = 33,000 • C = 396,000 x 5% = 19,800

  17. Notes • (2) Partners Share in Profit • A = 462,000 x 40% = 184,800 • B = 462,000 x 30% = 138,600 • C = 462,000 x 30% = 138,600

  18. A’s Current A/c Debit side. Drawing 202,400 Mark up on Drawing 5,280 Balance C/F 62,040 Credit side. Balance B/F 40,920 Salary 0 Markup on Capital 44,000 Profit 184,800 Notes • (3) A’s current Account

  19. B’s Current A/c Debit side. Drawing 156,200 Mark up on Drawing 3,960 Balance C/F 76,252 Credit side. Balance B/F 20,812 Salary 44,000 Markup on Capital 33,000 Profit 138,600 Notes (4) B’s Current Account

  20. C’s Current A/c Debit side. Drawing 151,800 Mark up on Drawing 2,860 Balance C/F 96,514 Credit side. Balance B/F 15,774 Salary 77,000 Markup on Capital 19,800 Profit 138,600 Notes • (5) C’s current Account

  21. Admission Of A Partner • At the time of admission of a partner: • Assets and liabilities are revalued. • Value of Goodwill is determined. • The value (in monetary terms) of the reputation of the business is called GOODWILL. It is an intangible asset.

  22. Dissolution Of A Firm • When a partnership firm is dissolved, first of all, liabilities of the partnership are paid. • The remaining amount (if available) is distributed among the partners in their profit/loss sharing ratios.

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