NCERT Textbook - Accounting for Partnerships : Basic Concepts | Accountancy Class 12 - Commerce PDF Download

 Page 1


Y
ou have learnt about the preparation of financial
statements for a sole proprietary concern. As the
business expands, one needs more capital and
larger number of people to manage the business and
share its risks. In such a situation, people usually
adopt the partnership form of organisation.
Accounting for partnership firms has it’s own
peculiarities, as the partnership firm comes into
existence when two or more persons come together
to establish business and share its profits. On many
issues affecting distribution of profits, there may not
be any specific agreement between the partners. In
such a situation the provisions of the Indian
Partnership Act 1932 apply. Similarly, calculation
of interest on capital, interest on drawings and
maintenance of partners capital accounts have their
own peculiarities. Not only that a variety of
adjustments are required on the death of a partner
or when a new partner is admitted and so on. These
peculiar situations need specific treatment in
accounting that need to be clarified.
The present chapter discusses some basic
aspects of  partnership such as distribution of profit,
maintenance of capital accounts, etc. The treatment
of situations like admission of partner, retirement,
death and dissolution have been taken up in the
subsequent chapters.
1.1 Nature of Partnership
When two or more persons join hands to set up a
business and share its profits and losses, they are
said to be in partnership. Section 4 of the Indian
Partnership Act 1932 defines partnership as the
LEARNING OBJECTIVES
After studying this chapter,
you will be able to :
• Define partnership and
list its essential features;
• Identify the  provisions of
the Indian Partnership
Act 1932 that are
relevant for accounting;
• Prepare partners’ capital
accounts under fixed and
fluctuating capital
methods;
• Explain the distribution
profit or loss among the
partners and prepare the
Profit and Loss
Appropriation Account;
• Calculate interest on
capital and drawing
under various situations;
• Explain how guarantee
for a minimum amount
of profit affects the
distribution of profits
among the partners;
•Make necessary
adjustments to rectify
the past errors in
partners capital
accounts; and
• Prepare final accounts of
a partnership firm;
Accounting for Partnership: Basic Concepts
1
Rationalised 2023-24
Page 2


Y
ou have learnt about the preparation of financial
statements for a sole proprietary concern. As the
business expands, one needs more capital and
larger number of people to manage the business and
share its risks. In such a situation, people usually
adopt the partnership form of organisation.
Accounting for partnership firms has it’s own
peculiarities, as the partnership firm comes into
existence when two or more persons come together
to establish business and share its profits. On many
issues affecting distribution of profits, there may not
be any specific agreement between the partners. In
such a situation the provisions of the Indian
Partnership Act 1932 apply. Similarly, calculation
of interest on capital, interest on drawings and
maintenance of partners capital accounts have their
own peculiarities. Not only that a variety of
adjustments are required on the death of a partner
or when a new partner is admitted and so on. These
peculiar situations need specific treatment in
accounting that need to be clarified.
The present chapter discusses some basic
aspects of  partnership such as distribution of profit,
maintenance of capital accounts, etc. The treatment
of situations like admission of partner, retirement,
death and dissolution have been taken up in the
subsequent chapters.
1.1 Nature of Partnership
When two or more persons join hands to set up a
business and share its profits and losses, they are
said to be in partnership. Section 4 of the Indian
Partnership Act 1932 defines partnership as the
LEARNING OBJECTIVES
After studying this chapter,
you will be able to :
• Define partnership and
list its essential features;
• Identify the  provisions of
the Indian Partnership
Act 1932 that are
relevant for accounting;
• Prepare partners’ capital
accounts under fixed and
fluctuating capital
methods;
• Explain the distribution
profit or loss among the
partners and prepare the
Profit and Loss
Appropriation Account;
• Calculate interest on
capital and drawing
under various situations;
• Explain how guarantee
for a minimum amount
of profit affects the
distribution of profits
among the partners;
•Make necessary
adjustments to rectify
the past errors in
partners capital
accounts; and
• Prepare final accounts of
a partnership firm;
Accounting for Partnership: Basic Concepts
1
Rationalised 2023-24
2 Accountancy – Not-for-Profit Organisation and Partnership Accounts
‘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 have entered into partnership with one another are individually
called ‘partners’ and collectively called ‘firm’. The name under which the business
is carried is called the ‘firm’s name’. A partnership firm has no separate legal
entity, apart from the partners constituting it. Thus, the essential features of
partnership are:
1. Two or More Persons: In order to form partnership, there should be at
least two persons coming together for a common goal. In other words,
the minimum number of partners in a firm can be two. There is however,
a limit on their maximum number. By virtue of Section 464 of the
Companies Act 2013, the Central Government is empowered to prescribe
maximum number of partners in a firm but the number of partners can
not be more than 100. The Central government has prescribed the
maximum number of partness in a firm to be 50.
