Partnership Account

Topic: ACCOUNTS OF PARTNERSHIP BUSINESS
INTRODUCTION TO PARTNERSHIP ACCOUNT

A partnership according to partnership Act 1890 can be defined as a relationship, which subsists
between persons carrying on a business in common with a view to making profit. Partnership can be
formed by two to twenty persons.
PARTNERSHIP DEED
For a partnership to be effective and efficient there must be some guiding rules and regulations. The
guiding rules will be contained in a written agreement known as "partnership deeds." The agreement
must be signed by the partners in the presence of a lawyer. Persons can enter into partnership without
any written form of agreement but it is better to have a written agreement.
The partnership deed is the agreement drawn up to regulate the conduct of a partnership business.
The following are always included in the partnership agreement or deed, these include:
a. The capital to be contributed by various partners.
b. The rate at which interest is to be allowed on partner's capital
c. The rate at which interest is to be charged on partners drawings
d. The amount of salary receivable by active partner(s)
e. The rate of interest to be allowed on partners' loan
f. The ratio in which profit/loss is to be shared among the partners
g. The method of calculating goodwill in the event of death or admission of new partner(s).
WHEN THERE IS NO AGREEMENT

Where there are no specific arrangements pertaining to the partnership agreement, the following
provisions of the Partnership Act of 1890 must be applied. Section 24 of the Act, lays down the
following:
a. No interest on capital
b. No remuneration or salary
c Profits and losses to be shared equally
d. 5% interest a year on loans made by partners in excess of the agreed capitals
e. No interests is to be charged on drawings.
TYPES OF PARTNER
i. Active partner
This is the partner who takes active part in the formation and management of the business.
They partake in the day-to-day running of the business.
ii. Sleeping or dormant partner

The dormant partner does not partake the day-to-day running of the business, but he only
contributes capital.
iii. Nominal partner

The partner only contributes his name to the formation of the business and nothing more.
They are normally people of substance in the society.
ACCOUNTING ENTRIES IN PARTNERSHIP

Under partnership accounting, there is no departure from the basic principles governing the final
accounts of a sole trader. The final accounts of a sole trader and partnership resemble each other, but
in partnership, there is an extra section called appropriation account. This is the account where the
profit sharing ratio. The net profit found in the profit and loss account will be carried down in the
appropriation account.
In partnership accounting, the following accounts must be prepared:

a. Trading, profit and loss account
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b. Appropriation account
c. Current and capital accounts
d. Balance sheet.
Before going into detail of the accounts, students must be familiar with the following:
i. Capital may be introduced by some or all the partners and this will be credited to
the capital accounts. The partnership can maintain any of these:
a. capital account without current account otherwise called fluctuation capital account; and
b. fixed capital account with current account.
Fixed capital account with current account

Here, the amount put into the business by each partners will not change. The capital will remain
fixed. In order to preserve the capital, a current account will be prepared. The current account will be
debited with interest on drawings and credited with interest on capital, share of profit and partners
salary.
Fixed Capital Account
Ayo Ojo Ayo Ojo
N N N N
Bal b/f 100,000 200,00
0
Current Account
Ayo Ojo Ayo Ojo
N N N N
Drawings 4,000 3,500 Bal b/f 3,000 6,000
Int. on drawings 400 350 Int. on capital 10,000 20,000
Share of profit 5,000 6,000
Bal c/d 14,600 30,150 Salary 1,000 2,000
19,000 34,000 19,000 34,000
14,600 30,150
Fluctuating capital without current account

This can be referred to as fluctuating capital account. The capital account represents a mixture of
capital and undrawn profit. The interest on capital, partners’ salary and share of profit are credited to
the capital account. The debit side will show drawings and interest on drawings.
Current Account
Ayo Ojo Ayo Ojo
N N N N
Drawings 4,000 3,500 Bal b/f 103,000 206,00
Int. on drawings 400 350 Int. on capital 10,000 0
Bal c/d 114,600 230,150 Salary 1,000 6,000
119,000 234,000 119,000 2,000
114,600 234,00
0
230,15
0
The fixed capital account is preferable to the fluctuating capital account.
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VARIOUS FORMATS OF AN ACCOUNT TO BE PREPARED IN THE PARTNERSHIP
ACCOUNT
PARTNERS’ CURRENT ACCOUNT FORMAT

