Partnership Accounting-Fundamentals of Partnership

Fundamentals of Partnership Accounting

1. UNIT I
INTRODUCITON TO PARTNERSHIP
ACCOUNTING
Mrs.G.Thamaraiselvi
Assistant Professor,
Department of Commerce, KARE.

2. A Partnership firm is an association
of two or more persons to carry on
a legal business and share its
profits or losses. The persons who
join hands together to do a
business are individually known as
partners and collectively a firm

3. According to Sec. 4 of the Indian
Partnership Act, 1932, “The term
partnership is the relation
between two or more persons
who have agreed to share the
profit of the business carried on
by all or any of them acting for
all.

4. 1. At least two persons: There must be at
least two persons to form a partnership and
all such persons must be competent to
contract
2. Agreement: There must be an agreement
to form a partnership. This agreement can be
oral or written.
3. Legal Business: An agreement should be
for the purpose of carrying on the business or
profession. The business to be carries on by
the partners should be legal

5. 4. Profit sharing: The agreement between
the partners must be to share the profits or
losses of the business in the particular ratio.
5. Mutual agency: There should be a mutual
agency relationship among the partners.
Mutual agency relationship means that each
partner is both an agent and the principal.
Each partner s an in the sense that he can
bind the other partners by his acts done.

6. 6. Number of partners: The minimum limit
of the partners in a firm is two and maximum
number of partners in a banking firm should
be 10 and in he other firm should be 20

7. As stated above a partnership is forms by an
agreement. This agreement can be oral or
written.
Though the law does not expressly require
that there should be an agreement in writing
but the absence of written agreement may
be the source of problem in managing the
affairs of the partnership firm.

8. Name of the firm
Name and addresses of all the partners
Nature and place of the business
Duration of partnership
Date of commencement of partnership
Amount of capital contributed by each
partners
Ratio in which profits and losses are to be
shared

9. Interest on partner’s capital and drawings
Interest on loan by the partner to the firm
Salary, Commission, etc. If any payable to a
partner
Method of calculation and treatment of
Goodwill on the reconstitution of the firm
Mode of settlement of accounts in case of
retirement and death of a partner
Mode of settlement of accounts in case of
dissolution of the firm

10. The partners will share the profits and losses
in the equal ratio
Interest on loan will be given @ 6% p.a. To
the partners
No interest is allowed to partners on the
capital invested by them
No partner is to get any remuneration such
as salary, commission, etc, for participating
in the business
No interest will be charged on drawings
made by the partners.

11. It is an extension of Profit and Loss Account
that is prepared to distribute the net profit
among the partners.
All adjustments relating to partners like
interest on capital, interest on drawings,
commission to partners, etc. Are made in
this account

12. The main purpose of preparing Profit and
Loss Appropriation Account of a partnership
concern is to calculate and distribute the
divisible profit and loss.
The income Tax Act and the audit rule does
not permit the partnership firm to consider
the amount as business expenditure which is
payable to the partners

13. The partner’s capital accounts are
maintained according to Fluctuating Capital
Method or Fixed Capital Method

14. Under fluctuating capital method, only one
account such as Capital account for each
partner is maintained and all the
transactions relating to a partner are
recorded in partners’ capital account. As a
result, the balance in the capital account
keeps on fluctuating.

15. Under fixed capital method, two accounts
such as capital account and current account
for each partner are maintained.
The transactions relating to introduction or
withdrawal of capital are recorded in capital
account and other transactions like Interest
on capital, salary, interest on drawings are
recorded in Current Account

16. Basis Fixed Capital
Method
Fluctuating Capital
Method
Change in CapitalThe capital remains
unchanged except in
some special
circumstances
The capital fluctuate
quite frequently from
period to period
No. of accountsTwo accounts are
maintained such as
capital account and
current account
One account is
prepared like capital
account

17. Basis Fixed Capital
Method
Fluctuating Capital
Method
Adjustments of
drawings, etc.
All adjustments of
drawings, salary, etc.
are done in capital
account.
All adjustments of
drawings, salary, etc.
are done in current
account
Negative balanceFixed capital account
can never show a
negative balance
Fluctuating capital
account can show a
negative balance