2. Agreement: Partnership is the result of an agreement between two or
more persons to do business and share its profits and losses. The
agreement becomes the basis of relationship between the partners. It is
not necessary that such agreement is in written form. An oral agreement
is equally valid. But in order to avoid disputes, it is preferred that the
partners have a written agreement.
3. Business: The agreement should be to carry on some business. Mere co-
ownership of a property does not amount to partnership. For example, if
Rohit and Sachin jointly purchase a plot of land, they become the joint
owners of the property and not the partners. But if they are in the business
of purchase and sale of land for the purpose of making profit, they will
be called partners.
4. Mutual Agency: The business of a partnership concern may be carried
on by all the partners or any of them acting for all. This statement has
two important implications. First, every partner is entitled to participate
in the conduct of the affairs of its business. Second, that there exists a
relationship of mutual agency between all the partners. Each partner
carrying on the business is the principal as well as the agent for all the
other partners. He can bind other partners by his acts and also is bound
by the acts of other partners with regard to business of the firm.
Relationship of mutual agency is so important that one can say that
there would be no partnership, if the element of mutual agency is absent.
5. Sharing of Profit: Another important element of partnership is that, the
agreement between partners must be to share profits and losses of a
business. Though the definition contained in the Partnership Act describes
partnership as relation between people who agree to share the profits of
a business, the sharing of loss is implied. Thus, sharing of profits and
Rationalised 2023-24
Page 3


Y
ou have learnt about the preparation of financial
statements for a sole proprietary concern. As the
business expands, one needs more capital and
larger number of people to manage the business and
share its risks. In such a situation, people usually
adopt the partnership form of organisation.
Accounting for partnership firms has it’s own
peculiarities, as the partnership firm comes into
existence when two or more persons come together
to establish business and share its profits. On many
issues affecting distribution of profits, there may not
be any specific agreement between the partners. In
such a situation the provisions of the Indian
Partnership Act 1932 apply. Similarly, calculation
of interest on capital, interest on drawings and
maintenance of partners capital accounts have their
own peculiarities. Not only that a variety of
adjustments are required on the death of a partner
or when a new partner is admitted and so on. These
peculiar situations need specific treatment in
accounting that need to be clarified.
The present chapter discusses some basic
aspects of  partnership such as distribution of profit,
maintenance of capital accounts, etc. The treatment
of situations like admission of partner, retirement,
death and dissolution have been taken up in the
subsequent chapters.
