After studying this chapter the student will be confident to:
FEATURES OF PARTNERSHIP
Since partnership is the outcome of an agreement, it is essential that there must be some terms and conditions agreed upon by all the partners. Such terms and conditions mat be either written or oral. The law does not make it compulsory to have a written agreement. However, in order to avoid all misunderstandings and disputes, it is always the best course to have a written agreement duly signed and registered under the Act.
The partnership deed is a written agreement among the partners which contains the terms of agreement. It is also called ‘ Articles of Partnership’.
A partnership deed should contain the following points:
Benefits of Partnership Deed:
Hence, it is always best course to have a written partnership deed duly signed by all the partners and registered under the Act.
Rules applicable in the absence of partnership deed
|Profit sharing Ratio||Equal. Irrespective of capital contribution.|
|Interest on Capital||No Interest on Capital is to be allowed to any Partner|
|Interest on Drawings||No interest in Drawings is to be charged to any partner|
|Salary or Commission to a Partner||Not allowed to any partner|
|Interest on loan by a Partner||Interest is allowed at 6% per annum.|
Distribution of Profits among Partners
Transactions of the partnership firm are recorded according to the principles of Double-entry book keeping system, and as in the case of a sole proprietorship concern a partnership firm will also prepare Trading account, Profit & Loss account and Balance Sheet at the end of every year. The only difference between accounting of a sole trader and partnership firm is that the profits of the partnership firm are divided amongst the partners.
A Profit and Loss Appropriation Account is prepared to show the distribution of profits among partners as per the provision of Partnership Deed (or as per the provision of Indian Partnership Act, 1932 in the absence of Partnership Deed). It is an extension of profit and Loss Account. It is nominal account. It records entries for interest on capital, Interest on Drawings, Salary to the partner, and division of profits among the partners.
Partner’s Capital Accounts:
It is an account which represents the partners interest in the business.
In case of partnership business, a separate capital account is mainted for each partner. The capital accounts of partners may be maintained by any of the following two methods.
1. Fixed Capital Accounts
2. Fluctuating Capital Accounts
1. Fixed Capital Accounts: Under this method the original capitals invested by the partners remain constant, unless additional capital is introduced by an agreement. All entries relating to drawings, interest on capitals, interest on drawings, salary to partner, share of profits/losses are made in separate account which is called as Current Account. Thus the following two accounts are maintained when capitals are fixed.
2. Fluctuating Capital Accounts: In this method only one account i.e., Capital Account of each and every partner is prepared and all the adjustment such as interest on capital interest on drawings etc, are recorded in this account under this method, Capital account may show a debit or credit balance and the balance of this account changes frequently from time to time therefore it is called fluctuating Capital Account.In this method the capitals are not fixed. In the absence of information, the Capital Accounts should be prepared by this method.