ICAI Notes- Unit 1: Introduction to Partnership Accounts | Accounting for CA Foundation PDF Download

 Page 1


 
LEARNING OUTCOMES 
PARTNERSHIP AND LLP 
 ACCOUNTS 
UNIT – 1 INTRODUCTION TO PARTNERSHIP 
ACCOUNTS 
 
After studying this unit, you will be able to: 
? Understand the provisions of the Indian Partnership Act, 1932, Limited 
Liability Partnership Act, 2008 and Limited Liability Partnership Amendment 
Act, 2021 
? Understand the features of a partnership firm and the need for a 
Partnership Deed. 
? Understand the points to be covered in a Partnership Deed regarding 
accounts. 
? Learn the technique of maintaining Profit and Loss Appropriation 
Account. 
? Familiarize with the two methods of maintaining Partners’ Capital 
Accounts, namely Fixed Capital Method and Fluctuating Capital Method. 
? Note that Capital Account balance as per Fluctuating Capital method is 
just equal to the sum of the balances of Capital Account and Current 
Account as per Fixed Capital Method. 
10 
CHAPTER 
© The Institute of Chartered Accountants of India
Page 2


 
LEARNING OUTCOMES 
PARTNERSHIP AND LLP 
 ACCOUNTS 
UNIT – 1 INTRODUCTION TO PARTNERSHIP 
ACCOUNTS 
 
After studying this unit, you will be able to: 
? Understand the provisions of the Indian Partnership Act, 1932, Limited 
Liability Partnership Act, 2008 and Limited Liability Partnership Amendment 
Act, 2021 
? Understand the features of a partnership firm and the need for a 
Partnership Deed. 
? Understand the points to be covered in a Partnership Deed regarding 
accounts. 
? Learn the technique of maintaining Profit and Loss Appropriation 
Account. 
? Familiarize with the two methods of maintaining Partners’ Capital 
Accounts, namely Fixed Capital Method and Fluctuating Capital Method. 
? Note that Capital Account balance as per Fluctuating Capital method is 
just equal to the sum of the balances of Capital Account and Current 
Account as per Fixed Capital Method. 
10 
CHAPTER 
© The Institute of Chartered Accountants of India
  ACCOUNTING
1.2 
10.2 
? Learn how to arrive at the corrected net profit figure which is to be taken 
to be Profit and Loss Appropriation Account after rectification of errors. 
Rectification of errors may be necessary to arrive at the net profit of the 
partnership and preparing Profit and loss Appropriation Account. 
? Learn that interest on capital and drawings, salaries/commissions are to 
be shown in the Profit and Loss Appropriation Account and not in the 
Profit and Loss Account. Also learn that drawings by partners will not 
appear in the Appropriation Account. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accounts of Partnership firm 
Trading and Profit and 
Loss Account and 
Balance Sheet 
Profit and Loss 
Appropriation 
Account 
Capital accounts of partners (fixed 
capital method or fluctuating 
capital method) 
 
Partnership
Business carried on 
by all or any one of 
them acting for all
Unlimited liability 
of all partners
An association of 
two or more 
persons
Sharing of profits 
and losses of the 
business
Existence of a 
business
An agreement 
entered into by all 
persons concerned
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
Page 3


 
LEARNING OUTCOMES 
PARTNERSHIP AND LLP 
 ACCOUNTS 
UNIT – 1 INTRODUCTION TO PARTNERSHIP 
ACCOUNTS 
 
After studying this unit, you will be able to: 
? Understand the provisions of the Indian Partnership Act, 1932, Limited 
Liability Partnership Act, 2008 and Limited Liability Partnership Amendment 
Act, 2021 
? Understand the features of a partnership firm and the need for a 
Partnership Deed. 
? Understand the points to be covered in a Partnership Deed regarding 
accounts. 
? Learn the technique of maintaining Profit and Loss Appropriation 
Account. 
? Familiarize with the two methods of maintaining Partners’ Capital 
Accounts, namely Fixed Capital Method and Fluctuating Capital Method. 
? Note that Capital Account balance as per Fluctuating Capital method is 
just equal to the sum of the balances of Capital Account and Current 
Account as per Fixed Capital Method. 
10 
CHAPTER 
© The Institute of Chartered Accountants of India
  ACCOUNTING
1.2 
10.2 
? Learn how to arrive at the corrected net profit figure which is to be taken 
to be Profit and Loss Appropriation Account after rectification of errors. 
Rectification of errors may be necessary to arrive at the net profit of the 
partnership and preparing Profit and loss Appropriation Account. 
? Learn that interest on capital and drawings, salaries/commissions are to 
be shown in the Profit and Loss Appropriation Account and not in the 
Profit and Loss Account. Also learn that drawings by partners will not 
appear in the Appropriation Account. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accounts of Partnership firm 
Trading and Profit and 
Loss Account and 
Balance Sheet 
Profit and Loss 
Appropriation 
Account 
Capital accounts of partners (fixed 
capital method or fluctuating 
capital method) 
 