A B A B
N N N N
Drawings X X Balance b/d X X
Interest on Drawing X X Salary of partners X X
Balance c/d X X Interest on capital X X
Interest on loan X X
Share of profit X X
XX XX XX XX
Balance b/d X X
HORIZONTAL FORMAT
PROFIT & LOSS APPROPRIATION ACCOUNT FOR THE YEAR …
N N N N
Partner’s Salary A X Net profit b/d X
B X X
Interest on Drawings: A X
Interest on Capital A X B X
B X X X
Share of Profit A X
B X X
XX
XX
VERTICAL FORMAL
PROFIT & LOSS APPROPRIATION ACCOUNT FOR THE YEAR …
N N
Net profit X
Add: Interest on drawings: A X
B X X
Less: Partners’ Salary A X

B X (X)
Interest on Capital A X
B X (X)
Profit to be shared between partners XX
Share of profits A X
B X
XX
Illustration 1
Kunfe and Kanyo formed a partnership on 1st January 2011, the partnership agreement contains the
following:
i. The partners fixed capital are Kunfe N30,000 and Kanyo N24,000
ii. Kanyo to receive a salary of N1,800 a year
iii. Interest on capital is to be calculated at 5% per annum.
iv. Interest to be charged on drawings at the rate of 2%
v. Kunfe and Kanyo to share profits on the ratio of 3:2
vi. During the year to 31/12/2002 drawing were Kunfe N2,450. Kanyo N1,750 and the profit of
N13,500
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You are required to show:
a. Appropriation account of the firm
b. The current account after the appropriation
c. Balance sheet extracts showing capital and current accounts.
Solution
KUNFE AND KANYO

A. APPROPRIATION ACCOUNT FOR THE YEAR ENDED 31/12/2011
N N
Kanyo’s salary 1,800 Net profit 13,500
Interest on capital: Interest on drawing:
Kunfe 1,500 Kunfe 49
Kanyo 1,200 2,700 Kanyo 35 84
Share of profit
Kunfe (3/5) 5,450
Kanyo ( /5)
2
3,634 9,084
13,584 13,584
B. PARTNERS CURRENT ACCOUNT

Kunf Kany Kunf Kany
e o e o
N N N N
Drawings 2,450 1,750 Salary - 1,800
Interest on 49 35 Interest on capital 1,500 1,200
drawings 4,451 4,849 Share of profit 5,450 3,634
Balance c/d 6,950 6,634 6,950 6,634
Balance b/d 4,451 4,849
C. KUNFE AND KANYO

BALANCE SHEET (EXTRACT) AS AT 31st DECEMBER 2011
KUNFE KANYO TOTAL
N N N
Capital accounts 30,000 24,000 54,000
Current accounts 4,451 4,849 9,300
34,451 28,849 63,300
Illustration 2
Dauda, Raji and Toray are in partnership. They share profits and losses in the ratio 3:2:1 respectively.
Interest is charged on drawings at the rate of 10% p.a. and credited at same rate in respect of the
balance of the partner’s capital account. Raji is to be credited with a salary of N2,000 p.a. In the year
to 31st December 2010, the net profit of firm was N50,400. The partners drawing of Dauda, N3,000,
Raji N7,200 and Toray, N4,800 were taken in two equal installments by the partners on 1st April
2010 and 1st October, 2010.
The balances of the partners account at 31st December 2010 were as follows: (all Credit Balance)
Capital Account Current Account
N N
Dauda 30,000 750
Raji 20,000 1,340
Toray 16,000 220
You are required to:
a. Prepare the firm’s profit and loss appropriation account for the year ended 31st December
2010.
b. Show how the partners’ capital and current account are shown in the balance sheet as at 31st
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December 2010.
Solution
DAUDA, RAJI AND TORAY
a.) Profit And Loss Appropriation Account for the Year Ended 31/12/2010
N N
Partners salary: Net profit 50,400
Raji 2,000 Interest on drawing:
Interest on capital: Raji 360
Raji 2,000 Toray 240
Toray 1,600 Dauda 150 750
Dauda 3,000 6,600
Share of profit
Raji (2/6 X 42,550) 14,183
Toray (1/6 X 42,550) 7,092
Dauda ( /6 X 42,550) 21,275 42,550
3
51,150 51,150
b.) Balance Sheet (Extract) as at 31/12/2011

