Accounting For Partnership Firms - Fundamentals - Introduction Video Lecture - Class 12

hello students welcome to the lecture on
accounting for partnership firm's
fundamentals and after this lecture we
will be able to learn the following
objectives describe partnership and
types of partnership explain partnership
deed and its role in partnership
accounting explain distribution of
profit among partners describe goodwill
and factors giving rise to goodwill and
explain methods of valuation
fundamentals let us begin by
understanding partnership a partnership
is a legal Association of two or more
individuals called partners and who are
co-owners of a business for profit like
proprietorships they are easy to form
this type of business organization is
based upon a written agreement that
details the various interests and right
of the partners and it is advisable to
get legal advice and document each
person's rights and responsibilities
kinds of partnerships there are three
main kinds of partnerships general
partnership a business that is owned and
operated by two or more persons where
each individual has a right as a
co-owner and is liable for the
business's debts limited partnership in
a limited partnership one or more
partners run the business as general
partners and the remaining partners are
passive investors who become limited
partners and are personally liable only
for the amount of their investments
master limited partnership these
partnerships are similar to corporations
trading partnership units on listed
stock exchanges they have many
advantages that are similar to
corporations example limited liability
unlimited life and transferable
ownership master limited partnerships
are
type of limited partnership that is
publicly traded there are two types of
partners in this type of partnership the
limited partner is the person or group
that provides the capital to the master
land partnership and receives periodic
income distributions from the master
land partnerships cash flow whereas the
general partner is the party responsible
for managing the master land
partnerships affairs and receives
compensation that is linked to the
performance of the venture one of the
most crucial criteria that must be met
in order for a partnership to be legally
classified as a master land partnerships
is that the partnership must derive most
of its cash flows from real estate
natural resources and commodities the
advantage of an master land partnerships
is that it combines the tax benefits of
a limited partnership with the liquidity
of a publicly traded company features of
partnership let us study the features of
partnership there must be at least two
persons to form a valid partnership
section 11 of the Indian Partnership Act
1930 to restrict the maximum number of
partners to ten for carrying on banking
business and 24 other kind of business
partnership comes into existence by an
agreement either written or oral among
the partners the written agreement among
the partners is called partnership deed
a partnership can be formed for the
purpose of carrying at sharing the
profits or losses of the business an
agreement between the partners must be
aimed at sharing the profits or losses
of the business a partnership can be
carried on by all or any one of them
acting for all partnership deed a
partnership is always formed by an
agreement between the partners this may
be oral or written when the agreement is
written duly stamped and signed by the
partners it is called the partnership
deed or article of partnership contents
of partnership deed are name of the firm
names qualifications occupation than
addresses of partners the nature of
business of firm duration of the
partnership the capital
version of each partner role of
partnership deed and accounting let us
study the role of partnership deed in
accounting every aspect relating to the
partnership may be included in the
partnership deed this deed forms the
basis of any transaction involving the
partners even accounting for partnership
firms is a function that is to be
carried on in accordance with the
provisions in the partnership deed
salary to be paid to partners profits to
be shared among partners interest on
capital interest on drawings etc are all
to be decided based on the agreement
between the partners that is based on
the partnership deed
thus in accounting for transactions
involving these compliance with what is
agreed upon should be ensured in the
case partnership deed or the agreement
between the partners is silent on any
aspect that is to be decided based on
that agreement the provisions in the
Indian partnership Act 1932 applies role
of partnership act in the absence of
partnership deed the partnership Act is
very important in the absence of
partnership deed because in will decide
the profit sharing ratio between the
partners it will provide the partner
their rights and solve many other issues
among the partners and declines special
aspects of partnership accounts a
capital account reflects four stake in
the partnership the exact behavior of a
capital account will vary depending on
the form of partnership selected this
reflects how a capital account will
behave in a general partnership with no
special allocation provisions a capital
account starts with the beginning
balance that partners have in capital
account then any contributions he adds
will be added to that total thus
increasing the value of capital account
it is very important to maintain these
accounts
currently this is extremely important
when dissolving the partnership as any
remaining property is distributed
