12 Accountancy Keynotes Ch01 Fundamentals of Partnership

8/17/2019 12 Accountancy Keynotes Ch01 Fundamentals of Partnership

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Class-12 Accountancy

Chapter 1 - Basics of artnership

!ntroduction

A business can be organised in the form of a sole proprietorship, a partnership firm or a

company. In Sole Proprietorship total capital is invested by only one person and only he is

responsible for functioning and all the profits and losses. The main disadvantage of single

ownership is that his all personal properties are always at risk and may be used for the

payment of the business liabilities. That's why the need of partnership takes place. Inpartnership loss is shared by all the partners while in single proprietorship only one

person is suffering for all losses. The main advantage of partnership is that there are two or

more persons to take the responsibility of business. All profits and losses are distributed

among the partners. Partnership comes into eistence out of agreement. The agreement

may be written or oral among the partners. It is better to have a written agreement among

the partners to avoid the conflicts or disputes. !henever there is dispute for the

distribution of the profits among the partners, in such case Indian partnership act "#$% is

applicable.

"eanin# and $efinition of artnership

A partnership is formed by an agreement. Partnership agreement may be written or oral.

The agreement should be to share the profits of the business. The firm&s business may be

carried on by all the partners or any one of them acting for all. As per the law, it is not

necessary to have a written agreement but to avoid the trouble in managing the affairs of

the partnership firm, it is always advisable to have a written partnership deed which

should be signed by all the partners.

Definition According to Section- 4 of the Indian Partnership Act, 1932 :

"Partnership is the relationship beteen persons ho ha!e agreed to the share

the profits of a bsiness carried on b# al or an# one of the$ acting for all"

%eatures&Characteristics of artnership

". '(o or "ore ersons ) A partnership business can be commenced with two or more

partners. According to the Indian ompanies Act, "#(), maimum number of persons

in case of a banking business is "* +Ten and %* +Twenty in case of other business.

Boo! "ecommended: #$%M&E B''( ') &CC'#N&NC* +By r. -inod (umar, -ishas Pulications0

1arning: his is copyrighted content of r. -inod (umar. Not to e reproduced in any form, anywhere else.


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%. A#reement Bet(een the artners - A partnership is formed by an agreement.

Partnership agreement can be written or oral. There is no fied or compulsory law for

the formation of written partnership agreement but in the absence of a written

agreement partners may face difficulty in managing the affairs of the partnership firm.

Therefore, to avoid the conflictsdisputes among the partners, it is also advisable to

have a written partnership agreement.

$. *a(ful Business - The agreement should be carrying on some legal business. /nlawful

activities are not considered as partnership business.

Example 1 - %inod and &!ra' prchased a piece of land 'ointl# and sold after so$eti$e at a

profit( )he profit earned fro$ sale of land as shared b# %inod and &!ra' *+all#( It ill not

be treated as partnership bsiness(

Example 2 : Da!id and ohn are partners doing s$ggling and share the a$ont earned

e+all#( It is not a partnership bsiness(

0. Sharin# of rofits - It is necessary to share the profitslosses of a partnership business

among the partners. A group of people doing some charitable activities, will not be termed

as partnership. The ratio of sharing profitslosses should be determined by the agreement

and in case if there is not partnership deed, in such a situation profitslosses should be

shared e1ually.

(. Business Carried on +y all or any of them actin# for all- It is not necessary for all the

partners to participate in day2to2day activities of the business. A partnership business can

be carried on by all the partners or any one of them acting for all on behalf of other

partners. In Acutal, partnership is based on the concept of 3utual Agency realtionship. A

partner is both an agent and a principal because he binds other partners by his acts and in

the same manner he is also bound by the acts of the other partners.

