Shree and Hari were partners in a firm sharing profits and losses in the ratio of 2 : 3. Their fixed capitals were Rs. 4,00,000 and Rs. 3,00,000 respectively. The partnership deed provided that Hari is to be allowed a commission of 5% of net profit.
The net profit of the firm for the year ended 31st March, 2025 was Rs. 1,00,000.
Pass the following journal entries in the books of the firm :
(i) For crediting Hari's commission to his current account.
(ii) For transferring the commission to Profit and Loss Appropriation Account.
Shree and Hari were partners in a firm sharing profits and losses in the ratio of 2 : 3. Their fixed capitals were Rs. 4,00,000 and Rs. 3,00,000 respectively. The partnership deed provided that Hari is to be allowed a commission of 5% of net profit.
The net profit of the firm for the year ended 31st March, 2025 was Rs. 1,00,000.
Pass the following journal entries in the books of the firm :
(i) For crediting Hari's commission to his current account.
(ii) For transferring the commission to Profit and Loss Appropriation Account.
Working: Hari's Commission = 5% of Net Profit = 5% × Rs. 1,00,000 = Rs. 5,000 (calculated on net profit before charging the commission itself, as the deed does not state otherwise).
Journal Entries
| Particulars | Dr. (Rs.) | Cr. (Rs.) |
|---|---|---|
| (i) Hari's Commission A/c Dr. | 5,000 | |
| To Hari's Current A/c | 5,000 | |
| (Being commission @ 5% of net profit credited to Hari's current account) | ||
| (ii) Profit and Loss Appropriation A/c Dr. | 5,000 | |
| To Hari's Commission A/c | 5,000 | |
| (Being Hari's commission transferred to Profit and Loss Appropriation Account) |
Marking Scheme
- 11 mark: correct calculation of commission (Rs. 5,000 = 5% of Rs. 1,00,000).
- 21 mark: correct entry (i) crediting Hari's Current Account through Hari's Commission Account.
- 31 mark: correct entry (ii) transferring the commission to Profit and Loss Appropriation Account.
Hint
Commission = agreed % × net profit, routed through Hari's Current Account and an intermediate Hari's Commission Account since capitals are fixed.
Quick Oral Answer
Since capitals are fixed, Hari's commission of Rs. 5,000 (5% of net profit) is credited to his Current Account and simultaneously debited to the Profit and Loss Appropriation Account, which distributes appropriations among partners.
Analysis & Explanation
This question tests the routine but frequently tested treatment of partner's commission when capitals are fixed.
Concept: Commission is an appropriation of profit, not a business expense, so it never appears in the Statement of Profit and Loss — only in the Profit and Loss Appropriation Account.
Key rule: Since capitals are fixed here, the commission must be credited to Hari's Current Account, never his Capital Account, so the fixed capital balance stays unchanged.
Exam trap: Students sometimes wrongly calculate commission 'after charging such commission' even though the question does not specify this, inflating the workings unnecessarily.
Real-world use: Commissions like this reward a partner for specific extra responsibilities (such as managing sales or operations) beyond ordinary capital contribution.
Common Mistakes
- 1Calculating commission on profit after deducting the commission itself when the question does not say 'after charging commission' — here it is simply 5% of the given net profit of Rs. 1,00,000.
- 2Crediting the commission directly to Hari's Capital Account instead of his Current Account, ignoring that capitals are fixed here.
- 3Reversing the debit and credit in entry (ii), i.e., debiting Hari's Commission Account instead of the Profit and Loss Appropriation Account when closing it.
Interesting Facts
When capitals are fixed, all appropriations like commission, interest on capital and salary are routed through the Partner's Current Account, never the Capital Account, so that fixed capital balances never change year to year.
Commission to a partner can be calculated either as a percentage of net profit before charging it, or after charging it — CBSE questions always specify 'after charging such commission' explicitly when that treatment is intended.
Partner's commission is an appropriation of profit, not a business expense, so it never reduces the figure shown as net profit in the Statement of Profit and Loss.
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Frequently Asked Questions
Why is the commission credited to Hari's Current Account and not his Capital Account?
Because the partners have fixed capitals (Rs. 4,00,000 and Rs. 3,00,000), so all appropriations such as commission must be routed through the Current Account, keeping the Capital Account balance unchanged.
How would the commission change if it were calculated 'after charging such commission'?
It would be computed as = Rs. 1,00,000 × 5/105 ≈ Rs. 4,762, since the commission itself would first be deducted from profit before applying the rate.
Is Hari's Commission Account a personal or nominal account?
It is a nominal account used as an intermediate account to record the commission before it is transferred to the Profit and Loss Appropriation Account.