Accounting for Partnership: Basic Concepts

Partnership (as per Indian Partnership Act, 1932 — Section 4): '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.' Persons who form partnership = Partners Collectively = Firm Name under which business is carried on = Firm Name Essential features: 1. Two or more persons: • Minimum 2 partners • Maximum: Banking business = 10; Other business = 50 (as per Companies Act 2013) 2. Agreement: • Must be an agreement (oral or written) among partners • Written agreement = Partnership Deed 3. Lawful business: • Business must be legal 4. Sharing of profits: • Partners share profits and losses in agreed ratio • Sharing of losses is also implied 5. Carried on by all or any of them: • Every partner is an agent of the firm and other partners • Business can be conducted by any partner on behalf of all 6. Unlimited liability: • Each partner is personally liable for firm's debts • Liability extends to personal assets (jointly and severally) 7. No separate legal entity: • A firm is not a separate legal person (unlike a company) • Partners and firm are NOT distinct in law

Partnership Deed: • A written agreement among partners that contains all the terms and conditions of the partnership • Also called Articles of Partnership • It is the charter of the partnership firm • Can be written, printed, or typed; must be signed by all partners • Stamped as per the Indian Stamp Act • Not compulsory by law (partnership can be oral), but highly advisable Contents of Partnership Deed: Essential contents: 1. Name and address of the firm 2. Names and addresses of all partners 3. Nature and place of business 4. Date of commencement of partnership 5. Duration (if any) of the partnership 6. Capital contribution of each partner 7. Profit and loss sharing ratio Optional but important contents: 8. Rate of interest on capital, drawings, and loans 9. Salary or commission payable to partners 10. Method of valuation of goodwill 11. Accounting period 12. Bank accounts and authorised signatories 13. Procedure for admission/retirement/expulsion of a partner 14. Provisions for dissolution of the firm 15. Method of settlement of disputes (arbitration) 16. Rules regarding drawings by partners In the absence of a Partnership Deed: The provisions of the Indian Partnership Act 1932 apply: • No interest on capital • No salary to any partner • Interest on drawings: none • Profit sharing: equal ratio • Interest on partner's loan: 6% per annum

Fixed Capital Method: • Each partner's capital account balance REMAINS FIXED from year to year (unless additional capital is introduced or capital is withdrawn permanently) • Two separate accounts maintained for each partner: (a) Capital Account: Only for permanent changes (introduction/withdrawal of capital) (b) Current Account: All other adjustments — interest on capital, share of profit/loss, salary, interest on drawings, drawings • Capital Account always shows a credit balance (fixed amount) • Current Account may show credit or debit balance • Opening capital = Closing capital (unless permanent change) Fluctuating Capital Method: • Only ONE account maintained for each partner: Capital Account • All entries — interest on capital, salary, share of profit, drawings, interest on drawings — recorded in the single Capital Account • Capital balance CHANGES (fluctuates) every year • Capital Account may occasionally show a debit balance (if drawings exceed profits) • Simpler — only one account per partner Comparison table: | Basis | Fixed Capital | Fluctuating Capital | |---|---|---| | Number of accounts | Two (Capital + Current) | One (Capital) | | Capital balance | Fixed, rarely changes | Changes every year | | Entries for adjustments | In Current Account | In Capital Account | | Debit balance possible | Only in Current Account | In Capital Account | | Complexity | More complex | Simpler | Unless stated otherwise in a problem, use Fixed Capital Method.

Step 1 — Calculate Interest on Capital: X: 3,00,000 × 10/100 = ₹30,000 Y: 2,00,000 × 10/100 = ₹20,000 Z: 1,00,000 × 10/100 = ₹10,000 Total interest on capital = ₹60,000 Step 2 — Calculate X's salary: X's salary = ₹2,000 × 12 = ₹24,000 Step 3 — Calculate Y's commission: Commission = 10% on net profit AFTER charging such commission Let commission = C C = 10/100 × (Profit − C) 100C = 10 × (1,80,000 − C) 100C = 18,00,000 − 10C 110C = 18,00,000 C = ₹16,364 (approx. ₹16,364) Step 4 — Distributable profit: Net profit = ₹1,80,000 Less: Interest on capital = ₹60,000 Less: X's salary = ₹24,000 Less: Y's commission = ₹16,364 Profit for distribution = ₹79,636 Step 5 — Share of profit (ratio 3:2:1): X: ₹79,636 × 3/6 = ₹39,818 Y: ₹79,636 × 2/6 = ₹26,545 Z: ₹79,636 × 1/6 = ₹13,273 Profit & Loss Appropriation Account for the year ended 31st March 2024 Dr. ₹ | Cr. ₹ Interest on Capital: | Net Profit b/d 1,80,000 X 30,000 | Y 20,000 | Z 10,000 60,000 | Salary — X 24,000 | Commission — Y 16,364 | Share of Profit: | X 39,818 | Y 26,545 | Z 13,273 79,636 | 1,80,000 | 1,80,000

Step 1 — Interest on Capital: A: 80,000 × 10% = ₹8,000 B: 60,000 × 10% = ₹6,000 Step 2 — A's Salary: A's salary = ₹500 × 12 = ₹6,000 Step 3 — Interest on Drawings (mid-year assumed = 6 months): A: 12,000 × 6% × 6/12 = ₹360 B: 8,000 × 6% × 6/12 = ₹240 Step 4 — Distributable profit: Net profit ₹50,000 Add: Interest on Drawings (A+B) 600 50,600 Less: Interest on Capital (A+B) 14,000 Less: A's Salary 6,000 Profit for distribution 30,600 A's share: 30,600 × 3/5 = ₹18,360 B's share: 30,600 × 2/5 = ₹12,240 P&L Appropriation Account Dr. ₹ | Cr. ₹ Interest on Capital: A 8,000 | Net Profit 50,000 B 6,000 14,000 | Interest on Drawings: A's Salary 6,000 | A 360 Share of Profit: A 18,360 | B 240 600 B 12,240 | 50,600 | 50,600 Partners' Current Accounts Dr. A B | Cr. A B Balance b/d — 5,000 | Balance b/d 10,000 — Interest on Dg. 360 240 | Interest/Cap. 8,000 6,000 Drawings 12,000 8,000 | Salary 6,000 — Balance c/d 30,000 5,000 | Share of P. 18,360 12,240 42,360 18,240 | 42,360 18,240