Professional Documents
Culture Documents
Accounting For Partnership
Accounting For Partnership
Accounting For Partnership
Features of Partnership
Agreement: In order to run the business smoothly, it is necessary that there must be
an agreement between partners named “Partnership Deed”. May be in oral or
writing mode.
Plurality of persons: Here, at least two persons are required. The maximum
number of person is ten in case of firms having banking business and twenty in case
of other business.
Lawful Business: It is essential that the partnership is formed for doing lawful
business to earn profits.
Voluntary Association: A partnership is a voluntary association of individuals. The
partnership firm has no separate legal existence.
Sharing of profits: It is essential that the partners share profits of the firm
according to predetermined ratio.
Non-transferability: No partner can transfer his share in the partnership without
the prior consent of all other partners.
Collective Management: The ownership is not separated form management. Each
partner is an owner and also a part of management.
Act: The partnership business is governed by the Indian Partnership Act,1932.
ADVANTAGES AND DISADVANTAGES OF PARTNERSHIP
The need for large amount of capital, better management, sharing risk jointly and
specialised knowledge gave rise to partnership firm.
Advantages:
Easy to form: This is a suitable type of organisation requiring no legal formalities
and no formal documents.
More funds: The resources of more than one person are available for the business.
Greater managerial talent: The partners may be assigned duties according to their
talent. Every department may be managed and controlled by different partners.
Promptness in decision making: The partners meet frequently a take prompt
decision.
Sharing of risk: The risk is shared by partners. The burden of each partner will be
much less as compared to sole trade.
Relationship between reword and work: The partners try to put more labour to
earn more profits. The more they work, the more will they get.
More possibility of growth and expansion: Partnership concern has more
possibilities for expansion and growth of the business.
Secrecy: A partnership concern is not expected to publish its profit and loss account
and balance sheet as is necessary for a joint stock company. They can keep the
business secrets to themselves.
Disadvantages:
Unlimited liability: Here, partners are not only liable for their investments but their
private properties can also be taken for business liabilities.
Limited resources: The business resources are limited to personal funds of the
partners.
Lack of continuity: The partnership concern suffers from the uncertainty of
duration because, it can be dissolved at the time of death, lunacy or insolvency of a
partner.
Mutual Distrust: It is difficult to maintain harmony among partners because they
may have different opinions and may not agree on certain matters.
Lack of public faith: The accounts of partnership concerns are not published. So,
public is unaware of the exact position of the business.
Lack of prompt decisions: All decisions are taken by the consent of partners. so
decision making process becomes time consuming.
Partnership Deed:
The document which contains the terms and conditions of partnership, as agreed among
the partners, is called ‘Partnership Deed’.
Contents of partnership Deed:
Name, address and place of business of the firm.
Name and address of all partners.
Type of business that the firm shall carry on.
Date of commencement of partnership.
Amount of capital contribution by each partner.
Ratio in which the profits or losses are to be shared.
Rate of interest on capital.
Rate of interest on drawings.
Rate of interest on loan by a partner to the firm.
The method of computation and treatment of goodwill on the reconstitution of a
firm.
The mode of settlement of accounts in case of dissolution.
The date on which accounts shall be closed every year.
Clear provisions about the rights and duties of partners.
Maximum permissible drawings by each partner.
Method of book-keeping – cash basis or accrual basis.
Valuation of assets and liabilities in case of reconstruction.
Method of settlement of dispute, if arises.
Partner or partners who will be in change of operating bank account.
When there is no partnership deed:
When there is no partnership deed or any agreement the relevant provisions of the Indian
Partnership Act,1932 would be applicable.
1.Sharing of profits and losses Profits and losses are to be shared equally.
(Sec 13)
2.Interest on capital No interest is to be allowed on capital.
(Sec 13c)
3.Interest on drawings.
No interest is to be charged on drawings.
4.Interest on loan given by a partner. Interest @6% p.a. is to be allowed on
advances/loans. (Sec 13d)
5.Salary/Commission/Remuneration to a
partner. No remuneration fix taking part in the
conduct of business is to be allowed to any
partner. (Sec 13 a)
FINAL ACCOUNTS OF PARTNERSHIP:
The final accounts of partnership business consist of the following:
Manufacturing Account (in case of manufacturing concern).
Trading and Profit & Loss Account.
Profit and Loss Appropriation Account.
Balance Sheet.
XXX XXX
Interest on capital
As pointed out earlier, interest is allowed on capital only when partnership deed provides
for it. It is allowed in such cases where partners’ capitals are disproportionate to the share
of profit taken by them and interest is allowed to compensate the partner contributing
excess relative capital.
JOURNALS;
i. For allowing interest on capital
Interest on capital A/c …..Dr
To partner’s capital/ current A/c
ii. For transferring interest on capital
Profit and loss Appropriation A/c …..Dr
To interest on capital A/c
INTEREST ON DRAWINGS
Partners are sometimes allowed to draw either cash or goods from the business for their
personal use in anticipation of profit and also against their claim of salary, commission etc
here, journal entries,
i.For charging interest on drawing
partner’s capital/ current A/c….. Dr
To interest on drawings A/c
ii.For transferring interest on drawings to profit and loss appropriation account
Interest on drawings A/c …. Dr
To profit & Loss Appropriation A/c
Calculation of interest on Drawings
Case- I when date of drawings is not given
Interest on drawings is always calculated with reference to the period of drawing. So,
when dates of drawings are not given it is to be calculated on total drawings made during
the year for an average period of six months. Similarly, when the rate of interest is given
without mentioning the word “per annum”, interest will be calculated ignoring the time
factor.
Profit and Loss Appropriation A/c for the year ended March 31,2020
Dr.
Cr.
Particulars Amount Particulars Amount
(Rs) (Rs)
To Interest on capital By Profit and Loss A/c 1,99,000
Aditya 18,000 - Net Profit
Binita 12,000 30,000
To Reserve Fund 17,230 By Interest on drawings
(10% of 2,02,300 – 30,000) Aditya 1,500
3,300
Binita 1,800
To share of profit
transferred to:
Aditya’s capital A/c 77,535 1,55,070
Binita’s capital A/c 77,535
2,02,300 2,02,300
Working Notes:
1.Interest on partner’s loan has been allowed @ 6% per annum as there has been no
agreement. But it will to shown on the debit side of the profit & loss account.
2.As the date of drawing is not mentioned interest has been calculated for an average
period of 6 months.