! LEARNING OBJECTIVES et ae After studying this Chapter you should be able to understand : ‘© Nature of Partnership Firm © Definition and Main Features of Partnership '* Partnership Deed — Meaning, Importance . pee ee pearing ee Accounts of Partners under Fixed and sion of Profit among Partners and Loss Appropriation Account Adjustments antee of Minimum Profit to a Partner Introduction :— There are certain limitations of a sole trader. In a sole trading concer only one man invests capital, undertakes the risk involved in the business and ontrols the whole affairs of the business. But one man’s capital, skill, controlling and Fisk taking capacity are generally limited. Therefore, some persons may combine and sr into an agreement to form a partnership. is a relation of mutual trust and faith. In order to maintain this trust, it that the partnership accounts be maintained in an honest, accurate and ‘manner. Partnership accounts should present a true and fair picture of the business. For this purpose it is necessary to study the definition of y as given in the Partnership Act and the relevant provisions of the Act which affect the partnership accounts. Nature of Partnership Firm ‘ing viewpoint, partnership firm is treated as a separate business its partners. However, as per legal viewpoint, a partnership firm is tity. In other words, it has no existence separate from its partners. ease of bankruptcy of the partnership firm, private estates of the to meet the firm’s debts. + Section 4 of the Indian P: rartnership Act, 1932, deu ‘ ACCOUNTING FOR PARTNERSHIP FIAMS — FUNDAMENTALS “Partnership isthe relation between persons who have agreed to share the profits “ofa business carried on by all or any of them acting for all. : Main Features or Essential Plements or Characteristics of Partnership . Two or More Persons :— There must be atleast two persons to form a partnership and such persons must be competent to contract. As per the Indian Contract Act, 1872 every person except the following are competent to contract : (@) Minor, (6) Persons of unsound mind, and (c) Persons disqualified by any law. Maximum Number of Partners : Partnership Act does not specify the maximum number of partners, but the Central Government has prescribed maximum number of partners in a firm to be 50 vide Rule 10 of the Companies (Miscellaneous) Rules, 2014. Minor as a Partner : A minor cannot be admitted as a partner in the firm, However, he is allowed to Participate in the profits of the firm. 2. Agreement :— Partnership is the result of an agreement. It must come into existence by an agreement and not by the operation of law. On the contrary, a Hindu undivided family comes into existence by the operation of law and not by an agreement. Such an agreement can be either oral or in writing. The agreement forms the basis of mutual rights and duties of partners. 3. Existence of Business and Profit Motive :— Partnership can be formed for the Purpose of carrying on some business with the intention of eaming profits and such business must be legal. A joint ownership of some property by itself cannot be called a partnership. 4. Sharing of Profits :— The agreement between the partners must be aimed at sharing the profits of the business. If some persons join hands to run some charitable activity, it will not be called partnership. Further, if a partner is deprived of his right to share the profits of the business, he cannot be called a partner, But it is not necessary that all partners should share the losses also. It may be agreed between the partners that ‘one or more of them shall not be liable for losses. __ 5. Relationship of Principal and Agent sof the firm. An agent, because he can bind the other partners by his acts and cipal, because he himself can be bound by the acts of the other partners. Carried on by All or Any of them Acting for all :— It means that ‘can participate in the conduct of business and each partner is bound by the ‘Partners in respect to the business of the firm. Existence :— A partnership firm has no separate existence from means that all agreements entered with the firm will be enforceable ner separately and jointly. “eamnot come into existence in the absence of any one of the above features. Each partner is an agent as well as aEvery partner has the right to it re Rat to insect and have copy of the books of 5. Every partner has aright to disallow the admission ofa new partner. 6, Every partner is the joint owner of the partnership property ; I partene bas given loan to the firm, he has a rig w ; ni to ive ii eh Vote rate of interest i not marge tn aia Gh ae 8. Ifa partner incurs expenses or makes eal or right to be indemnified by the firm. anes: a 9, Every partner has a right to retire from the firm after giving a proper notice. ‘Liabilities of Partners : 1. A partner should not carry on a business in competition with the firm. If he earns a profit from such business it shall be paid to the firm. However, if he : incurs a loss, it will be borne by him alone. 