1.1 Nature of Partnership
When two or more persons join hands to set up a
business and share its profits and losses, they are
said to be in partnership. Section 4 of the Indian
Partnership Act 1932 defines partnership as the
LEARNING OBJECTIVES
After studying this chapter,
you will be able to :
• Define partnership and
list its essential features;
• Identify the  provisions of
the Indian Partnership
Act 1932 that are
relevant for accounting;
• Prepare partners’ capital
accounts under fixed and
fluctuating capital
methods;
• Explain the distribution
profit or loss among the
partners and prepare the
Profit and Loss
Appropriation Account;
• Calculate interest on
capital and drawing
under various situations;
• Explain how guarantee
for a minimum amount
of profit affects the
distribution of profits
among the partners;
•Make necessary
adjustments to rectify
the past errors in
partners capital
accounts; and
• Prepare final accounts of
a partnership firm;
Accounting for Partnership: Basic Concepts
1
Rationalised 2023-24
2 Accountancy – Not-for-Profit Organisation and Partnership Accounts
‘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 have entered into partnership with one another are individually
called ‘partners’ and collectively called ‘firm’. The name under which the business
is carried is called the ‘firm’s name’. A partnership firm has no separate legal
entity, apart from the partners constituting it. Thus, the essential features of
partnership are:
1. Two or More Persons: In order to form partnership, there should be at
least two persons coming together for a common goal. In other words,
the minimum number of partners in a firm can be two. There is however,
a limit on their maximum number. By virtue of Section 464 of the
Companies Act 2013, the Central Government is empowered to prescribe
maximum number of partners in a firm but the number of partners can
not be more than 100. The Central government has prescribed the
maximum number of partness in a firm to be 50.
2. Agreement: Partnership is the result of an agreement between two or
more persons to do business and share its profits and losses. The
agreement becomes the basis of relationship between the partners. It is
not necessary that such agreement is in written form. An oral agreement
is equally valid. But in order to avoid disputes, it is preferred that the
partners have a written agreement.
3. Business: The agreement should be to carry on some business. Mere co-
ownership of a property does not amount to partnership. For example, if
Rohit and Sachin jointly purchase a plot of land, they become the joint
owners of the property and not the partners. But if they are in the business
of purchase and sale of land for the purpose of making profit, they will
be called partners.
4. Mutual Agency: The business of a partnership concern may be carried
on by all the partners or any of them acting for all. This statement has
two important implications. First, every partner is entitled to participate
in the conduct of the affairs of its business. Second, that there exists a
relationship of mutual agency between all the partners. Each partner
carrying on the business is the principal as well as the agent for all the
other partners. He can bind other partners by his acts and also is bound
by the acts of other partners with regard to business of the firm.
Relationship of mutual agency is so important that one can say that
there would be no partnership, if the element of mutual agency is absent.
5. Sharing of Profit: Another important element of partnership is that, the
agreement between partners must be to share profits and losses of a
business. Though the definition contained in the Partnership Act describes
partnership as relation between people who agree to share the profits of
a business, the sharing of loss is implied. Thus, sharing of profits and
Rationalised 2023-24
3 Accounting for Partnership : Basic Concepts
losses is important. If some persons join hands for the purpose of some
charitable activity, it will not be termed as partnership.
6. Liability of Partners: Each partner is liable jointly with all the other
partners and also severally to the third party for all the acts of the firm
done while he is a partner. Not only that the liability of a partner for acts
of the firm is also unlimited. This implies that his private assets can also
be used for paying off the firm’s debts.
1.2 Partnership Deed
Partnership comes into existence as a result of agreement among the partners.
The agreement can be either oral or written. The Partnership Act does not require
that the agreement must be in writing. But wherever it is in writing, the document,
which contains terms of the agreement  is called ‘Partnership Deed’. It generally
contains the details about all the aspects affecting the relationship between the
partners including the objective of business, contribution of capital by each
partner, ratio in which the profits and the losses will be shared by the partners
and entitlement of partners to interest on capital, interest on loan, etc.
The clauses of partnership deed can be altered with the consent of all the
partners. The deed should be properly drafted and prepared as per the provisions
of the ‘Stamp Act’ and preferably registered with the Registrar of Firms.
Contents of the Partnership Deed
The Partnership Deed usually contains the following details:
• Names and Addresses of the firm and its main business;
• Names and Addresses of all partners;
• Amount of capital to be contributed by each partner;
• The accounting period of the firm;
• The date of commencement of partnership;
• Rules regarding operation of Bank Accounts;
• Profit and loss sharing ratio;
• Rate of interest on capital, loan, drawings, etc;
• Mode of auditor’s appointment, if any;
• Salaries, commission, etc, if payable to any partner;
• The rights, duties and liabilities of each partner;
• Treatment of loss arising out of insolvency of one or more partners;
• Settlement of accounts on dissolution of the firm;
• Method of settlement of disputes among the partners;
• Rules to be followed in case of admission, retirement, death of a partner; and
• Any other matter relating to the conduct of business.