"eanin# and Contents of artnership $eed

A Partnership is formed by an agreement. This agreement may be written or oral. In actual,

Partnership deed is a written agreement signed by all the partners. It is a document whichcontains all terms and conditions of partnership agreed by the partners. As we know that

partnership is the result of agreement among the partners. The agreement may be written

or oral. In absence of a written agreement, there may be dispute or conflicts among other

partners regarding profits. Therefore, an agreement should be written and signed by all the

partners. Partners can make changes in the clauses of partnership deed time to time with

the consent of all partners.

Contents of partnership deed

The partnership deed usually contains the following particulars-


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". 4ame of the 5irm 6 address of 5irm 6 its main 7usiness

%. 4ames and addresses of all partners

$. 8ate of commencement of partnership

0. apital contributed by each partners

(. 9atios in which profits and losses are to be shared by the partners

). Salaries, commission, allowances payable to the partners

:. 9ights, duties and liabilities of the partners

;. 8uration of partnership, if any

#. 3ode of auditors appointment

"*. Accounting period of the firm

"". 9ules regarding the operation of bank account

"%.


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$. Interest on e is entitled for the full

amount of interest on such loan.

0. Interest on 8rawings In the absence of partnership deed, no interest will be

charged on the drawings made by the partners.

(. Salary9emuneration to

Partners

In the absence of partnership deed, no

salaryremuneration will be paid to any partner

whether his particpation in the business is more than

other partners.

"ights of partners

Right to take part in management

Right to inspect the books of accounts

Right to share profits

Right to be consulted about matters affecting the partnership business

Right to retire

uties of partners

He should be faithful to other partners

He should share the losses of the firm

To attend his duties diligently

He should not compete with the firm

reparation of rofit , *oss Appropriation Account

In case of a partnership firm, all charge are shown in profit and loss account and all appropriations

are shown in Profit and


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Profit and


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+7eing profit distributed among partners

roforma of rofit and *oss Appropriation Account

articulars Amount articulars Amount

To Interest on Capital

X xxxx

Y xxxx

Z xxxx

To Partners Salary

X xxxx

Y xxxx

Z xxxx

To Partners Commission

X xxxx

Y xxxx

Z xxxx

To Transfer to Reserve

To Profit Transferred to

X’s Capital/Current A/c xxxx

Y’s Capital/Current A/c xxxx

Z’s Capital/Current A/c xxxx

xxxx

xxxx

xxxx

xxxx

xxxx

y Profit ! "oss A/c #profit$

y interest on %ra&in's (

X xxxx

Y xxxx

Z xxxx

xxxx

xxxx

xxxx xxxx

reparation of artners Capital

AccountsPartner's apital Accounts - It is an account

which represents the partner's interst in

the business.

In case of partnership business, a separate

capital account is maintained for each

partner. The capital accounts of partners may

be maintained by following any of the

following two methods-

+" %ied Capital Accounts ) /nder this method capitals of the partners remain fied. apital

accounts of the partners will show always redit balances. /nder This method mainly two


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accounts are prepared i.e. Partners apital Account and Partners urrent Account. There

are only two situations when fied capitals of the partners may change -

#ituation 1: When Additional !apital is introduced %$ the partners #ituation 2: When #ome part of capital is withdrawn permanentl$ %$ the partners

Bnly two items are shown in the credit side i.e. opening balance or capital introduced by

the partners and additional capital +if any introduced by the partners.

In the debit side withdrawn of capital +permanently and closing balance is shown.

artners Capital Account

articulars A B articulars A 7

'o Cash&+ank

.(ithdra(n of

capital/

'o +alance c&d

By Balance +&d

artners Current Account

articulars A B articulars A B

To ashbank

+withdrawn ofcapital

To balance cd

7y 7alance bd

7y Interest on apital7y Salary9emuneration

7y ommission7onus

7y 7alance cd +if any

Note -

". 8ebit balance of urrent Account is shown in Assets side of 7alance Sheet.