N N N
Capital accounts: Raji 20,000
Toray 16,000
Dauda 30,000 66,000
Current accounts:
Raji:b/fwd 1,340
Salary 2,000
Interest on capital 2,000
Less: Drawings 7,200
Interest on drawings 360 (7,560) 11,963
Toray: brought fwd 220
Dauda: brought fwd 750
103,710
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REVIEW QUESTIONS
Part A: Multiple Choice Questions (MCQ)

1. What is the minimum partner requirement to start a partnership firm?
A. 10 B. 5 C. 2 D. 20
2. Agreement in which form is required in a partnership firm?
A. Written B. Oral C. A or B D. None of the above.
3. What is the liability of partners in a partnership firm?
A. Limited B. Unlimited C. Limited to the capital of business D. No Liability
4. When is the Debit to partner's capital a/c entry passed in accounts?
A. Drawings are made B. Investment is done C. Interest on Drawings is charged
B. Capital is withdrawn
5. Partnership Firm Agreement is known as?
A. Partnership Contract B. Partnership Deed C. Partnership Act D. Agreement
6. How will the profits be divided among partners in the absence of a partnership deed?
A. Depending on the capital invested B. Depending on the work experience.
C. Unequal D. Equal
7. Which among the following is not a characteristic of a partnership firm?
A. Easy Formation B. Equal Profits C. Limited Liability D. Mutual Consent
8. What is Partnership at Will?
A. Form of business partnership where there is no fixed term agreed for the duration of the part-
nership.
B. Partnership in which some or all partners can exhibit elements of partnerships and corpora-
tions.
C. Form of partnership under common law D. A partnership formed for a single transaction.
9. What is a limited liability partnership?
nership.
tions.
C. Form of partnership under common law D. A partnership was formed for a single trans-
action.
10. What is a General Partnership?
nership.
tions.
action.
11. What is Particular Partnership?
nership.
tions.
action.
12. In which sort of partnership does one accomplice has limitless risk and another accomplice have
a restricted obligation?
A. Partnership At will B. Particular Partnership C. General Partnership
D. Limited Liability Partnership
13. The agreement for the duration of partnership is absent in what kind of partnership?
A. Partnership At will B. Particular Partnership C. General Partnership
D. Limited Liability Partnership
14. Which among the following are the features of a partnership firm?
A. Two or more persons are carrying common business under an agreement.
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B. They are sharing profits and losses in the fixed ratio.
C. Business is carried by all or any of them acting tor all as an agent. D. All of the above.
15. What is an Active Partner?
A. An invested person who is involved in the daily operations of the partnership.
B. A person who provides some of the capital for a business but who does not take an active part
in managing the business.
C. A person who holds himself out as a partner or permits a partner to hold him out.
D. A person who gives an impression to others that he/she is a partner of the firm.
16. What is a Sleeping Partner?
17. What is a Nominal Partner?
18. What is partner by estoppel?
19. What is a partner in profits only?
C. A partner who gets into an agreement to share only the profits of the partnership firm and not
the losses.
D. A Partner who is under the age of 18.
20. What is a minor partner?
C. A partner who gets into an agreement to share only the profits of the partnership firm and not
the losses D. A Partner who is under the age of 18.
21. What will be the extent of liability if Prince, Rijule and Krishan are partners in a firm sharing
profits and losses in an equal ratio. Their capital balance as of 31st March 2022 is ₹ 80,000, ₹
60,000 and ₹ 40,000 respectively. Their assets are worth ₹ 20,000, ₹ 15,000, ₹ 10,000.
A. Prince - ₹ 80,000 : Rijule - ₹ 60,000 : Krishan - ₹ 40,000
B. Prince - ₹ 1,00,000 : Rijule - ₹ 50,000 : Krishan - ₹ 30,000
C. Prince - ₹ 1,00,000 : Rijule - ₹ 40,000 : Krishan - ₹ 10,000
D. Prince - ₹ 20,000 : Rijule - ₹ 15,000 : Krishan - ₹ 10,000
22. In a partnership firm, every partner is bound to fulfil his/her … in the business?
A. Meetings B. Partnership Deed C. Duties D. Rights
23. In a Partnership Firm forming a partnership deed is … ?
A. Verbal B. Not Necessary C. Necessary D. Necessary in Writing
24. What is the other name for Partnership Deed?
A. Articles of Association B. Prospectus C. Principles of Partnership D. Articles of
Partnership
25. Partnership Act 1932 does not comprise of which of the following?
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A. No interest is allowed on capital invested B. All loans provided are to be allowed
on a fixed interest rate
C. Profit and Losses are to be shared equally D. Interest has to be charged on all drawings
26. When does the Partnership Act come into action in a firm?
A. When there is a conflict of interest and opinions in a firm.
B. When the capital invested is unequal
C. In the absence of Partnership Deed D. When interest is charged on drawings
27. At what per cent the interest is levied on partners' capital in the absence of partnership deed?
A. 14 % p. a B. 12 % p. a C. No interest is levied D. 6 % p. a
28. What is the accepted rate of interest on a partner's loan account in the absence of a partnership
