Partnership Accounts ~ Introduction (Meaning characteristic and important terms)

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Meaning of Partnership as per Section 4 of Indian Partnership Act, 1932

“Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.”

 

Essential Elements, Main Features or Characteristics of Partnership

  • There must be two or more persons.
  • There must be an agreement.
  • There must be a lawful business.
  •  There must be sharing of profits of business.
  • There must be a mutual agency, i.e., the business must be either carried on by all or any of them acting for all.


Partnership Deed: The document containing the terms and conditions of the agreement between/among partners, is known as the Partnership Deed. The Partnership Deed usually includes the following: 


1.      Name and address of the firm.

2.      Names and addresses of all partners.

3.      Date of commencement of partnership.

4.      Capital to be contributed by each partner.

5.       Whether interest is to be allowed on capitals.

6.       Whether any partner is to be allowed salary.

7.       The profit-sharing ratio.

8.      The duties of each partner.

9.      Mode of settlement of accounts in case of retirement/death of a partner.

 

Profit and Loss Appropriation Account is an extension of the Profit and Loss Account. The purpose of this account is to show how Net Profit is appropriated and distributed among the partners.

  • It is credited with Net Profit and interest on drawings.
  • It is debited with interest on capitals, salary or commission to partners as per the terms of Partnership Deed.
  • Its balance is transferred to the Partners’ Capital (or Current) Accounts in their agreed profit-sharing ratio (or equally if there is no agreed profit-sharing ratio).

 

Salary or Commission to a Partner: Salary or Commission to a partner is allowed if the Partnership Deed provides for it.

 


 

Salary or commission to a partner being an appropriation of profits is transferred to the debit of the Profit and Loss Appropriation Account and not to the debit of the Profit and Loss Account.


·    Interest on Capital: Interest on capital is calculated on time basis, taking into consideration any additional capital introduced or any existing capital withdrawn.

 

·    Interest on Current Account: Interest on Current Account is allowed (in case of Credit Balance) and charged (in case of debit balance) on Opening Balance.

It is allowed or charged if instructed in the question.

 

·    Interest on Drawings: If the Partnership Deed so provides, interest on drawings is charged from the partners. The interest so charged is credited to the Profit and Loss Appropriation Account and debited to the Partners’ Capital or Current Accounts.

 

If the date of Drawings is not given, the Interest on total Drawings is calculated for 6 months. Interest @ 10% without the word ‘per annum’ means interest is calculated without any reference to time period.

·    Interest on Partner’s Loan to the Firm: If a partner gives a loan to the firm, he is entitled to interest on such loan at an agreed rate of interest. If there is no agreement as to the rate of interest on loan, the partner is entitled to interest on loan @ 6% p.a. Interest on partner’s loan is a ‘charge’ against the profit and is credited to his/her Loan Account.

 

·    Interest on Loan by the Firm to a Partner: Firm is entitled to receive interest on loan given to a partner. However, the firm will charge interest on loan advanced to a partner only, if it is provided in the Partnership Deed or is agreed to charge interest along with the rate of interest among the partners. It is a gain to the firm and is credited to Profit and Loss A/c.


   For Video Notes click the link --> https://www.youtube.com/watch?v=0pyuIPVtFN8


 


 

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