Partnership Deed | Crash Course of Accountancy - Class 12 - Commerce PDF Download

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 is also called ‘Articles of Partnership’ 
• 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;
• Profit and loss sharing ratio;
• Rate of interest on capital, loan, drawings, etc;
• Salaries, commission, etc, if payable to any partner

Importance of Partnership Deed : 

Though, the law does not make it mandatory (compulsory) for every firm to have a partnership deed, it is desirable to have it due to the following reasons :  
(i) It regulates the rights, duties and liabilities of each partner.  
(ii) It helps to avoid any misunderstanding amongst the partners because all the terms and conditions of partnership have been laid down before hand in the deed.  
(iii) Any dispute amongst the partners may be settled easily as the partnership deed may be readily referred to.  
Hence, it is always the best course to have a written partnership deed duly signed by all the partners and registered under the Act.

Rules in absence of Partnership Deed 
1. profits and losses of the firm are to be shared equally
2. no Interest on Capital
3. no Interest on Drawings
4. Interest on Advances or on partner loan will be @ 6%p.a.
5. No partner is entitled to get salary or other remuneration
6. Without the consent of all existing partners no new partner can be admitted to the firm. 7. Each partner can participate in the conduct of business 8. Each partner can inspect the books of firm and can take a copy of the same.

Final accounts of a partnership firm
1. Trading and P&L a/c (not in syllabus) - profits will be given
2. P&L Appropriation A/c
3. Balance sheet (not in syllabus)
4. Partner’s capital a/c

P&L Appropriation A/c 
Meaning – Profit and Loss Appropriation Account’ records all the entries for interest on capital, interest on drawing, salary to partners and division of profits among the partners 

Nature of Profit and Loss Appropriation Account’- 

Nominal account 

Purpose of preparing of P&L Appropriation A/c 
1. Records all the expenses related to the partners-   
Partner salary (remuneration)
Partner commission
Interest on capital
2.  Records all the incomes related to the partners
Interest on drawings  
3. Record all adjustments on profits
Transfer money to Reserves
Distribution of profits on the basis of profit sharing ratio.

Specimen of P&L Appropriation A/c

All XXXX items shows that these will be transferred to the cross i.e. opposite side of capital a/c.

Important points for P&L Appropriation a/c
1. Prepared only at the time of profits (so in-case of losses this account will not be prepared)
2. Follow the rule of nominal a/c
3. The profits should be after deducting all the items of P&L a/c – mainly interest on partner loan, manager commission & rent.

Accounting treatment of various items of P&L appropriation a/c


Distinction between Profit & Loss Account and Profit & Loss Appropriation Account:

 All adjustments of Profit & Loss Appropriation Account are an Appropriation out of Profit and are not a Charge Against Profit

Meaning of an Appropriation

Appropriations are made only when there is profit and is debited to Profit and Loss Appropriation Account. ExInterest on capital, partner’s salary etc.

Meaning of charge Against Profit – 
Charge means the expenses which will be deducted from profits while calculating net profit or loss and is debited to Profit and Loss Account. Ex- Interest on partner’s loan and rent paid to a partner It is necessary to make charges against profits even if there is loss.

Distinction between Charge Against Profit and Appropriation out of Profit