deed in a partnership firm?
A. 10 % Compound Interest Per annum B. 6 % Simple Interest Per annum
C. 11 % Compound Interest Per annum C. 12 % Simple Interest Per annum
29. Tapan and Mirza are partners in a partnership firm without any agreement. Tapan has given a
loan of Rs. 50000 to the firm. At the end of the year, the loss was incurred in the firm. What
percentage of interest shall be paid to Tapan by the firm?
A. 12 % Per Annum B. 14 % Per Annum C. Due to loss incurred in the business,
interest cannot be paid D. 6 % Per Annum
30. Krishan and Saif are partners in a partnership firm without any agreement. Krishan has
withdrawn Rs. 60000 out of his capital as drawings. What is the percentage of interest on
drawings that may be charged from Krishan by the firm?
A. No interest can be charged B. 10 % Per Annum C. 12 % Per Month D. 6 % Per Annum
31. Simran and Aditi are partners in a partnership firm in the absence of any written agreement.
Simran devotes more time to the firm as compared to Aditi. So, Simran will receive what
percentage of commission in addition to the profit in the firm's profit?
A. 10 % of Profit B. 8 % of Profit C. 6 % of Profit D. None of the above
32. Which of the following rule applies to the partnership firm in the absence of a partnership deed?
A. Equal profit sharing ratio B. Profit based salary to the partners C. No interest
shall be charged on capital D. 6 % Interest on Drawings
33. Partners of a partnership firm are not entitled to which of the following in the absence of
partnership deed?
A. Equal share in profits B. 10 % Commission C. No salary or commission D. Interest on
Drawings
34. Partners in a firm will get Interest on Capital if provided in the partnership deed but only out of
which account?
A. Reserves B. Goodwill C. Assets D. Profits
35. Rent Paid to Partners cannot be recorded in which of the following accounts in the partnership
firm?
A. Salary Account B. Depreciation Account C. Profit & Loss Account
D. Expenses Account
36. Balance of loan account should be transferred to which account if any loan or advance is
provided by a partner?
A. Balance Sheet Assets Side B. Partners' Capital Account C. Balance Sheet Liability Side
D. Partner's Liability Account
37. Divakshi, Palak and Unnati were partners in a firm with capitals of Rs. 50,000 ; Rs. 40,000 and
Rs. 30,000 respectively carrying on business in the partnership firm. Their firm’s reported profit
for the year was Rs. 80,000. As per the provision in the Indian Partnership Act, 1932. Find out
the share of each partner in the profit after taking into account that no interest has been provided
on an advance by Divakshi of Rs. 20,000 in addition to her capital contribution.
A. 26,667 to each partner B. 26,647 for Palak and Unnati and Rs. 27,466 for Divakshi
C. 33,333 for Divakshi ; Rs. 26,667 for Palak and Rs. 20,000 for Unnati D. 30,000 for each
partner
38. Nandini, Shreya and Ujjwal are partners in a firm. At the time of the division of profit for the
year, there was a dispute between the partners. Profit before interest on partner’s capital was Rs.
6,000 and Shreya determined interest @24% Per Annum on her loan of Rs. 80,000. There was
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no agreement on this point. Calculate the amount payable to Nandini, Shreya and Ujjwal
respectively.
A. 400 for Nandini; Rs. 5,200 for Shreya and Rs. 400 for Ujjwal B. 2000 to each partner
C. Loss of Rs. 4,400 for Nandini and Ujjwal; Shreya will take Rs. 14,800
D. None of the above
39. The members of partnership firm are individually called ... A.) director B.) investor C.)
Partner D.) Manager
40. An ordinary partnership business can have … A.) not more than 50 partners B.) not more than 20
partners C.) any number of partners D.) any number than 2 partners.
41. A banking partnership business can have … A.) not more than 10 partners B.) not more than
20 partners C.) not more than 50 partners D.) any number of partners.
42. In the absence of an agreement profit and loss are divided by partners in the ratio of ... A.)
capital B.) equally C.) time devoted by each partners D.) none of these
43. In the absence of an agreement, Interest on loan advanced by the partner to the firm is allowed at
the rate of ... A.) 6% B.) 5% C.) 12% D.) 9%
44. Current accounts of the partners should be opened when the capitals are ... A.) fluctuating
B.) fixed C.) either fixed or fluctuating D.) none of these
45. Investment in partnership is made by introducing ... A.) cash B.) none – cash assets C.) cash
or non – cash assets D.) none of these
46. Partnership is formed by the partners by ... A.) written agreement B.) oral agreement C.)
written or oral agreement D.) none of these
47. Any partner who investments in the business but does not take active part in the business is ...
A.) secret partner B.) sleeping partner C.) active partner D.) nominal partner
48. The written agreement of partnership is called ... A.) Partnership Deed B.) Articles of
Association C.) Memorandum of Association D.) Certificate of Incorporation
49. Under fixed capital methods, profit will be credited to ... A.) Capital Account B.) Drawings
C.) Current Account D.) Profit & Loss
50. Partnership business is governed by ... A.) Partnership Act B.) Act of Parliament
C.) Companies Act D.) Constitution
Section B: Theory Questions
Part A: Short Answer Questions (SAQ)

