According to Section 4 of the Indian Partnership Act, 1932:
“Partnership is 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.”
Features of Partnership
- Two or more persons: Minimum two persons. Maximum cannot exceed 50 in any business.
- Agreement: Created by agreement (written or oral). Written agreement is called Partnership Deed.
- Existence of business and profit motive: Must be for legal business with profit intention.
- Sharing of Profits: Agreement must include profit sharing. Charitable activity is not partnership.
- Business carried on by all or any acting for all: Each partner can conduct business, and each is bound by acts of others.
- Relationship of Principal and Agent: Each partner is both an agent (can bind others) and a principal (can be bound by others).
Partnership Deed
A written agreement containing terms of partnership. Also called Articles of Partnership.
Contents of Partnership Deed:
- Name and address of firm and partners.
- Nature and place of business.
- Duration of partnership.
- Capital contributions.
- Interest on capital, drawings, and loan.
- Profit-sharing ratio.
- Partner’s salary/commission.
- Valuation of goodwill and assets.
- Rights and duties, dispute resolution.
- Rules for admission, retirement, death.
- Revaluation of assets & liabilities.
- Method of recording accounts, auditing.
- Date of commencement.
Benefits:
- Regulates rights, duties, liabilities.
- Avoids misunderstandings.
- Helps in easy settlement of disputes.
Rules in Absence of Partnership Deed (Indian Partnership Act, 1932)
- Profit sharing ratio: Equal, irrespective of capital.
- Interest on capital: Not allowed.
- Interest on drawings: Not charged.
- Salary/commission to partner: Not allowed.
- Interest on loan by partner: Allowed @ 6% p.a.
- Admission of new partner: All partners must agree.
Logical Questions with Solutions
Q. Maira, Ekalavya and Saiansh – Capital ₹3,00,000; ₹2,00,000; ₹1,00,000. Saiansh gave loan ₹1,00,000. No partnership deed.
- Maira wants 8% interest on capital.
→ Not allowed. No interest on capital in absence of deed. - Saiansh wants 10% interest on loan; others want 5%.
→ Interest allowed @ 6% p.a. - Maira & Ekalavya want profit in capital ratio.
→ Profit shared equally. - Ekalavya demands ₹40,000 as remuneration.
→ Not allowed. No salary to partners.
Q. Shyam and Sahoo – no partnership deed.
(i) Shyam wants profit sharing in capital ratio.
→ Profit shared equally.
(ii) Sahoo wants salary for more time devoted.
→ Not allowed.
Q. Santosh and Mayank – deed silent.
(i) Mayank advanced loan, wants 13% interest.
→ Allowed @ 6% p.a.
(ii) Santosh contributed ₹1,00,000, Mayank ₹50,000. Mayank wants equal profit share.
→ Profit shared equally.
Q. Abhishikt and Saurya – no deed.
(a) Abhishikt wants 12% interest on capital. → Not allowed.
(b) Abhishikt wants salary for extra time. → Not allowed.
(c) Abhishikt wants to admit son Rajesh. → Saurya objects → Cannot admit.
(d) Abhishikt gave loan, wants 8% interest. → Allowed @ 6% p.a.
Q. Naman, Kavya, Dakshya disputes.
(a) Naman used ₹1,00,000 of firm, made ₹75,000 speculation profit.
→ Must return ₹1,75,000 to firm (principal + profit).
(b) Naman used ₹50,000, lost ₹20,000.
→ Must return ₹50,000 (full amount used).
(c) Naman & Kavya want to admit Mohan, Dakshya objects.
→ Cannot admit without unanimous consent.
(d) Naman & Kavya want to buy from Raghubir, Dakshya objects.
→ Majority can decide in ordinary business matters → Can purchase.
Distribution of Profits among Partners
A Profit and Loss Appropriation Account is prepared to distribute profits as per deed (or Act if no deed).
Format of Profit & Loss Appropriation A/c
Profit and Loss Appropriation Account
For the year ended 31st March ____
| Dr. | Cr. | ||
|---|---|---|---|
| Particulars | Amount (₹) | Particulars | Amount (₹) |
| To Interest on Capital: | By Net Profit b/d | XXXX | |
| Partner A | XXXX | By Interest on Drawings: | |
| Partner B | XXXX | Partner A | XXXX |
| To Partner’s Salary/Commission | XXXX | Partner B | XXXX |
| To Reserve A/c | XXXX | ||
| To Profit transferred to: | |||
| Partner A’s Capital | XXXX | ||
| Partner B’s Capital | XXXX | ||
| XXXX | XXXX |
Journal Entries for P&L Appropriation A/c
| Transaction | Journal Entry |
|---|---|
| 1. Transfer of net profit | Profit & Loss A/c Dr. To Profit & Loss Appropriation A/c |
| 2. For partners’ salary/commission | Partners’ Salary/Commission A/c Dr. To Partners’ Capital/Current A/c |
| 3. Closing salary/commission to P&L App. A/c | Profit & Loss Appropriation A/c Dr. To Partners’ Salary/Commission A/c |
| 4. Interest on capital provided | Interest on Capital A/c Dr. To Partners’ Capital/Current A/c |
| 5. Closing interest on capital | Profit & Loss Appropriation A/c Dr. To Interest on Capital A/c |
| 6. Interest on drawings charged | Partners’ Capital/Current A/c Dr. To Interest on Drawings A/c |
| 7. Closing interest on drawings | Interest on Drawings A/c Dr. To Profit & Loss Appropriation A/c |
| 8. Transfer to reserve | Profit & Loss Appropriation A/c Dr. To Reserve A/c |
| 9. Distributable profit transferred | Profit & Loss Appropriation A/c Dr. To Partners’ Capital/Current A/c |
Capital Accounts – Two Methods
1. Fixed Capital Accounts Method
- Capital A/c → Fixed balance (changes only with fresh capital or withdrawal).
- Current A/c → All adjustments (salary, interest, drawings, profit/loss).
Format of Fixed Capital Account
Partner’s Capital Account
| Dr. | Cr. | ||
|---|---|---|---|
| To Cash/Bank (withdrawal) | XXX | By Balance b/d | XXX |
| To Balance c/d | XXX | By Cash/Bank (additional) | XXX |
| XXX | XXX |
Partner’s Current Account
| Dr. | Cr. | ||
|---|---|---|---|
| To Drawings | XXX | By Interest on Capital | XXX |
| To Interest on Drawings | XXX | By Salary/Commission | XXX |
| To P&L App. A/c (loss share) | XXX | By P&L App. A/c (profit) | XXX |
| To Balance c/d (if debit) | XXX | By Balance c/d (if credit) | XXX |
| XXX | XXX |
2. Fluctuating Capital Accounts Method
- Only one Capital Account per partner.
- All transactions affect this account → balance fluctuates.
Format of Fluctuating Capital Account
Partner’s Capital Account
| Dr. | Cr. | ||
|---|---|---|---|
| To Drawings | XXX | By Balance b/d | XXX |
| To Interest on Drawings | XXX | By Cash/Bank (capital) | XXX |
| To P&L App. A/c (loss) | XXX | By Interest on Capital | XXX |
| To Cash/Bank (withdrawal) | XXX | By Salary/Commission | XXX |
| To Balance c/d | XXX | By P&L App. A/c (profit) | XXX |
| XXX | XXX |
Summary
- Partnership is based on agreement; deed avoids disputes.
- In absence of deed, Indian Partnership Act, 1932 applies → equal profit sharing, no interest on capital/drawings, no salary, 6% on loan.
- Profits distributed via P&L Appropriation Account.
- Capital accounts maintained either fixed + current method or fluctuating method.
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