%. redit balance of urrent Account is shown in


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$e+it Side !tems

+a !ithdrawl of capital +if any

+b

8rawings made during the year +if any

+c Interest on drawings +if any

+d Share of loss +if any

+e losing balance

artners Capital Account

articulars A B articulars A B

To ashbank

+withdrawn of

capitalTo 8rawings

To Int. on 8rawings

To P< Ac +if loss

To balance cd

7y 7alance bd

7y ash7ank +additional cap.

7y Interest on apital7y Salary9emuneration

7y ommission7onus

7y 7alance cd +if any

INTEREST ON CAPITAL

Interest on partners& capital will be allowed only when it has been specifically mentionedin the partnership deed. Interest on apital can be treated as either an Appropriation

of profit or a charge against profits.

Charge &ppropriation

C)ar'e is compulsory in nature*

+)et)er t)ere is profit or loss, all

c)ar'e items &ill -e met*

.xample of C)ar'e(ffice Rent

Salary to .mployees

0ana'er’s Commission etc*

Appropriation is not compulsory in nature*

Appropriation is t)at amount of profit &)ic)

is paid to t)e partners in t)e form of interest

on capital, salary, commission/-onus etc*

T)e concept of appropriation is applica-le

only &)en t)ere is some profit*

In case of loss no appropriations*

.xample of Appropriation( Interest on capital,

salary or remuneration to partners, -onus or

commission to partners etc*


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A. Interest on Capital : An Appropriation of Profits:

When there is loss Interest on Capital is not allowed because it

is an appropriation and will be paid onlywhen there is some profit

In Case of Sufficient Profits Interest on Capital is allowed in full. All

partners are entitled for the interest on

capital at the agreed rate or rate of

interest on capital already mentioned in

the partnership deed.

In case of Insufficient Profits Interest on Capital is allowed only to the

extent of profits in the ratio of interest oncapital of each partner. In this case

partners do not get full amount of

interest.

B. Interest on Capital: As a Charge against Profits:

Interest on Capital is always allowed in full irrespective of amount of profits or

losses

Journal Entries

a. In case of sufficient profits

Profit and Loss Appropriation A/c Dr.

To Interest on Capital A/c

(Being interest on capital transferred to P & L Appropriation A/c)

b. In case of Insufficient Profits or Losses

Profit and Loss / Profit and Loss Adjustment A/c Dr.

To Interest on Capital A/c

(Being interest on capital transferred to P&LAdjustment A/c)

Note :

Interest on Capital is always calculated on the opening capital. If Opening Capital

is not given in the question, it should be ascertained as follows :


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Calculation of 0penin# Capital

apital at the end +closing capital

A88 - 8rawings made during the year

A88 - Share of


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"ethods for Calculation of interest on dra(in#s

1 hen a fied amount is (ithdra(n +y the partners after re#ular intervals and rate of

interest is #iven in the 3uestion (ith the (ord per annum

Step 2. Calculate aerage period :

aerage period 3 ime after first drawing 4 time after last drawing

5

Step 5. Calculate interest on drawings :

interest on drawings 3 otal drawings 6 "ate/277 6 &erage period

2 hen rate of interest is #iven (ithout the (ord per annum

In such a case, Interest on Drawings is calculated with a flat rate irrespective of date ofdrawings.

4 hen $ifferent amounts are (ithdra(n at different time intervals

!e have the following two methods to calculate the amount of Interest on 8rawing -

". Simple !nterest "ethod

In this method, interest on drawing is calculated for each amount of drawing

indivdually of the basis of periods for which

% roduct "ethod

In this method, the amounts of drawings are multiplied by the period for which itremained withdrawn during the period, Interest for " month is calculated on the sum of

these products.