Normally, the partnership deed covers all matters affecting relationship of
partners amongst themselves. However, if there is no express agreement on
certain matters, the provisions of the Indian Partnership Act, 1932 shall apply.
Rationalised 2023-24
Page 4


Y
ou have learnt about the preparation of financial
statements for a sole proprietary concern. As the
business expands, one needs more capital and
larger number of people to manage the business and
share its risks. In such a situation, people usually
adopt the partnership form of organisation.
Accounting for partnership firms has it’s own
peculiarities, as the partnership firm comes into
existence when two or more persons come together
to establish business and share its profits. On many
issues affecting distribution of profits, there may not
be any specific agreement between the partners. In
such a situation the provisions of the Indian
Partnership Act 1932 apply. Similarly, calculation
of interest on capital, interest on drawings and
maintenance of partners capital accounts have their
own peculiarities. Not only that a variety of
adjustments are required on the death of a partner
or when a new partner is admitted and so on. These
peculiar situations need specific treatment in
accounting that need to be clarified.
The present chapter discusses some basic
aspects of  partnership such as distribution of profit,
maintenance of capital accounts, etc. The treatment
of situations like admission of partner, retirement,
death and dissolution have been taken up in the
subsequent chapters.
1.1 Nature of Partnership
When two or more persons join hands to set up a
business and share its profits and losses, they are
said to be in partnership. Section 4 of the Indian
Partnership Act 1932 defines partnership as the
LEARNING OBJECTIVES
After studying this chapter,
you will be able to :
• Define partnership and
list its essential features;
• Identify the  provisions of
the Indian Partnership
Act 1932 that are
relevant for accounting;
• Prepare partners’ capital
accounts under fixed and
fluctuating capital
methods;
• Explain the distribution
profit or loss among the
partners and prepare the
Profit and Loss
Appropriation Account;
• Calculate interest on
capital and drawing
under various situations;
• Explain how guarantee
for a minimum amount
of profit affects the
distribution of profits
among the partners;
•Make necessary
adjustments to rectify
the past errors in
partners capital
accounts; and
• Prepare final accounts of
a partnership firm;
Accounting for Partnership: Basic Concepts
1
Rationalised 2023-24
2 Accountancy – Not-for-Profit Organisation and Partnership Accounts
‘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 have entered into partnership with one another are individually
called ‘partners’ and collectively called ‘firm’. The name under which the business
is carried is called the ‘firm’s name’. A partnership firm has no separate legal
entity, apart from the partners constituting it. Thus, the essential features of
partnership are:
1. Two or More Persons: In order to form partnership, there should be at
least two persons coming together for a common goal. In other words,
the minimum number of partners in a firm can be two. There is however,
a limit on their maximum number. By virtue of Section 464 of the
Companies Act 2013, the Central Government is empowered to prescribe
maximum number of partners in a firm but the number of partners can
not be more than 100. The Central government has prescribed the
maximum number of partness in a firm to be 50.
2. Agreement: Partnership is the result of an agreement between two or
more persons to do business and share its profits and losses. The
agreement becomes the basis of relationship between the partners. It is
not necessary that such agreement is in written form. An oral agreement
is equally valid. But in order to avoid disputes, it is preferred that the
partners have a written agreement.
3. Business: The agreement should be to carry on some business. Mere co-
ownership of a property does not amount to partnership. For example, if
Rohit and Sachin jointly purchase a plot of land, they become the joint
owners of the property and not the partners. But if they are in the business
of purchase and sale of land for the purpose of making profit, they will
be called partners.
