partnership introduction

04/11/2023By Sunil Kumar Vishwakarma 1

PARTNERSHIP ACCOUNTS

Unit -I Introduction to

Partnership Accounts


1.Introduction

An individual i.e., a sole proprietor may not be in a position to cope with the financial and managerial demands of the present business world.

As a result, tow or more individuals may decide to pool their financial and non-financial resources to carry on a business.

The final accounts of partnership firm including basic concepts of accounting for Admission, Retirement and Death.


2. Definition and features The Indian Partnership Act defines

partnership as “ the relationship between persons

who have agreed to share the profit of a business carried on by all or any one of them acting for all”


Essential features

1. An association of two or more persons;2. An agreement entered into by all person

concerned;3. Existence of business;4. The carrying on of such business by all or

any one of them acting for all; and5. Sharing of profit of the business (including

losses).The persons who enter into such an

agreement are called partners and the business is called a firm.


From the accounting point of view, the main thing is that relations among the partners will be governed by mutual agreement.The agreement is known as partnership Deed which is to be properly stamped.

It is usual therefore, to find the following clauses in a partnership Deed which may or may not registered


1. Name of the firms and partners; 2. Commencement and duration of business;3. Amount of capital to be contributed by

each partner;4. Amount to be allowed to each partners as

drawings and the timings of such drawings;

5. Rate of interest to be allowed to each partners on his capital and on his loan to the firm, and to be charged on his drawings;

6. The ratio in which profits or losses are to be shared;

7. Whether a partner will be allowed to draw any salary;


8. Any variations in the mutual rights and duties of partners;

9. Methods of valuing goodwill on the occasions of changes in the constitution of the firm;

10.Procedure by which a partner may retire and the method of payment of his dues;

11.Basis of the determination of the executors of a deceased partner and the method of payment;

12.Treatment of losses arising out of the insolvency of a partner;

13.Procedure to be allowed for settlement of disputes among partners;

14.Preparation of accounts and there audit.


Rules applicable in the absence of Agreement

1. No partner has the right to a salary,2. No interest is to be allowed on capital,3. No interest is to be charged on drawings,4. Interest at the rate of 6% is to be

allowed on a partner’s loan to the firm, and

5. Profit and losses are to shared equally.note: In the absence of an agreement, the

interest and salary payable to a partner will be paid only if there is profit.


6. Admission of a New Partner :- without the consent of all existing partners no new partner can be admitted to the firm.

7. Each partner can participate in the conduction of business.

8. Each partner can inspect the books of firm and can take a copy of the same.

Note – partners may change any of the above provisions by coming to a common agreement.


3 Accounts There is not much difference between the

accounts of a partnership firm & that of sole proprietorship (provided there is no change in the firm itself).

The only difference to be noted is that instead of one capital A/c there will be as many Capital A/c as there are partners.

When a partner takes money out of the firms for his domestic purpose,

a) Capital A/c can be debited or b) Separate A/c, named as Drawings A/c can

be debited


3.1 Profit & loss appropriation A/c

The profit of the partnership firm are divided among the partners.

Usually, for this purpose, the profit as per Profit & loss A/c is transferred to a newly-opened account, namely “ profit & loss Appropriation Account”

Entries for INTREST ON CAPITAL, interest on Drawings, SALARY TO PARTNERS, and division of profits among the partners will be passed only in that account


Profit & loss Appropriation A/cTo profit & loss A/c ( loss transferred from P & L A/c)To Salaries of partnersTo commission to partnersTo interest on partners’ CapitalsTo reserve A/cTo profit transferred partners’ Capital or Current A/cs

Rs. -----

----- ----- ----- - ---

________________

By profit & loss A/c (profit transferred from P & L A/c)By Interest on drawingsBy loss transferred to partners’ Capital or Current A/cs

Rs. ------

------ ------

______________


The journal entries1. Entry for Interest on Capital (on

allowing & Closure)2. Entry for Interest on Drawings (charging

& Closure)3. Entry for salary or commission payable

to partner;4. Entry for transferring a part of profit to

reserve :5. Entry for transfer of credit balance of

profit and loss Appropriation A/c (being profit)


Special Aspects of Partnership Accounts

1. Partners’ Capital Accounts;2. Interest on Partners’ Drawings;3. Interest on partners’ Capital;4. Salary or Commission to Partners;5. Interest on Partner’s loan;6. Capital Ratio; and7. Guarantee of Profit.


1. fixed & Fluctuating Capital A/c 1. Fixed Capital Accounts Means the Capital remain

unaltered, under this system the original capital remains constant, unless;

Additional capital is introduced by an agreement.

When fixed capital method is adopted

All entries related to drawings, interest, salary to partners, profit & loss etc., are made in newly-opened account for each partner, called Current /Drawings Account.


2.Fluctuating Capital

Under fluctuating Capital Method only one account namely-’capital account’ is maintained for each partner.

Amount of capital of each partner do not remains fixed but alters with every credit or debit.

When this method is followed following Capital accounts having credit balance are shown on the liabilities side while capital accounts having debit balances are shown on the assets side of the balance Sheet.


2. Interest on Partners Drawings Drawings’ means the amount withdrawn,

by partners, in cash or in kind, for their personal use.

Methods of calculating interest1) Simple Method:- IOD=

2) Product Method:- IOD=

Amount of Drawings * Rate of Interest * Months 100

12

Total of products * Rate of Interest * 1 100

12


Interest on Drawings

A. If interest on drawing is to be calculated for the year irrespective of period.(interest charged for full year, irrespective of date)

B. If dates of withdrawals are not specified. (interest should be charged for the average period-6 month)

C. Interest on monthly drawings. (If partners draw money every month regularly either at the beginning or end of the month)


1. If amounts are withdrawn on 1st day of every month throughout the year. ( 6.5 months)

2. If amounts are withdrawn on last day of every month throughout the year. (5.5 months)

3. If amount is withdrawn in the middle of every month or evenly throughout the year. (6 months)

4. When drawings of equal amount are made in quarter:

a) In the beginning (7.5 months) b) At the end of (4.5 months) c) In the middle (6 months)* Quarter means three months


*Charge & AppropriationBasis Charge Against Profit Appropriation Out of

Profit

1

2

3

4

Nature

Recording

Necessary or not

Example

It includes expenses to be deducted from profit while calculating net profit or loss.It is debited to profit and loss Account.

It is necessary to make charges against profits even if there is loss.

Interest on partners Loan and rent paid to a partner.

It indicates distribution of net profit to various heads.

It is debited to P & L Appropriation Account.

Appropriation are made only when there is profit.

Interest on partners capital, partners salary.


3 Interest on partners Capital

partnership introduction

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