5 6alf 7early $ra(in#s

6alf yearly $ra(in#s for year (hen)

+a 8rawings are made in the begnning of each period +half2year Interest on drawing C

Amount 9ate"** #"%

+b 8rawings are made in the middle of each period +half year Interes on drawing C

Amount 9ate"** )"%


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+c 8rawings are made at the end of each period +half year

Interest on drawing C Amount 9ate"** $"%

%or monthly dra(in#s for 8 months

+a 8rawings are made in beginning of each month

Interst C Amount 9ate"** $.("%

+b !hen drawings are made in the middle of each month

Interest C Amount 9ate"** $"%

1hen date of withdrawal is not specified

Sometimes date of &it)dra&al is not 'iven in t)e 1uestion2 amount &it)dra&n -y t)e partners as

dra&in's is 'iven only* In suc) a case it is assumed t)at t)e amount is &it)dra&n at avera'e -asis or

&it)dra&n evenly t)rou')out t)e year and interest &ill -e c)ar'ed for t)e avera'e period &)ic) &ill

-e assumed to -e 3 mont)s* It is assumed t)at amount is &it)dra&n in t)e middle of every mont)* T)e

follo&in' formula &ill -e used*

Interest on %ra&in's 4 Total %ra&in's x Rate/566 x 3/57

%mportant Points

5* If amount is &it)dra&n in t)e -e'innin' of eac) mont), interest is calculated for 3 8

mont)s*7* If amount is &it)dra&n in t)e middle of eac) mont), interest is calculated for 3 mont)s*

9* If amount is &it)dra&n at t)e end of eac) mont), interest is calculated for : 8 mont)s*

;* If amount is &it)dra&n in t)e -e'innin' of eac) 1uarter, interest is calculated for < 8

mont)s*

:* If amount is &it)dra&n at t)e middle of eac) 1uarter, interest is calculated for 3

mont)s*

3* If amount is &it)dra&n at t)e end of eac) 1uarter, interest is calculated for ; 8

mont)s*


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Concept of ast Ad9ustment

Past AdDustments are concerned with the previous entries which were left out or

ommitted or wrongly entered in the accounts. If, after preparation of 5inal

Accounts of firm, it is found that some errors or omission in accounts hasoccurred than such errors or omissions are rectified in the net year by

passing an adDustment entry.

A statement is prepared to ascertain the net effect of such errors or omissions

on partner's capitalcurrent accounts in the following manner.

&dustment ale

Particulars & B

Step 2. 1hat &mount partners should get

+%nterest 4 Salary 4 Commission 4 Profits etc.0

Step 5. $ess : &mount already receied +wrong Profit0

66666

66666

66666

66666

66666

66666

Now compare Step 2 and Step 5 and decide Partner is gainer or sacrificing.

&fter this ma!e the following entry :

8ainer partner9s &/c r.

o Sacrificing Partner9s &/c

:;ARAN'EE 0% R0%!'S '0 A AR'NER

Euarantee is an assurance given to the partner of the firm that at least a fied

amount shall be given to himher irrespective of hisher actual share in profits of

the firm. If actual share in profits is less than the guaranteed amount in that case

the deficit amount shall be borne either by the firm or by any partner as the

case may be.

ote : .arantee to a partner is gi!en for $ini$$ share in profits( If the actal

share in profits is $ore than the $ini$$ garanteed a$ont then the actal

profits ill be alloed to the partner

Case ) 1 hen #uarantee is #iven +y %!R" .ie< +y all the artners of the firm/

". Euaranteed amount to a partner is written in Profit and


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remaining ratio.

Case 2) hen #uarantee is #iven +y a partner or partners to another partner

".

alculate the share in profits for the partner to whom guarantee is given

%. If share in profits is more than the guaranteed amount, distribute the profits as

per the profit and loss sharing ratio in usual manner.

$. If share in profits is less than the guaranteed amount, find the difference

between the share in profits and the guaranteed amount and the difference is

known as 8eficiency. 8eficiency is distributed among the partner or partners

who guaranteed in a certain ratio and subtracted from his or their respective

shares.

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12 Accountancy Keynotes Ch01 Fundamentals of Partnership

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