4. Mutual Agency: The business of a partnership concern may be carried
on by all the partners or any of them acting for all. This statement has
two important implications. First, every partner is entitled to participate
in the conduct of the affairs of its business. Second, that there exists a
relationship of mutual agency between all the partners. Each partner
carrying on the business is the principal as well as the agent for all the
other partners. He can bind other partners by his acts and also is bound
by the acts of other partners with regard to business of the firm.
Relationship of mutual agency is so important that one can say that
there would be no partnership, if the element of mutual agency is absent.
5. Sharing of Profit: Another important element of partnership is that, the
agreement between partners must be to share profits and losses of a
business. Though the definition contained in the Partnership Act describes
partnership as relation between people who agree to share the profits of
a business, the sharing of loss is implied. Thus, sharing of profits and
Rationalised 2023-24
3 Accounting for Partnership : Basic Concepts
losses is important. If some persons join hands for the purpose of some
charitable activity, it will not be termed as partnership.
6. Liability of Partners: Each partner is liable jointly with all the other
partners and also severally to the third party for all the acts of the firm
done while he is a partner. Not only that the liability of a partner for acts
of the firm is also unlimited. This implies that his private assets can also
be used for paying off the firm’s debts.
1.2 Partnership Deed
Partnership comes into existence as a result of agreement among the partners.
The agreement can be either oral or written. The Partnership Act does not require
that the agreement must be in writing. But wherever it is in writing, the document,
which contains terms of the agreement  is called ‘Partnership Deed’. It generally
contains the details about all the aspects affecting the relationship between the
partners including the objective of business, contribution of capital by each
partner, ratio in which the profits and the losses will be shared by the partners
and entitlement of partners to interest on capital, interest on loan, etc.
The clauses of partnership deed can be altered with the consent of all the
partners. The deed should be properly drafted and prepared as per the provisions
of the ‘Stamp Act’ and preferably registered with the Registrar of Firms.
Contents of the Partnership Deed
The Partnership Deed usually contains the following details:
• Names and Addresses of the firm and its main business;
• Names and Addresses of all partners;
• Amount of capital to be contributed by each partner;
• The accounting period of the firm;
• The date of commencement of partnership;
• Rules regarding operation of Bank Accounts;
• Profit and loss sharing ratio;
• Rate of interest on capital, loan, drawings, etc;
• Mode of auditor’s appointment, if any;
• Salaries, commission, etc, if payable to any partner;
• The rights, duties and liabilities of each partner;
• Treatment of loss arising out of insolvency of one or more partners;
• Settlement of accounts on dissolution of the firm;
• Method of settlement of disputes among the partners;
• Rules to be followed in case of admission, retirement, death of a partner; and
• Any other matter relating to the conduct of business.
Normally, the partnership deed covers all matters affecting relationship of
partners amongst themselves. However, if there is no express agreement on
certain matters, the provisions of the Indian Partnership Act, 1932 shall apply.
Rationalised 2023-24
4 Accountancy – Not-for-Profit Organisation and Partnership Accounts
1.2.1 Provisions of Partnership Act Relevant for Accounting
The important provisions affecting partnership accounts are as follows:
(a) Profit Sharing Ratio: If the partnership deed is silent about the profit
sharing ratio, the profits and losses of the firm are to be shared equally
by partners, irrespective of their capital contribution in the firm.
(b) Interest on Capital: No partner is entitled to claim any interest on the
amount of capital contributed by him in the firm as a matter of right.
However, interest can be allowed when it is expressly agreed to by the
partners. Thus, no interest on capital is payable if the partnership deed
is silent on the issue.
(c) Interest on Drawings: No interest is to be charged on the drawings made
by the partners, if there is no mention in the Deed.
(d) Interest on Loan: If any partner has advanced loan to the firm for the
purpose of business, he/she shall be entitled to get an interest on the
loan amount at the rate of 6 per  cent per annum.
(e) Remuneration for Firm’s Work: No partner is entitled to get salary or
other remuneration for taking part in the conduct of the business of the
firm unless there is a provision for the same in the Partnership Deed.