Partnership
Business carried on 
by all or any one of 
them acting for all
Unlimited liability 
of all partners
An association of 
two or more 
persons
Sharing of profits 
and losses of the 
business
Existence of a 
business
An agreement 
entered into by all 
persons concerned
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
10.3
PARTNERSHIP AND LLP ACCOUNTS 
1.1  INTRODUCTION: WHY PARTNERSHIP? 
An individual, i.e., a sole proprietor may not be in a position to cope with the financial and 
managerial demands of the present-day business world. As a result, two or more individuals 
may decide to pool their financial and non-financial resources to carry on a business. The 
preparation of final accounts of sole proprietors have already been discussed in chapter 6. 
The final accounts of partnership firms including basic concepts of accounting for admission 
of a partner, retirement and death of a partner have been discussed in succeeding units of 
this chapter.  
1.2  DEFINITION AND FEATURES OF PARTNERSHIP  
As per Section 4 of the Partnership Act, 1932: 
“Partnership is the relation between persons who have agreed to share the profit of a 
business carried on by all or any of them acting for all.” 
Features of a partnership, 
(i) Existence of an agreement: As per section 5 of the Indian Partnership Act, 1932, 
The relation of partnership arises from contract between parties and not from status 
as it happens in case of HUF (Hindu Undivided Family). A formal or written 
agreement is not necessary to create a partnership. 
(ii) Business: A partnership can exist only in business. Thus, it is not the agreement alone 
which creates a partnership. A partnership comes into existence only when partners 
begin to carry on business in accordance with their agreement. Section 2 (b)of Indian 
Partnership Act, 1932 only states that business includes every trade, occupation 
and profession. 
(iii) Sharing of profit: The persons concerned must agree to share the profits of the 
business. Because no person is a partner unless he or she has the right to share the 
profits of the business. Section 4 of Indian Partnership Act, 1932 does not insist 
upon sharing of losses. Thus, a provision for sharing of loss is not necessary. 
(iv) Mutual agency: It means that the business is to be carried on by all or any of them 
acting for all. Thus, if the person carrying on the business acts not only for himself but 
for others also so that they stand in the positions of principals and agents, they are 
partners. 
 
 
© The Institute of Chartered Accountants of India
Page 4


 
LEARNING OUTCOMES 
PARTNERSHIP AND LLP 
 ACCOUNTS 
UNIT – 1 INTRODUCTION TO PARTNERSHIP 
ACCOUNTS 
 
After studying this unit, you will be able to: 
? Understand the provisions of the Indian Partnership Act, 1932, Limited 
Liability Partnership Act, 2008 and Limited Liability Partnership Amendment 
Act, 2021 
? Understand the features of a partnership firm and the need for a 
Partnership Deed. 
? Understand the points to be covered in a Partnership Deed regarding 
accounts. 
? Learn the technique of maintaining Profit and Loss Appropriation 
Account. 
? Familiarize with the two methods of maintaining Partners’ Capital 
Accounts, namely Fixed Capital Method and Fluctuating Capital Method. 
? Note that Capital Account balance as per Fluctuating Capital method is 
just equal to the sum of the balances of Capital Account and Current 
Account as per Fixed Capital Method. 
10 
CHAPTER 
© The Institute of Chartered Accountants of India
  ACCOUNTING
1.2 
10.2 
? Learn how to arrive at the corrected net profit figure which is to be taken 
to be Profit and Loss Appropriation Account after rectification of errors. 
Rectification of errors may be necessary to arrive at the net profit of the 
partnership and preparing Profit and loss Appropriation Account. 
? Learn that interest on capital and drawings, salaries/commissions are to 
be shown in the Profit and Loss Appropriation Account and not in the 
Profit and Loss Account. Also learn that drawings by partners will not 
appear in the Appropriation Account. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accounts of Partnership firm 
Trading and Profit and 
Loss Account and 
Balance Sheet 
Profit and Loss 
Appropriation 
Account 
Capital accounts of partners (fixed 
capital method or fluctuating 
capital method) 
 
