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ACCOUNTING FOR 
PARTNERSHIP FIRM –
FUNDAMENTALS
Page 2


ACCOUNTING FOR 
PARTNERSHIP FIRM –
FUNDAMENTALS
Meaning of Partnership
• A partnership firm is an 
association of two or more 
persons to carry on a legal 
business and share its profits or 
losses. The persons who join 
hands together to do a business 
are individually known as partners 
and collectively a firm.
Page 3


ACCOUNTING FOR 
PARTNERSHIP FIRM –
FUNDAMENTALS
Meaning of Partnership
• A partnership firm is an 
association of two or more 
persons to carry on a legal 
business and share its profits or 
losses. The persons who join 
hands together to do a business 
are individually known as partners 
and collectively a firm.
.
• According to Sec 4 of the Indian 
Partnership Act, 1932, "the term 
partnership is the relation between 
two or more persons who have 
agreed to share the profit of the 
business carried on by all or any of 
them acting for all
Page 4


ACCOUNTING FOR 
PARTNERSHIP FIRM –
FUNDAMENTALS
Meaning of Partnership
• A partnership firm is an 
association of two or more 
persons to carry on a legal 
business and share its profits or 
losses. The persons who join 
hands together to do a business 
are individually known as partners 
and collectively a firm.
.
• According to Sec 4 of the Indian 
Partnership Act, 1932, "the term 
partnership is the relation between 
two or more persons who have 
agreed to share the profit of the 
business carried on by all or any of 
them acting for all
Essential elements of Partnership
•1 . At least two persons: There must be at 
least two persons to form a partnership and all 
such persons must be competent to contract.
•2. Agreement: There must be an agreement 
to form a partnership. This agreement can be oral 
or written.
•3 . Legal Business: An agreement should be 
for the purpose of carrying on the business or 
profession. The business to be carried on by the 
partners should be legal.
Page 5


ACCOUNTING FOR 
PARTNERSHIP FIRM –
FUNDAMENTALS
Meaning of Partnership
• A partnership firm is an 
association of two or more 
persons to carry on a legal 
business and share its profits or 
losses. The persons who join 
hands together to do a business 
are individually known as partners 
and collectively a firm.
.
• According to Sec 4 of the Indian 
Partnership Act, 1932, "the term 
partnership is the relation between 
two or more persons who have 
agreed to share the profit of the 
business carried on by all or any of 
them acting for all
Essential elements of Partnership
•1 . At least two persons: There must be at 
least two persons to form a partnership and all 
such persons must be competent to contract.
•2. Agreement: There must be an agreement 
to form a partnership. This agreement can be oral 
or written.
•3 . Legal Business: An agreement should be 
for the purpose of carrying on the business or 
profession. The business to be carried on by the 
partners should be legal.
.
• •4 . Profit Sharing: The agreement between the 
partners must be to share the profits or losses of 
the business in the particular ratio.
• •5 Mutual agency: There should be a mutual 
agency relationship among the partners. 'Mutual 
Agency' relationship means that each partner is 
both an agent and the principal. Each partner is 
an in the sense that he can bind the other 
partners by his acts done.
6. Number of partners: The minimum limit of the 
partners in a firm is two and maximum number of 
partners in a banking firm should be 10 and in the 
other firm should be 20.
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FAQs on PPT - Accounting for Partnerships - Accountancy Class 12 - Commerce

1. What is accounting for partnerships?
Ans. Accounting for partnerships is a method of recording and reporting the financial transactions of a business that is jointly owned by two or more individuals or entities. It involves maintaining separate capital accounts for each partner, allocating profits and losses, and preparing partnership financial statements.
2. How are profits and losses allocated in a partnership?
Ans. Profits and losses in a partnership are typically allocated based on the agreed-upon partnership agreement. The allocation can be based on the partners' capital contributions, the partners' agreed-upon sharing ratio, or a combination of these factors. The partnership agreement outlines the specific method for allocating profits and losses among the partners.
3. What are the advantages of accounting for partnerships?
Ans. Accounting for partnerships offers several advantages. Firstly, it allows for the pooling of resources and expertise, enabling partners to share the workload and responsibilities. Secondly, it provides flexibility in the allocation of profits and losses, allowing partners to distribute earnings based on their contributions. Lastly, partnerships often enjoy a lower tax rate compared to corporations, resulting in potential tax savings.
4. How are partnership financial statements prepared?
Ans. Partnership financial statements are prepared by combining the financial information of all partners. The process involves recording and summarizing each partner's capital accounts, preparing an income statement to show revenues and expenses, and generating a balance sheet to reflect the financial position of the partnership. These financial statements are crucial for assessing the profitability and financial health of the partnership.
5. What is the role of a partner's capital account in partnership accounting?
Ans. A partner's capital account in partnership accounting represents the partner's ownership interest in the business. It reflects the initial capital contributed by the partner, additional investments made, and the partner's share of profits or losses. The capital account is adjusted for these transactions and is used to determine each partner's share of the partnership's assets and liabilities. It also serves as a basis for allocating profits and losses among the partners.
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