Apart from the above, the Indian Partnership Act specifies that subject to
contract between the partners:
(i) If a partner derives any profit for him/her self from any transaction of the
firm or from the use of the property or business connection of the firm or
the firm name, he/she shall account for the profit and pay it to the firm.
(ii) If a partner carries on any business of the same nature as and competing
with that of the firm, he/she shall account for and pay to the firm, all
profit made by him/her in that business.
Test your Understanding – I
1. Mohan and Shyam are partners in a firm. State whether the claim is valid if the
partnership agreement is silent in the following matters:
(i) Mohan is an active partner. He wants a salary of Rs. 10,000 per year;
(ii) Shyam had advanced a loan to the firm. He claims interest @ 10% per
annum;
(iii) Mohan has contributed Rs. 20,000 and Shyam Rs. 50,000 as capital. Mohan
wants equal share in profits.
(iv) Shyam wants interest on capital to be credited @ 6% per annum.
2. State whether the following statements are true or false:
(i) Valid partnership can be formulated even without a written agreement
between the partners;
(ii) Each partner carrying on the business is the principal as well as the agent
for all the other partners;
(iii) Maximum number of partners can be 50;
(iv) Methods of settlement of dispute among the partners can’t be part of the
partnership deed;
Rationalised 2023-24
Page 5


Y
ou have learnt about the preparation of financial
statements for a sole proprietary concern. As the
business expands, one needs more capital and
larger number of people to manage the business and
share its risks. In such a situation, people usually
adopt the partnership form of organisation.
Accounting for partnership firms has it’s own
peculiarities, as the partnership firm comes into
existence when two or more persons come together
to establish business and share its profits. On many
issues affecting distribution of profits, there may not
be any specific agreement between the partners. In
such a situation the provisions of the Indian
Partnership Act 1932 apply. Similarly, calculation
of interest on capital, interest on drawings and
maintenance of partners capital accounts have their
own peculiarities. Not only that a variety of
adjustments are required on the death of a partner
or when a new partner is admitted and so on. These
peculiar situations need specific treatment in
accounting that need to be clarified.
The present chapter discusses some basic
aspects of  partnership such as distribution of profit,
maintenance of capital accounts, etc. The treatment
of situations like admission of partner, retirement,
death and dissolution have been taken up in the
subsequent chapters.
1.1 Nature of Partnership
When two or more persons join hands to set up a
business and share its profits and losses, they are
said to be in partnership. Section 4 of the Indian
Partnership Act 1932 defines partnership as the
LEARNING OBJECTIVES
After studying this chapter,
you will be able to :
• Define partnership and
list its essential features;
• Identify the  provisions of
the Indian Partnership
Act 1932 that are
relevant for accounting;
• Prepare partners’ capital
accounts under fixed and
fluctuating capital
methods;
• Explain the distribution
profit or loss among the
partners and prepare the
Profit and Loss
Appropriation Account;
• Calculate interest on
capital and drawing
under various situations;
• Explain how guarantee
for a minimum amount
of profit affects the
distribution of profits
among the partners;
•Make necessary
adjustments to rectify
the past errors in
partners capital
accounts; and
• Prepare final accounts of
a partnership firm;
Accounting for Partnership: Basic Concepts
1
Rationalised 2023-24
2 Accountancy – Not-for-Profit Organisation and Partnership Accounts
‘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 have entered into partnership with one another are individually
called ‘partners’ and collectively called ‘firm’. The name under which the business
is carried is called the ‘firm’s name’. A partnership firm has no separate legal
entity, apart from the partners constituting it. Thus, the essential features of
partnership are:
1. Two or More Persons: In order to form partnership, there should be at
least two persons coming together for a common goal. In other words,
the minimum number of partners in a firm can be two. There is however,
a limit on their maximum number. By virtue of Section 464 of the
Companies Act 2013, the Central Government is empowered to prescribe
maximum number of partners in a firm but the number of partners can
not be more than 100. The Central government has prescribed the
maximum number of partness in a firm to be 50.