1. Define partnership account
2. Define partnership deed
3. Mention items contained in deed of partnership
4. State accounting procedure for a partnership where there is no agreement
5. Mention types of partner
6. Differentiate between active partner and dormant partner
7. Highlight the rights and privileges of partners
8. State the duties of partners
9. Explain partnership accounting
10. Name various accounts prepared under a partnership
11. Define partnership appropriation account
12. State items contained in the partnership appropriation account
13. Draw layout of current and capital accounts with fluctuation capital account.
14. Draw layout of capital account with fixed capital account
15. Draw layout of current account with fixed capital account
Part B: Essay Questions

1. Compare partnership to:
i. sole proprietorship ii. joint stock company
2. Differentiate between partnership and joint venture
3. Identify three major setbacks in a partnership business and suggest measure to put in place
to overcome these setbacks
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Topic: ACCOUNTS OF PARTNERSHIP BUSINESS

INTRODUCTION TO PARTNERSHIP ACCOUNT

WHEN THERE IS NO AGREEMENT

ii. Sleeping or dormant partner

iii. Nominal partner

ACCOUNTING ENTRIES IN PARTNERSHIP

In partnership accounting, the following accounts must be prepared:

Fixed capital account with current account

Fluctuating capital without current account

The fixed capital account is preferable to the fluctuating capital account.

PARTNERS’ CURRENT ACCOUNT FORMAT

Less: Partners’ Salary A X

KUNFE AND KANYO

B. PARTNERS CURRENT ACCOUNT

C. KUNFE AND KANYO

b.) Balance Sheet (Extract) as at 31/12/2011

Part A: Multiple Choice Questions (MCQ)

Section B: Theory Questions

Part A: Short Answer Questions (SAQ)

Part B: Essay Questions

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