according to these balances partner
liability can also be determined along
these lines assuming everyone has the
ability to pay there are two methods by
which the capital accounts of partners
can be maintained these are fixed
capital method and fluctuating capital
method the difference between the two
lies in whether or not the transactions
other than addition withdrawal of
capital are recorded in the capital
accounts of the partners fixed capital
account of partners this is one of the
ways of keeping partners contribution
that is capital in the books of the
phone the main aim of maintaining fixed
capital accounts of partners is to show
the amount of original contribution of
partners throughout holier on a constant
figure under this method capital
accounts are maintained one of it shows
the original capital of the partners
without any change throughout the year
and another account is open to record
the transactions between the partners
and the firm that is salary to partners
Commission to partners bonus to partners
interest on capital and drawings made by
the partners and so as like in the
partners current account the capital
account of partners showing the original
capital could be changed when there is a
change in the Constitution or when a
partner draws money from the business
against her or his capital and the other
way of maintaining accounts is
fluctuating capital account of partners
in fluctuating capital account of
keeping partners capital account only
one capital account of partners is
opened this account will record not only
the original capital contribution but
also the transaction between the
partners and the form it includes
partners drawings Commission and
interest on capital bonus and salary to
partners and
on as the case may be this account is
fluctuating whenever there is a presence
of any transaction influencing the
concerned account whenever there is a
system of fluctuating capital account no
maximum limit can be put on the partners
drawings as is maintained in the fixed
capital account system fixed capital is
an assets or capital investments that
are needed to startup and conduct
business even at a minimal stage these
assets are considered fixed in that they
are not used up in the actual production
of a good or service but have a reusable
value fixed capital investments are
typically depreciated on the company's
accounting statements over a long period
of time up to 20 years or more
examples include factories office
buildings computer servers insurance
policies legal contracts and
manufacturing equipment anything that is
not continually purchased in the course
of production of a good or service the
amount of fixed capital needed to set up
a business is quite variable
especially from industry to industry
some lines of business by their nature
require high fixed capital investment
common examples would include industrial
manufacturers telecommunications
providers and oil exploration firms
fixed capital investments typically
don't depreciate in the even way that is
shown on income statements some devalue
quite quickly while others have nearly
infinite usable lives but the
depreciation method allows investors to
see a rough estimate of how much value
fixed capital investments are
contributing to the current performance
of the company distribution of profits
among partners a profit and loss
appropriation account is prepared to
show the distribution of profits among
partners as for the provision of
partnership deed it is an extension of
profit and loss account it is nominal
account a profit and loss appropriation
account is the account in which one
shows the distribution of profit among
partners of partnership form in the form
of salary interest on capital Commission
and distributable profit to the partner
profit-and-loss appropriation account is
merely an extension of the profit and
loss account of the firm contents of
profit and loss appropriation account
interest on capital it is the expenses
for the partnership interest on capital
is allowed only if there is a profit
partnership agreement specifically
provides for the payment of the interest
on the capital contributed by the
partners the same has to be allowed
interest to be allowed on capital is to
be calculated with respect to the time
rate and amount interest on drawing the
partnership agreement may also provide
for charging of interest on money
withdrawn out of the firm by the
partners for their personal use no
interest is charged on the drawings if
there is no Express agreement among the
partners about it however if the
partnership deed so provides for it the
interest is charged at an agreed rate
for the period money remained
outstanding from the partners during an
accounting year charging interest on
drawings discourages excessive amounts
of drawings by the partners credit made
clearer understanding interest and APR
when you use your credit card charges
like interest and normally added to the
amount you've borrowed just like that
and although most providers will wait up
to 56 days before charging you interest
on purchases the interest rate is
different depending on how you use your
card exactly and that interest is often
higher and charged immediately together
the interest fees and what you spent add
up to the total amount you'll have to
pay back and the way it's calculated is
a real science but because we're not all
rocket scientists like this chap credit
card providers wrap up all those
difficult numbers and sums into a handy
thing call
the APR the APR makes it easy to compare
different cards before deciding which