2. Agreement: Partnership is the result of an agreement between two or
more persons to do business and share its profits and losses. The
agreement becomes the basis of relationship between the partners. It is
not necessary that such agreement is in written form. An oral agreement
is equally valid. But in order to avoid disputes, it is preferred that the
partners have a written agreement.
3. Business: The agreement should be to carry on some business. Mere co-
ownership of a property does not amount to partnership. For example, if
Rohit and Sachin jointly purchase a plot of land, they become the joint
owners of the property and not the partners. But if they are in the business
of purchase and sale of land for the purpose of making profit, they will
be called partners.
4. Mutual Agency: The business of a partnership concern may be carried
on by all the partners or any of them acting for all. This statement has
two important implications. First, every partner is entitled to participate
in the conduct of the affairs of its business. Second, that there exists a
relationship of mutual agency between all the partners. Each partner
carrying on the business is the principal as well as the agent for all the
other partners. He can bind other partners by his acts and also is bound
by the acts of other partners with regard to business of the firm.
Relationship of mutual agency is so important that one can say that
there would be no partnership, if the element of mutual agency is absent.
5. Sharing of Profit: Another important element of partnership is that, the
agreement between partners must be to share profits and losses of a
business. Though the definition contained in the Partnership Act describes
partnership as relation between people who agree to share the profits of
a business, the sharing of loss is implied. Thus, sharing of profits and
Rationalised 2023-24
3 Accounting for Partnership : Basic Concepts
losses is important. If some persons join hands for the purpose of some
charitable activity, it will not be termed as partnership.
6. Liability of Partners: Each partner is liable jointly with all the other
partners and also severally to the third party for all the acts of the firm
done while he is a partner. Not only that the liability of a partner for acts
of the firm is also unlimited. This implies that his private assets can also
be used for paying off the firm’s debts.
1.2 Partnership Deed
Partnership comes into existence as a result of agreement among the partners.
The agreement can be either oral or written. The Partnership Act does not require
that the agreement must be in writing. But wherever it is in writing, the document,
which contains terms of the agreement  is called ‘Partnership Deed’. It generally
contains the details about all the aspects affecting the relationship between the
partners including the objective of business, contribution of capital by each
partner, ratio in which the profits and the losses will be shared by the partners
and entitlement of partners to interest on capital, interest on loan, etc.
The clauses of partnership deed can be altered with the consent of all the
partners. The deed should be properly drafted and prepared as per the provisions
of the ‘Stamp Act’ and preferably registered with the Registrar of Firms.
Contents of the Partnership Deed
The Partnership Deed usually contains the following details:
• Names and Addresses of the firm and its main business;
• Names and Addresses of all partners;
• Amount of capital to be contributed by each partner;
• The accounting period of the firm;
• The date of commencement of partnership;
• Rules regarding operation of Bank Accounts;
• Profit and loss sharing ratio;
• Rate of interest on capital, loan, drawings, etc;
• Mode of auditor’s appointment, if any;
• Salaries, commission, etc, if payable to any partner;
• The rights, duties and liabilities of each partner;
• Treatment of loss arising out of insolvency of one or more partners;
• Settlement of accounts on dissolution of the firm;
• Method of settlement of disputes among the partners;
• Rules to be followed in case of admission, retirement, death of a partner; and
• Any other matter relating to the conduct of business.
Normally, the partnership deed covers all matters affecting relationship of
partners amongst themselves. However, if there is no express agreement on
certain matters, the provisions of the Indian Partnership Act, 1932 shall apply.
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4 Accountancy – Not-for-Profit Organisation and Partnership Accounts
1.2.1 Provisions of Partnership Act Relevant for Accounting
The important provisions affecting partnership accounts are as follows:
(a) Profit Sharing Ratio: If the partnership deed is silent about the profit
sharing ratio, the profits and losses of the firm are to be shared equally
by partners, irrespective of their capital contribution in the firm.
(b) Interest on Capital: No partner is entitled to claim any interest on the
amount of capital contributed by him in the firm as a matter of right.
