Chapter – 1 : Accounting for Partnership
Partnership
When two are more partners join hands to set up a business the share its profit and losses, they
are said to be in Partnership.
Definition:
Section 4 of the Indian Partnership Act 1932 defines Partnership as does the ‘relation between
persons who have agreed to share the profits of a business carried on by all or any of them
acting for all’.
• Persons who have entered into partnership with one another are individually called
Partners and collectively called Firm.
• The name under which the business is carried is called Firm’s name.
Features of Partnership are –
1. Two or more persons - To form partnership they should be atleast two persons coming
together for a common goal.
2. Agreement – Partnership is the result of an agreement between 2 or more persons to do
business and share its profit and losses.
3. Business - The agreement should be to carry on some business.
4. Sharing of profit - The agreement between partners must be to share profits and losses
of a business.
5. Liability of partners - Each partner is liable jointly with all the other partners and
liability of a partner for acts of the firm is also unlimited.
6. Mutual agency - The business of a partnership concern may be carried on by all the
partners or any of them acting for all.
Partnership Deed
Partnership deed is a partnership agreement between the partners of the firm which outlines the
terms and conditions of the partnership between the partners.
Contents of the partnership deed
• Names and addresses of the firm and its main business
• Names and addresses of all partners
• Amount of capital to be contributed by each partner.
• The accounting period of the firm.
• The date of commencement of partnership.
• Rules regarding operation of bank accounts.
• Profit and loss sharing ratio.
• Rate of interest on capital, loan, drawings, etc.
• Mode of auditor’s appointment
• Salaries, commission, etc. if payable to any partner.
• The rights, duties and liabilities of each partner.
• Treatment of loss arising out of insolvency of one or more partners.
• Settlement of accounts on dissolution of the firm.
• Method of settlement of disputes among the partners.
• Rules to be followed in case of admission, retirement, death of a partner.
• Any other matter relating to the conduct of business.
Provisions of Partnership act relevant for accounting:
1. Profit sharing ratio - all the partners will get profits equally respective of their capital
contribution in the company, if the partnership agreement is silent in the profit sharing
ratio.
2. Internet interest on capital - No interest on capital is payable, if the partnership deed is
silent on the issue.
3. Interest on drawings - No interest to be charged on the drawings made by the partners,
if there is no mention in the deed.
4. Interest on loan - If any partner has advanced loan to the firm for the purpose of
business, he/she shall be entitled to get an interest on the loan amount at the rate of 6%
per annum.
5. Remunerations for the firms work - a partner is not entitled to a salary or remuneration
for participating in the business unless the partnership deed specifically provides for it.
• If a partner gens any personal profits from the firm’s transactions, property or
business connections, they must account for and pay those profits to the firm.
• If a partner competes with the firm in a similar business, they must account for and
all profits made from that business to the firm.
Special aspects of partnership accounts
• Maintenance of partners capital accounts
• Distribution of profit and loss among the partners
• Adjustments for wrong appropriation of profits in the past.
• Reconstitution of the partnership firm.
• Dissolution of partnership firm.
Maintenance of capital accounts partners :
a) Fixed capital method
Fixed capital account is that form of capital account where the business maintains two
different accounts which are related to the different kinds of transactions that take place
in the capital of the partners.
Proforma of Partner’s Capital and Current Account under Fixed Capital Method
Partner’s Capital Account
Dr Cr
Date Particulars J. Amount Date Particulars J. Amount
F (Rs.) F (Rs.)
To Bank (permanent XXX By Balance b/d XXX
withdrawal of capital) (opening balance)
To Balance c/d XXX By Bank (fresh capital XXX
(closing balance) introduced)
XXX XXX
Partner’s Current Account
Dr Cr
Date Particulars J. Amount Date Particulars J. Amount
F (Rs.) F (Rs.)
To Balance b/d XXX By Balance b/d XXX
(in case of debit (in case pf credit
opening balance) opening balance)
To Drawings XXX By Salary XXX
To Interest on XXX By Commission XXX
drawings By Interest on Capital XXX
To Profit & Loss a/c XXX By Profit & Loss XXX
(Share of loss) appropriation
(Share of profit)
To Balance c/d XXX By Balance c/d XXX
(in case of credit (in case of debit closing
closing balance) balance)
XXX XXX
b) Fluctuating capital method
Fluctuating capital method is that form of capital account where the capital of the
partners keeps on fluctuating.
Proforma of Partner’s Capital Account under Fluctuating Capital Method
Partner’s Capital Account
Dr Cr
Date Particulars J. Amount Date Particulars J. Amount
F (Rs.) F (Rs.)
To Balance b/d (in XXX By Balance b/d XXX
case of debit (in case pf credit
opening balance) opening balance)
To Drawings XXX By Bank (fresh capital XXX
To Interest on XXX introduced)
drawings By Salary XXX
To Profit & Loss a/c XXX By Commission XXX
(Share of loss) By Interest on Capital XXX
By Profit & Loss XXX
To Balance c/d XXX appropriation
(in case of credit (Share of profit)
closing balance) By Balance c/d XXX
(in case of debit closing
balance)
XXX XXX
Distinction between fixed and fluctuating capital accounts:
Basis of distinction Fixed capital Fluctuating capital
Number of accounts Two separate accounts are maintain Each partner have one account i.e.
for each partner i.e. capital account capital account.
and current account
Items related to deed Drawings, salary, interest on All adjustments for drawings,
capital, etc. are posted in the salary, interest on capital, etc. are
current accounts. posted in the capital account.
Fixed balance The capital account balance The balance of the capital account
remains constant unless additional fluctuates from year to year.
or withdrawal of capital.
Credit balance The capital accounts always shows The capital account may
a credit balance. sometimes shoe a debit balance.