2 ___ 2 If a partner earns some profit by using the firm’s property or money, such z profit will be paid to the firm. For example, 4 and B are partners in a firm. Firm sold goods to C for 25,00,000 and 4 gets a commission of 4% from C. Commission eamed by A shal be paid tothe firm. partnership is the outcome of an agreement, it is essential that there must be ‘and conditions agreed upon by all the partners. Such terms and conditions ‘oral or written. The law does not make it compulsory to have a written nt. However, in order to avoid all misunderstandings and disputes, itis always urse to have a written agreement duly signed and registered under the Act. en document which contains the terms of agreement is called‘ Partnership called “Articles of Partnership’. The partnership deed should contain points : ame and Address of the Firm. Addresses of the Partners. Nature of the Business the Firm Proposes to do. to be Contributed by each Partner and whether the will be fixed or fluctuating, __ Whether interest is to be allowe -d on capitals.‘a ACCOUNTING FOR PARTNERSHIP FIRMS — FUNDAMENTALS (©) Drawings :— How much amount the partners are entitled to withdraw fr personal use. (7) Interest on Drawings :— Whether interest will be charged on partner ® drawings. If so, the rate of interest (8) Profit Sharing Ratio :— The ratio in which profits or losses "© to be divided among the partners by him. (9) Salary :— Whether any partner will be paid salary for the work done If so, how muc! (10) Goodwill :— Method of valuation of goodwill in case of admission oF retirement of a partner (11) Accounting Period of the Firm :— The period after which of the firm are to be prepared. Whether yearly oF half-yearly ar the final accounts and the date on which accounts are to be closed every Ye’ (12) Method of Recording of Firm’s Accounts of accounts and other documents of the firm. _ Whether the firm’s books will be and the safe custody of the books audited or not? If so, the mode (13) Auditing of auditor's appointment. (14) Date of Commencement of Partnership. (15) Duration of partnership :— The period for which the tablished and the mode of dissolution of partnership. (16) Use of the Decision of Garner vs Murray = Whether decision in the case tf Gamier vs Murray is to apply in the case of insolvency of a parinét (17) Bank Accounts :— Whether the account in the bank will be opened in firm’s veame or in some partner's name? Who will have the right to sign the cheques? (18) Rules to be Followed in Case of Admission of a Partner, (19) Rules to be Followed while Settling the Accounts on Retirement :— The manner in which the amount due on the retirement or death of a partner will be calculated and the manner in which it will be paid. (20) Settiement of Disputes dispute will be solved. Whether arbitrator will be appointed’ of Partnership Deed : Though, the aw does not make it mandatory (compulsory) for every firm to have ership deed, it is desirable to have it due to the following reasons partnership has been In case of dispute among the partners, how the #) It regulates the rights, duties and responsibilities of each partner Ithelps to avoid any misunderstanding amongst the partners because all the terms and conditions of partnership have been laid down before hand in the dispute amongst the partners may be settled easily as the part may be readily referred to. itis always the best course to have a written partnership deed dh and registered under the ActACCOUNTING FOR PARTNERSHIP FIRMS — FUNDAMENTALS Rules Applicable in the Absence of Partners Deed In the absence of a Partnership Deed or Verbal agreement, ns js silent on a certain point, the following provisions of pons Tne rales isions of Partnership Act, 1932 (1) Profit-Sharing Ratio :— Profits and Lo: Renin ofiak cll pict = Q Interest on Capital :— No interest on Capi ; a ‘pitals shall partners. If there is a provision for the interest on gk re ip deed, it will be allowed only when there is a profit asians’ ) Interest on Drawings :— No interest is to be charged on drawings, (4) Salary toa Partner :—No partner is entitled t iss ME ere n's bss, oS (5) Interest on Loan :— Interest at the rate of 6% i 0 h 6 per annum isto be allowed a jer’ loan to the fii i i co apres an tthe fm. Such ners sale paid even if here ses (6) Admission of a New Partner :— Without the consent of all exist no new partner can be admitted to the firm. eae aad (7) Each partner can participate in the conduct of business. (8) Each partner can inspect the books of firm and can take a copy of the same 1.5 shared equally Itshould be remembered that partners may change any of the above provisions by ‘coming to a common agreement. . Recording of Partnership Transactions Transactions of the partnership firm are recorded according to the