However, interest can be allowed when it is expressly agreed to by the
partners. Thus, no interest on capital is payable if the partnership deed
is silent on the issue.
(c) Interest on Drawings: No interest is to be charged on the drawings made
by the partners, if there is no mention in the Deed.
(d) Interest on Loan: If any partner has advanced loan to the firm for the
purpose of business, he/she shall be entitled to get an interest on the
loan amount at the rate of 6 per  cent per annum.
(e) Remuneration for Firm’s Work: No partner is entitled to get salary or
other remuneration for taking part in the conduct of the business of the
firm unless there is a provision for the same in the Partnership Deed.
Apart from the above, the Indian Partnership Act specifies that subject to
contract between the partners:
(i) If a partner derives any profit for him/her self from any transaction of the
firm or from the use of the property or business connection of the firm or
the firm name, he/she shall account for the profit and pay it to the firm.
(ii) If a partner carries on any business of the same nature as and competing
with that of the firm, he/she shall account for and pay to the firm, all
profit made by him/her in that business.
Test your Understanding – I
1. Mohan and Shyam are partners in a firm. State whether the claim is valid if the
partnership agreement is silent in the following matters:
(i) Mohan is an active partner. He wants a salary of Rs. 10,000 per year;
(ii) Shyam had advanced a loan to the firm. He claims interest @ 10% per
annum;
(iii) Mohan has contributed Rs. 20,000 and Shyam Rs. 50,000 as capital. Mohan
wants equal share in profits.
(iv) Shyam wants interest on capital to be credited @ 6% per annum.
2. State whether the following statements are true or false:
(i) Valid partnership can be formulated even without a written agreement
between the partners;
(ii) Each partner carrying on the business is the principal as well as the agent
for all the other partners;
(iii) Maximum number of partners can be 50;
(iv) Methods of settlement of dispute among the partners can’t be part of the
partnership deed;
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5 Accounting for Partnership : Basic Concepts
(v) If the deed is silent, interest at the rate of 6% p.a. would be charged on the
drawings made by the partner;
(vi) Interest on partner’s loan is to be given @ 12% p.a., if the deed is silent
about the rate.
1.3 Special Aspects of Partnership Accounts
Accounting treatment for partnership firm is similar to that of a sole
proprietorship business with the exception of the following aspects:
• Maintenance of Partners’ Capital Accounts;
• Distribution of Profit and Loss among the partners;
• Adjustments for Wrong Appropriation of Profits in the Past;
• Reconstitution of the Partnership Firm; and
• Dissolution of Partnership Firm.
The first three aspects mentioned above have been taken up in the following
sections of this chapter. The remaining aspects have been covered in the
subsequent chapters.
1.4 Maintenance of Capital Accounts of Partners
All transactions relating to partners of the firm are recorded in the books of the
firm through their capital accounts. This includes the amount of money brought
in as capital, withdrawal of capital, share of profit, interest on capital, interest
on drawings, partner’s salary, commission to partners, etc.
There are two methods by which the capital accounts of partners can be
maintained. These are: (i) fixed capital method, and (ii) 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.
(a) Fixed Capital Method: Under the fixed capital method, the capitals of the
partners shall remain fixed unless additional capital is introduced or a
part of the capital is withdrawn as per the agreement among the partners.
All items like share of profit or loss, interest on capital, drawings, interest
on drawings, etc. are recorded in a separate accounts, called Partner’s
Current Account. The partners’ capital accounts will always show a credit
balance, which shall remain the same (fixed) year after year unless there
is any addition or withdrawal of capital. The partners’ current account
on the other hand, may show a debit or a credit balance. Thus under
this method, two accounts are maintained for each partner viz., capital
account and current account, While the partners’ capital accounts shall
always appear on the liabilities side in the balance sheet, the partners’
current account’s balance shall be shown on the liabilities side, if they
have credit balance and on the assets side, if they have debit balance.
The partner’s capital account and the current account under the fixed capital
method would appear as shown in Fig.1.1.
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