CHAPTER 1

FUNDAMENTALS OF PARTNERSHIP

FEATURES OF PARTNERSHIP= DEFINATION=

If 2 or more persons join hands for the purpose of running business with intention of earning profits, that
association is called partnership firm.

1. It is a relationship. =Two or more persons: Minimum 2, as per company act 2013 maximum numbers
of partners is 50. = Profit sharing should be.
2. For a business (must be legal)
3. Carried on by all or any of them acting for all: each partner acts on behalf of others.
4. Unlimited liability. This can be draw backed partnership. Due to wrong act of one partner others also
become liable. They are not liable up to their investment only but they can be held personally also.
5. Minor can be admitted only for sharing of profits only

NUMBER OF PARTNERS

1=Company Act 2013, (Section 464) empowers Govt. can maximum 100. 2=Vide rule no 10 of companies
(Misc.) rules 2014 Central Govt. prescribed maximum numbers =50.So now maximum 50 members can be.

PROFIT AND LOSS ACCOUNT IS PREPARED IN 2 PARTS

1. Profit and loss account

2. Profit and loss appropriation account

After profit and loss appropriation account we need to prepare

=Capital account of all partners.

There are two methods of maintaining the capital account

1= FLUCTUATING CAPITAL METHOD: (Generally it is used).

When so many items are debited and credited. If so, it means fluctuating capital method is used.

EXAMPLE OF FLUCTUATING CAPITAL

A B C A B C

DRAWINGS 50 000 50 000 50 000 OPENING 1 00 000 2 00 000 3 00 000

CAPITAL

INTT ON 5 000 5 000 5 000 INTT ON 10 000 20 000 30 000

DRAWING CAPITAL

BALANCING 75 000 2 05 000 3 35 000 PROFIT 20 000 40 000 60 000

FIGURE

TOTAL 1 30 000 2 60 000 3 90 000 TOTAL 1 30 000 2 60 000 3 90 000

 FIXED CAPITAL METHOD

If current accounts are found in question it means firm has fixed capital method.

Other than capital related transactions all transactions will be recorded here.

DRAWINGS

When money is withdrawn by the partner for personal use. It may be withdrawal from profits, in anticipation
of profits.AS PER ACT 1932 =No interest to be charged

AS PER AGREEMENT =Interest can be charged.

If agreement is silent NO interest will be charged as per law.

INTEREST ON CAPITAL

Interest is paid by the firm because capital is by the firm. That is an expenditure of firm and

AS PER ACT 1932 =No interest to be given ,AS PER AGREEMENT =Interest can be given

Appropriation means interest will be provided to the partners if there are sufficient profits.

LOAN GIVEN BY PARTNER TO FIRM:

AS PER ACT 1932 =As per section 13(A) of Indian partnership act 1932, @6% interest on loan must be
paid.Whether firm earns profit or not.

AS PER AGREEMENT=Interest can be given

SALARY OR COMMISSION TO PARTNERS

AS PER ACT 1932 =No salary no commission allowed .Whether firm earns profit or not.

AS PER AGREEMENT =Salary, commission can be given: in case of loss not to be given .

IF PROFIT AT CHARGE=To be given in case of loss even

PARTNERSHIP DEED

A=All details are mentioned in partnership deed. B=It may be registered or not.

IF NO AGREEMENT

1 No salary. 2 No interest on capital. 3 No interest on drawings .4 Interest on loan @6%

5 Profit sharing ratios must be equal. 6 Salary and interest on capital is payable only if there is a profits. 7 If
agreement provides such salary and interest on capital it should be paid only when profit exists (in loss no such
would be Paid)
 RATIO OF PROFIT

AS PER ACT 1932 =Always to be divided equally /AS PER AGREEMENT

As per pre decided ratio and mentioned in agreement

WHAT EFFECT IS IF CHARGE ON PROFITS?

IF INTEREST ON CAPITAL IS GIVEN CHARGE ON PROFIT. IT IS DEBITTED TO PROFIT AND LOSS ACCOUNT.

CONCLUSION

1 Act 1932 section 4 definition. 2. Maximum members 50

3. As per Act, interest on loan 6 %. treated as Charged against profits. . It is debited to P & L account. It is done
before appropriation of profits.

4. EQUALYY Profits/ loss are shared .5. NO Interest on capital allowed

6. NO Interest on drawings charged. 7. NO Remunerations, salary, commission allowed/paid

8. CAN BE=As per section 30, minors may be admitted for sharing of profits.

9 CONSENT OF ALL, As per section 31, new partner with consent of all or if express agreement otherwise. 10
MAY RETIRE, As per section 32 may retire from firm either with consent of all or as expressed agreement

11. OPTIONAL: Section 69 Registration is optional/ 12. ON DEATH As per section 35, firm is dissolved on
death of partner / unless agreed.

13. CHARGE ON PROFIT, means that the amount should be paid or credited to partner ‘capital account
whether firm earns profit or not.

Whereas Appropriation means that it is allowed only on profit.

P & L appropriation account is extension of P & L account. Net profit or loss as per P & L account is transferred
to show its appropriation. It is credited with net profit or debited with loss.

PROFIT AND LOSS APPROPRIATION ACCOUNT

Debited: Credited:

1= interest on capital, 1=Net profit

2=Interest on drawings

2=Partners salary

3=Partners commission

4=Reserve

5=To profit transferred to partners’ capital account