principles of suble-entry system, and as in the case of a sole proprietorship concern a partnership ‘will also prepare Trading Account, Profit & Loss Account and Balance Sheet at of every year. The only difference between accounting of a sole trader and ip firm is that the profits of the partnership firm are divided among the Usually, for this purpose, the profits as per Profit and Loss Account is to a newly-opened account, namely ‘Profit and Loss Appropriation Be and entries for interest on capital, interest on drawing, salary to partners and profits among the partners will be passed only in that account. A specimen Loss Appropriation Account showing the distribution of profits is given PROFIT AND LOSS APPROPRIATION ACCOUNT for the year ended Cr ofit & Loss A/e (Net Profit transferred from P&LAC) By Interest on Drawings : 4 ‘ee 2023, A and B entere oe 26,00,000 respectively. They aBF° sllowing information is provided regardin wed a salary of €10,000 per month sion of 2% on sale ear were 5, Sales for the y { is to be allow ) B is to be allowed a commis: %40,00,000. (iii) Interest is to be (i) Interest is to be for thé 4,40,000. Prepare num. and 2,400 on B’s drawings. allowed on capitals @ 6% per 2" charged €3,600 on 4’s drawings 31st March 2024 before making above e year ended Profit and Loss Appropriation Account The profit appropriations was PROFIT AND LOSS APPROPRIATION ACCOUNT Jor the year ended 31st March, 2024 z ass z A (210,000 x 12) 1,20,000| By Profit & Loss A/c ission : B (Net Profit transferred from Profit & Loss A/c) 4,40,000 ‘of €40,00,000) 80,000 By Interest on Drawings on Capital A 60,000 A 3,600 36,000 96,000 B 2, ee 2,400 6,000 Ale (0,000) —1,00,000 000 | 1,50,000 4,46,000 ies that are passed for various iter Account are as followTo Partner's Capital A/c (Interest on Capital at ....% p.a.) 4 (i On closure of Interest on Capital A/c : eo Ath on capital is closed by transferring ji Ree ees ekverites for Gis toon, Yio et : A ; Profit & Loss Met SwAproriaion Ae NY Wilts To Interest on Capital A/c Dr. for Interest on Drawings (@ On Charging Interest on Drawings : Partner’s Capital A/c To Interest on Drawings A/c (ii) On closure of Interest on Drawings A/c : Interest on Drawings is closed by transferring i it si heat eee ig it to the ion A/e, as this is income for the firm. The cay ae ee Interest on Drawings A/c Ds To Profit & Loss Appropriation A/c . 4. Entry for Salary or Commission Payable to a Partner :— (@ On allowing salary or Commission to a partner : Pariner’s Salary/Commission A/c Dr. To Pariner’s Capital A/c ‘ (i) On closure of salary or commission account : Salary or Commission payable to a partner is closed by transferring it to the debit ‘of Profit and Loss Appropriation Account, as these are expenses for the firm. The will be : Profit & Loss Appropriation A/c Dr. To Partner's Salary/Commission A/c for Transferring a Part of Profit to Reserve : Dr. Profit & Loss Appropriation A/c To Reserve A/c ransfer of Credit balance of Profit & Loss Appropriation A/c " Profit & Loss Appropriation A/c x To Partner's Capital or Current A/es fof Profit and Loss Appropriation Account : s prepared just after the Profit and Loss Account, tand Loss Account. ‘only by partnership firms Hence, it is an extension(distribute Ener ' > Indian Pa & Lass Appropriation ee Profit & Lows Account fra A am 1. Stage of Preparation 2, Objective prep 3. Opening/Closing Balance 4. Charge or Appropriation 5. Partnership Agreement Attention payable to a imterest on P of prof fit & Los Charge Against Profit Appropria It indicatCOUNTING FoR Pp; 2 FOR PARTNERSHIP FIRMS — FUNDAMENTALS Partners 00) Capital Accounts of In case of partnership there is a sera, apital contributed by each partner w accounts of partners may be maintain (1) Fixed Capital Accounts (2) Fluctuating Capital Accounts Separate Capital Account for each partner. The ll be credited to his capital account. The capital ed in any one of the following two methods : (1) Fixed ¢ ‘ a “es Ppaad \ceounts :— Under this system the original capitals invested agreement. In othe: nn, O™S'2M, unless additional capital is introduced by an "er words, capitals of the partners are not allowed to change during the life-time of busines ; Seat ee except in extraordinary circumstances. When eee onl spt autres relating to drawings, interest allowed on capi ®, (AST newly-opened 2, Salary to partner, share of profit or loss etc., are mas Brave Pened account for each partner. This account is called Current Account or rawings Account ___ Thus, the following two accounts will be prepared separately when the capitals are fixed PROFORMA OF c Dr. CAPITAL ACCOUNTS (When the Capitals are fixed) r. ae To Cash/Bank A/c By Balance b/d (Permanent with- (Opening drawal of Capital)’ | Balance) To Balance c/d By Cash/Bank A/e (Additional (Closing Balance) L Capital) eh: 2 is By Balance b/d. (In case of credit k opening balance)