Partnership Accounting ~ Important Key Terms

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Important Key Terms in Partnership Accounting

Partnership

Partnership is a relationship between persons who have agreed to share profits and losses of business carried on by all or any of them acting for all.

Partners

Partners are the persons who have agreed to do business and share its profits and losses.

Firm

Partners carrying on the business are collectively known as firm. The name under which the business is carried on is called firm name.

Partnership Deed

Partnership Deed is a written agreement among the partners detailing the terms and conditions of the partnership.

The Indian Partnership Act, 1932

It is an Act that governs the partnership firms. In case, Partnership Deed is silent on any issue, provisions of the Act apply.

Capital

Capital is the amount in credit of Partner’s Capital Account. It may be contributed by the partners in the firm and/or credited by way of his or her share of profit, salary, commission and interest on capital. Capitals of the partners may be fixed or fluctuating.

Fixed Capitals

Fixed Capitals mean that capitals of the partners remain fixed and change only with the introduction or withdrawal of capital. When capitals are fixed two accounts for each partner are maintained, i.e., Capital Account and Current Account.

Fluctuating Capitals

Fluctuating Capitals mean that capitals of the partners do not remain fixed but change with each entry. When capitals are fluctuating only one account is maintained for each partner, i.e., Capital Account.

Drawings

Drawings means withdrawal by the partner from the firm in cash or kind for his or her personal use.

Profit-sharing Ratio

Profit-sharing Ratio is the ratio in which the partners have agreed to share profits and losses of the firm. In the absence of agreement, it is as provided in the Indian Partnership Act, 1932, i.e., equal.

Capital Ratio

Capital Ratio means the ratio in which the partners shall maintain their capitals in the firm.

Guarantee of Profit

Guarantee of Profit means minimum profit guaranteed to a partner or partners of the firm. Guarantee may be given by a partner or partners or the firm.

Past Adjustments

Past Adjustments means adjustment made either for the errors or omissions in the books of the firm or for the wrong or incorrect distribution of profits made in the past year or years

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