2 Accounting For Partnership Basic Concept 1

Accounting for Partnership Firms
Basic Concepts
Meaning and Definition
According to Section 4 of the 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 Firm
1. Association of two or more persons: There must be at least two persons
and maximum of 50 persons to form a partnership and they must be
competent to contract.(exempted: persons of unsound mind and disqualified
by law).Minor can be a partner of the firm and only in the profits of the firm
and not in the losses.
2. Legal Business: The business of the partnership firm must be a legally
allowed business.
3. Sharing of Profits or Losses: The partners must share profits or losses in
a certain ratio.
5. Mutual Agency: The partners mutually take part in daily routine work or the
work may be carried on by one or more partners on behalf of the other
partners. Every partner is legally liable for the acts of all other partners,
whether he is taking part in the activities of the firm or not.
6. Unlimited Liability: Partners' liability to the third parties is unlimited. If
there are losses, and the firm is not able to pay its debts fully, then all the
partners shall be jointly and severally liable to pay the debts of the firm to
an unlimited extent.
7. Partnership Deed: The document, which contains terms of the agreement, is
called' Partnership Deed'. It generally contains the details about all the
aspects affecting the relationship between the partners including the objective
of business, contribution of capital by each partner, ratio in which the profits
and the losses will be shared by the partners and entitlement of partners to
interest on capital, interest on loan, etc. It can be oral or written and should be
signed by all partners.
Contents of Partnership deed
• Description of the partners and • Remuneration to partners
firm • Valuation of goodwill
• Principle place of business • Valuation of assets
• Nature of the business • Settlement of account
• Commencement of partnership • Accounting period
• Capital contribution • Rights and duties of partners
• Interest on capital • Duration of partnership
• Interest on drawings • Bank account operation(any or all)
• Profit-sharing ratios • Death of a partner
• Interest on loan • Settlement of disputes
▶ Provisions of Partnership Act, 1932 in the absence of Partnership
Deed:
a. Profit Sharing Ratio: If the partnership deed is silent about
the profit sharing ratio, the profits and losses of the firm are
to be shared equally by partners.
b. Interest on Capital: No interest on capital is payable if the
partnership deed is silent on the issue.
c. Interest on Drawings: No interest is to be charged on the
drawings made by the partners, if there is no mention in the
Deed.
d. Interest on Advances and interest on loan: If any partner has
advanced some money to the firm beyond the amount of his
capital for the purpose of business,or to a partner as loan he shall
been titled to get an interest on the amount at the rate of 6 % per
annum.
(e) Remuneration for Firm's Work: No partner is entitled to get
salary or other remuneration for taking part in the
conduct of the business of the firm.
(f) Admission of partner: New partners cannot be admitted unless all
the partners agree to it.
Liabilities of a partner
1. If a partner carries on a business in competition with the firm without
the consent of other partners and earns profit from it, the profit earned
from such business shall be paid to the firm. However, losses incurred,
if any, are borne by him alone.
2. If a partner earns profit for himself from any transaction of the firm or
from the use of firm's property or business connection, the profit so
earned shall be paid to the firm. For example, a partner gets commission
from the buyer of goods on goods sold by the firm, the commission so
earned shall be paid to the firm.
Question
Amar, Lalit and Charu are partners in a firm and they do not have a Partnership Deed.
(i) Amar had invested more capital than other partners and asks for interest on capital
at10% p.a. But Lalit and Charu do not agree with him.
(ii) Lalit devotes more time in handling the business and demands a salary of ₹ 5,000
p.m. But Amar and Charu do not agree with him.
(iii) Charu demands interest on the loan of ₹50,000 given by her @ 12% p.a.
(iv) Amar withdrew * 10,000 from the firm for his personal use. Lalit and Charu
demand that interest on drawings be charged from him @ 10% p.a.
(v) Profit for the year before the above claims was 50,000. Amar demands profits to be
distributed in the capital ratio.
(vi) Lalit wants to introduce his son Inder as partner. Charu objects to his proposal.
How will be the above issues resolved?
Question
Harry and Garry are partners in a firm. They do not have Partnership Deed but had
agreed on following.(Oral agreement).
(i) Salary to be paid to Harry @ 10,000 per month.
(ii) Garry to get commission @ 10% of Net Profit.
(iii) Interest to be allowed on capitals @ 10% p.a.
(iv) Interest to be charged on drawings @ 10% p.a.
(v) Partner cannot be admitted unless both the partners agree.
How will be the following disputes between Harry and Garry resolved?
1. Garry demands salary in lieu of commission equal to the salary of Harry.

2. Harry demands that his son Sherry be admitted as partner for 25% share to be given
out of his share of profits. Garry does not agree to Sherry's admission as partner .
Charge against Profit and Appropriation of Profit
Charge against Profit means that it is an expense for the firm deducted
from revenue to determine net profit or loss for the year and is paid
whether the firm earns profit or incurs loss. Interest on Loan by Partner,
Rent Payable to a partner and Manager's Commission, charge against
profit and are payable whether the firm earns profit or incurs loss.
Appropriation of profit means distribution of net profit for the year among
partners under different heads as per the partnership deed. Interest on
Drawings among partners as Salary/Remuneration, etc. and transfer to
reserves. Salary/Commission to partners, interest on capitals and transfer
of profit to Reserves are appropriations of profit.

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Accounting for Partnership Firms

1. Garry demands salary in lieu of commission equal to the salary of Harry.

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