Partnership
Business carried on 
by all or any one of 
them acting for all
Unlimited liability 
of all partners
An association of 
two or more 
persons
Sharing of profits 
and losses of the 
business
Existence of a 
business
An agreement 
entered into by all 
persons concerned
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
10.3
PARTNERSHIP AND LLP ACCOUNTS 
1.1  INTRODUCTION: WHY PARTNERSHIP? 
An individual, i.e., a sole proprietor may not be in a position to cope with the financial and 
managerial demands of the present-day business world. As a result, two or more individuals 
may decide to pool their financial and non-financial resources to carry on a business. The 
preparation of final accounts of sole proprietors have already been discussed in chapter 6. 
The final accounts of partnership firms including basic concepts of accounting for admission 
of a partner, retirement and death of a partner have been discussed in succeeding units of 
this chapter.  
1.2  DEFINITION AND FEATURES OF PARTNERSHIP  
As per Section 4 of the Partnership Act, 1932: 
“Partnership is the relation between persons who have agreed to share the profit of a 
business carried on by all or any of them acting for all.” 
Features of a partnership, 
(i) Existence of an agreement: As per section 5 of the Indian Partnership Act, 1932, 
The relation of partnership arises from contract between parties and not from status 
as it happens in case of HUF (Hindu Undivided Family). A formal or written 
agreement is not necessary to create a partnership. 
(ii) Business: A partnership can exist only in business. Thus, it is not the agreement alone 
which creates a partnership. A partnership comes into existence only when partners 
begin to carry on business in accordance with their agreement. Section 2 (b)of Indian 
Partnership Act, 1932 only states that business includes every trade, occupation 
and profession. 
(iii) Sharing of profit: The persons concerned must agree to share the profits of the 
business. Because no person is a partner unless he or she has the right to share the 
profits of the business. Section 4 of Indian Partnership Act, 1932 does not insist 
upon sharing of losses. Thus, a provision for sharing of loss is not necessary. 
(iv) Mutual agency: It means that the business is to be carried on by all or any of them 
acting for all. Thus, if the person carrying on the business acts not only for himself but 
for others also so that they stand in the positions of principals and agents, they are 
partners. 
 
 
© The Institute of Chartered Accountants of India
  ACCOUNTING
1.4 
10.4 
(v) Minor as a partner: A minor can be added in partnership firm. But the condition is 
that he can be admitted to share profit only. He cannot be made to share losses of the 
firm. If the partnership firm suffers loss than it will be borne by other major partners is 
their profit-sharing ratio. 
 Number of Partners: Minimum Partners: Two 
 Maximum Partners: As per Section 464 of the Companies Act, 2013, no association 
or partnership consisting of more than 100 number of persons as may be prescribed 
shall be formed for the purpose of carrying on any business. Rule 10 of Companies 
(incorporation) Rules 2014 specifies the limit as 50. Thus, maximum number of 
members in a partnership firm are 50. 
1.3  LIMITED LIABILITY PARTNERSHIP 
The Indian Partnership Act of 1932 provides for a general form of partnership which has 
inherent shortcoming of unlimited liability of all partners for business debts and legal 
consequences, regardless of their holding or profit-sharing ratio, as the firm is not a legal 
entity. General partners are also jointly and severally liable for tortuous acts of co-partners. In 
case of liquidation personal assets of partners can be liquidated to meet liabilities of the firm. 
With the growth of the Indian economy, the role played by its entrepreneurs as well as its 
technical and professional manpower has been acknowledged internationally. 
Entrepreneurship, knowledge, risk and capital may be combined to provide a further impetus 
to India’s economic growth.  In this background, a need has been felt for a new corporate 
form that would provide an alternative to the traditional partnership, with unlimited personal 
liability on the one hand, and, the statute-based governance structure of the limited liability 
company on the other. This would enable professional expertise and entrepreneurial initiative 
to combine, organize and operate in flexible, innovative and efficient manner. 
The Government felt that with Indian professionals increasingly transacting with or 
representing multi-nationals in international transactions, the extent of the liability they could 
potentially be exposed to, is extremely high. Hence, in order to encourage Indian professionals 
to participate in the international business community without apprehension of being subject 
to excessive liability, the need for having a legal structure like the LLP is encouraged. Thus, in 
convergence towards global scenario, Limited Liability Partnership Act, 2008 was introduced. 
The Limited Liability Partnership (LLP) is viewed as an alternative corporate business proposal 
that provides the benefits of limited liability but allows its members, the flexibility of 
organizing their internal structure as a partnership, which is based on a mutually arrived 
agreement. 
© The Institute of Chartered Accountants of India
Page 5