one is best for you it's based on the
purchase interest rate and includes
things like annual fees
although cash withdrawal charges and
default fees are not included if you
think you might have trouble making any
repayments click the default fees button
or have a look at more information on
interest and APR on our website
guarantee of profit to a partner
guaranty is an assurance that a partner
will not get as a share of profit less
than the guaranteed amount there may be
two situations guaranteed to one partner
by others the firm sometimes a partner
is guaranteed a minimum amount by way of
a share in the profits of the firm such
a guarantee may be given to an existing
partner or to a new partner and the time
of admission such guaranteed amount
shall be paid to partner when his share
of profit as calculated according to his
profit sharing ratio is less than the
guaranteed amount the deficiency of such
guaranteed amount will be borne by the
other partners in their profit sharing
or agreed ratio as the case may be
guaranteed to a partner by another
partner individually the guarantee to an
existing or incoming partner may be
given by all the old partners or any of
them in their new profit sharing ratio
or in a greed guarantee past adjustments
sometimes after the final accounts have
been prepared and the partners capital
account are closed it is found that
certain items have been omitted by
mistake or have been wrongly treated
such omissions and commissions usually
relate to the interest on capital
interest on drawings salary to partners
etc in such a situation necessary
adjustments have to be made in the
partners capital account through an
account called profit and loss
adjustment account
the adjustment can also be made directly
in the partners capital accounts without
preparing a profit and loss adjustment
account in such a situation one can
prepare a statement to find out the net
effect of commissions and commissions
and then to damage the capital account
of the partner who had been credited in
excess and credit the capital account of
the partner who had been debited in
excess
sometimes after closing the accounts it
is discovered that there were errors or
omissions in the accounts goodwill
goodwill is an accounting concept
meaning the value of an asset owned that
is intangible but has a quantifiable
prudent value in a business for example
a reputation the firm enjoyed with its
clients goodwill is also one of the
special aspects of partnership accounts
which require adjustment at the time of
a change in the profit sharing ratio the
admission of a partner or the retirement
or death of a partner over a period of
time a well-established business
develops an advantage of good name
repetition and wide business connections
this helps the business to earn more
profits as compared to a newly set up
business in accounting the monetary
value of such advantage is known as
goodwill it is regarded as an intangible
asset in other words goodwill is the
value of the repetition of a firm in
respect of the profits expected in
future over and above the normal profits
it is generally observed that when a
person pays for goodwill he/she pays for
something which places him in the
position of being able to earn super
profits as compared to the profit earned
by other firms in the same industry in
simple words goodwill can be defined as
the present value of a firm's
anticipated excess earnings or as the
capitalized value attached to the
differential profit capacity of a
business
thus goodwill exists only when the firm
earns super profits any firm that earns
normal profits or is incurring losses
has no goodwill types of goodwill the
goodwill is generally of two types that
is purchased goodwill or non purchase
raised goodwill purchase goodwill arises
only when a business enterprise is
acquired by another business enterprise
and the price paid is more than the net
assets required such goodwill is
recognized by the accounting profession
and is also shown in the balance sheet
the main features of such goodwill are
it arises only on purchase of business
it is reflected by a purchase
transaction non purchased or raised
goodwill arises only when a business
generates its own goodwill over a period
of time due to various factors such as
location good management good quality
products etc the main features of such
goodwill are it is internally generated
no cost can be placed on it factors
giving rise to goodwill nature of
business location efficiency of
management market situation special
advantages summary now in the end let us
summarize what we have learnt in this
lecture a partnership is a legal
association of two or more individuals
called partners and who are co-owners of
a business for profit types of
partnerships are general partnership
limited partnership master limited
partnership contents of partnership deed
name of the firm names qualifications
occupations and addresses of partners
the nature of business of firm duration
of the partnership the capital
contribution of each partner a profit
and loss appropriation account is
prepared to show the distribution of
profits among partners as per the
provision of partnership deed goodwill
is an accounting concept meaning the
value of an asset
onde that is intangible but has a
quantifiable prudent value in a business
for example a repetition the firm
enjoyed with its clients the goodwill is
generally of two types that is purchase
goodwill or non purchase raised goodwill
factors giving rise to goodwill our
nature of business location efficiency
of management market situation special
advantages
you