 
LEARNING OUTCOMES 
PARTNERSHIP AND LLP 
 ACCOUNTS 
UNIT – 1 INTRODUCTION TO PARTNERSHIP 
ACCOUNTS 
 
After studying this unit, you will be able to: 
? Understand the provisions of the Indian Partnership Act, 1932, Limited 
Liability Partnership Act, 2008 and Limited Liability Partnership Amendment 
Act, 2021 
? Understand the features of a partnership firm and the need for a 
Partnership Deed. 
? Understand the points to be covered in a Partnership Deed regarding 
accounts. 
? Learn the technique of maintaining Profit and Loss Appropriation 
Account. 
? Familiarize with the two methods of maintaining Partners’ Capital 
Accounts, namely Fixed Capital Method and Fluctuating Capital Method. 
? Note that Capital Account balance as per Fluctuating Capital method is 
just equal to the sum of the balances of Capital Account and Current 
Account as per Fixed Capital Method. 
10 
CHAPTER 
© The Institute of Chartered Accountants of India
  ACCOUNTING
1.2 
10.2 
? Learn how to arrive at the corrected net profit figure which is to be taken 
to be Profit and Loss Appropriation Account after rectification of errors. 
Rectification of errors may be necessary to arrive at the net profit of the 
partnership and preparing Profit and loss Appropriation Account. 
? Learn that interest on capital and drawings, salaries/commissions are to 
be shown in the Profit and Loss Appropriation Account and not in the 
Profit and Loss Account. Also learn that drawings by partners will not 
appear in the Appropriation Account. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accounts of Partnership firm 
Trading and Profit and 
Loss Account and 
Balance Sheet 
Profit and Loss 
Appropriation 
Account 
Capital accounts of partners (fixed 
capital method or fluctuating 
capital method) 
 
Partnership
Business carried on 
by all or any one of 
them acting for all
Unlimited liability 
of all partners
An association of 
two or more 
persons
Sharing of profits 
and losses of the 
business
Existence of a 
business
An agreement 
entered into by all 
persons concerned
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
10.3
PARTNERSHIP AND LLP ACCOUNTS 
1.1  INTRODUCTION: WHY PARTNERSHIP? 
An individual, i.e., a sole proprietor may not be in a position to cope with the financial and 
managerial demands of the present-day business world. As a result, two or more individuals 
may decide to pool their financial and non-financial resources to carry on a business. The 
preparation of final accounts of sole proprietors have already been discussed in chapter 6. 
The final accounts of partnership firms including basic concepts of accounting for admission 
of a partner, retirement and death of a partner have been discussed in succeeding units of 
this chapter.  
1.2  DEFINITION AND FEATURES OF PARTNERSHIP  
As per Section 4 of the Partnership Act, 1932: 
“Partnership is the relation between persons who have agreed to share the profit of a 
business carried on by all or any of them acting for all.” 
Features of a partnership, 
(i) Existence of an agreement: As per section 5 of the Indian Partnership Act, 1932, 
The relation of partnership arises from contract between parties and not from status 
as it happens in case of HUF (Hindu Undivided Family). A formal or written 
agreement is not necessary to create a partnership. 
(ii) Business: A partnership can exist only in business. Thus, it is not the agreement alone 
which creates a partnership. A partnership comes into existence only when partners 
begin to carry on business in accordance with their agreement. Section 2 (b)of Indian 
Partnership Act, 1932 only states that business includes every trade, occupation 
and profession. 
(iii) Sharing of profit: The persons concerned must agree to share the profits of the 
business. Because no person is a partner unless he or she has the right to share the 
profits of the business. Section 4 of Indian Partnership Act, 1932 does not insist 
upon sharing of losses. Thus, a provision for sharing of loss is not necessary. 
(iv) Mutual agency: It means that the business is to be carried on by all or any of them 
acting for all. Thus, if the person carrying on the business acts not only for himself but 
for others also so that they stand in the positions of principals and agents, they are 
partners. 
 
 
© The Institute of Chartered Accountants of India
  ACCOUNTING
1.4 
10.4 
(v) Minor as a partner: A minor can be added in partnership firm. But the condition is 
that he can be admitted to share profit only. He cannot be made to share losses of the 
firm. If the partnership firm suffers loss than it will be borne by other major partners is 
their profit-sharing ratio. 
 Number of Partners: Minimum Partners: Two 
 Maximum Partners: As per Section 464 of the Companies Act, 2013, no association 
or partnership consisting of more than 100 number of persons as may be prescribed 
shall be formed for the purpose of carrying on any business. Rule 10 of Companies 
(incorporation) Rules 2014 specifies the limit as 50. Thus, maximum number of 
members in a partnership firm are 50. 
1.3  LIMITED LIABILITY PARTNERSHIP 
The Indian Partnership Act of 1932 provides for a general form of partnership which has 
inherent shortcoming of unlimited liability of all partners for business debts and legal 
consequences, regardless of their holding or profit-sharing ratio, as the firm is not a legal 
entity. General partners are also jointly and severally liable for tortuous acts of co-partners. In 
case of liquidation personal assets of partners can be liquidated to meet liabilities of the firm. 
With the growth of the Indian economy, the role played by its entrepreneurs as well as its 
technical and professional manpower has been acknowledged internationally. 
Entrepreneurship, knowledge, risk and capital may be combined to provide a further impetus 
to India’s economic growth.  In this background, a need has been felt for a new corporate 
form that would provide an alternative to the traditional partnership, with unlimited personal 
liability on the one hand, and, the statute-based governance structure of the limited liability 
company on the other. This would enable professional expertise and entrepreneurial initiative 
to combine, organize and operate in flexible, innovative and efficient manner. 
The Government felt that with Indian professionals increasingly transacting with or 
representing multi-nationals in international transactions, the extent of the liability they could 
potentially be exposed to, is extremely high. Hence, in order to encourage Indian professionals 
to participate in the international business community without apprehension of being subject 
to excessive liability, the need for having a legal structure like the LLP is encouraged. Thus, in 
convergence towards global scenario, Limited Liability Partnership Act, 2008 was introduced. 
The Limited Liability Partnership (LLP) is viewed as an alternative corporate business proposal 
that provides the benefits of limited liability but allows its members, the flexibility of 
organizing their internal structure as a partnership, which is based on a mutually arrived 
agreement. 
© The Institute of Chartered Accountants of India
10.5
PARTNERSHIP AND LLP ACCOUNTS 
The LLP will be a separate legal entity, liable to the full extent of its assets, with the liability of 
the partners being limited to their agreed contribution in the LLP which may be of tangible or 
intangible nature or both tangible and intangible in nature. No partner would be liable on 
account of the independent or un-authorized actions of other partners or their misconduct. 
The liabilities of the LLP and partners who are found to have acted with intent to defraud 
Creditors or for any fraudulent purpose shall be unlimited for all or any of the debts or other 
liabilities of the LLP. 
The main benefit in an LLP is that it is taxed as a partnership, but has the benefits of being a 
corporate, or more significantly, a juristic entity with limited liability. An LLP has the special 
characteristic of being a separate legal personality distinct from its partners. The LLP is a body 
corporate in nature. 
Summary of key advantages and challenges associated with formation of LLP could be 
presented as below: 
Advantages: 
(i)  LLP is organized and operates on the basis of an agreement. 
(ii)  Enables professional/technical expertise and initiative to combine with financial risk 
taking capacity in an innovative and efficient manner. 
(iii)  Limited liability of partners as in case of corporate entities along with flexibility of a 
partnership without imposing detailed legal and procedural requirements; 
(iv)  Lower registration costs as compared to corporate entities; 
(v)  Audit not mandatory (subject to turnover / capital contribution benchmark) 
Challenges: 
(i) Public disclosure of financial statements; 
(ii) No option for Equity investments; 
(iii) Extensive penal provisions for non-compliance 
The Limited Liability Partnerships (LLPs) in India were introduced by Limited Liability 
Partnership Act, 2008 which lay down the law for the formation and regulation of Limited 
Liability Partnerships. Later, the Ministry of Law and Justice made amendments to the Limited 
Liability Partnership Act, 2008 (LLP Act) through the LLP (Amendment) Act, 2021. 
1.3.1 Definition of LLP 
Section 2 of the Limited Liability Partnership (LLPs) Act, 2008 defines limited liability 
partnership” as a partnership formed and registered under this Act; and “limited liability 
partnership agreement” means any written agreement between the partners of the limited 
© The Institute of Chartered Accountants of India