PARTNERSHIP Partnership Act 1932 Partnership Act 1932

In order to meet the requirements of a growing business, two or more persons may become owners thereof , each bringing in a certain amount of capital and sharing the profits in agreed proportions. Such a relationship is called partnership.
Definition:
According to Section 4 of the Partnership Act 1932, partnership is defined as “the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”

1. PARTNERSHIP Dr.M.Devaki Assistant Professor Sri Ramakrishna College of Arts & Science (Autonomous)

2. Partnership In order to meet the requirements of a growing business, two or more persons may become owners thereof , each bringing in a certain amount of capital and sharing the profits in agreed proportions. Such a relationship is called partnership. Definition: According to Section 4 of the Partnership Act 1932, partnership is defined as “the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”

3.  The essential features of partnership are: There must be an agreement entered into between two or more persons. The object of the agreement must be to share the profits of a business. The business must be carried on by all or any of the persons concerned acting for all. It is formed to carry on a lawful business. It is an association of two or more persons ie ., the number of persons constituting a partnership must not exceed ten, in case of a banking business and twenty in other business.

4. Partnership Deed - Key Points Definition : A formal agreement between two or more persons to conduct a business jointly for mutual benefit. Legal Requirement : Writing is not legally required but highly recommended. Purpose : Ensures clarity on terms, responsibilities, and profit-sharing. Contents of Partnership Deed : Partner details Capital contributions Profit-sharing ratios Roles and responsibilities Dispute resolution mechanisms Benefits : Reduces misunderstandings, protects interests, and serves as a legal reference.

5. Rules Applicable in the absence of partnership deed In the absence of an agreement, the under mentioned points should be noted for proper accounting amongst the partners. 1. Profit sharing ratio: Profits and losses are to be shared equally amongst partners. 2. Interest on Loan: On any loan (apart from capital) advanced by a partner, he/she is entitled to interest on the same at 6% per annum. 3. Interest on Capital: No interest is to be allowed on capitals. If under the agreement, interest is to be paid, it will be allowed only when there is profit. In case of loss, no interest can be allowed. 4. Salary to partners: Partners are not entitled for any salary or other remuneration. 5. Interest on Drawings: No interest is to be charged on drawings.

6. Accounts of Partnership Firm Double Entry System : Daily transactions of a partnership firm are recorded using the double entry system, similar to a sole trader's accounts. Profit & Loss Account : Calculates the net profit for the period. Profit & Loss Appropriation Account : Purpose: Shows how the net profit is distributed or appropriated. Includes: Profit for the period and any balance from the previous year. Appropriation Details : Indicates how profits are allocated, including partners’ shares, interest on capital, salaries, and other distributions. This account provides a structured view of how profits are handled within the partnership, ensuring transparency in profit distribution.

7. Necessary Adjustments in Accounts: 1. Interest on Capital Provision in Partnership Deed : Interest on partners' capital is only allowed if specifically mentioned in the partnership deed. Purpose : Compensates partners who have contributed more capital by dividing part of the profit in proportion to their capital contributions. Impact on Profit Sharing : If capital ratios and profit-sharing ratios are equal, not charging interest on capital does not affect profit distribution. Calculation Basis : Calculated on the opening balance of partners' capital. If opening capital is unknown, adjust the capital balance by: Subtracting any additions. Adding any subtractions to the capital. Interest on capital ensures a fair distribution of profit in cases of unequal capital contributions among partners.

8. 2. Interest on Drawings Absence of Agreement : No interest is charged on drawings if there is no prior agreement among partners. Interest on Drawings with Interest on Capitals : Typically, interest on drawings is charged if interest on capitals is allowed to ensure fairness. Calculation and Debit of Interest : The interest amount for each partner’s drawings is calculated and then debited to the partner's respective Capital Account or Current Account , depending on the account system used. Credit to Profit and Loss Appropriation Account : The corresponding credit entry is made to the Profit and Loss Appropriation Account .

9. Calculation Based on Each Withdrawal Date : Interest on drawings is calculated individually for each withdrawal, from the date of withdrawal to the date of account closure. Methods of Calculation : Product Method : Multiply each withdrawal by the period (in months) for which it is outstanding, and then calculate interest on the total. Average Due Date Method : Useful when there are multiple withdrawals; a single average date is used to simplify interest calculation. Assumption for Mid-Month Withdrawals : When dates of withdrawals are unknown , assume withdrawals are made mid-month and calculate interest for 6 months . Fixed Sum Withdrawals at Month-End : If fixed sums are withdrawn at the end of each month , calculate interest on total drawings for 5½ months . Fixed Sum Withdrawals at Month-Start : If fixed sums are withdrawn at the beginning of each month , calculate interest on total drawings for 6½ months .

10. 3. Partners' salary or commission: Special Compensation for Contribution : Partners who contribute more time, skills, or expertise may receive additional compensation, such as a salary or commission . Not a Business Expense : This compensation is not considered a business expense . Instead, it is treated as a part of profit distribution among partners. Partnership Deed Requirement : For salary or commission to be payable to a partner, there must be a specific provision in the partnership deed authorizing it. Charge to Profit & Loss Appropriation Account : The salary or commission to a partner is debited to the Profit and Loss Appropriation Account and credited to the partner’s Capital or Current Account. Division of Remaining Profit : After charging the salary or commission, the remaining profit is divided among partners according to their agreed profit-sharing ratio .

11. 4. Interest on Partners' Loan Loan Separate from Capital : If a partner loans additional money to the partnership beyond their agreed capital contribution, a separate Loan Account must be created for that amount, distinct from the Capital Account . Default Interest Rate : In the absence of a specific agreement, this loan will automatically carry 6% interest per annum . Independent of Capital Interest : This 6% interest on the loan is payable regardless of whether interest is being paid on capital contributions or not. Business Expense : Interest on the partner’s loan is considered a business expense and is debited to the Profit and Loss Account .

12. Profit and Loss Appropriation Account Interest on Capital : Adjustments are made for interest on capital contributed by each partner, rewarding their capital investment. Interest on Drawings : Any drawings by partners incur an interest charge, which is adjusted in this account, reducing their share. Salary and Commission to Partners : If the partnership agreement allows for salaries or commissions to partners for their efforts, these are credited to their accounts. Distribution of Profit or Loss : After adjustments, the remaining profit or loss is divided among partners as per the agreed profit-sharing ratio.

13. Capital Accounts of Partners In partnership accounting: Capital Accounts : Each partner has an individual capital account. Contribution Entry : When a partner invests, Cash or Property Account is debited, and the Partner’s Capital Account is credited. Purpose : Records each partner's investment in the business, either in cash or kind. The capital accounts may be prepared under the following two methods viz : Fixed Capital Method and Fluctuating (Floating) Capital Method

14. Fixed Capital Account Under this method, there are two accounts for each partner: (1) Partners' capital account (2) Partners' current account Capital Account : Purpose : Records only the initial capital contribution and any additional capital or permanent withdrawals. Fixed Balance : No adjustments for drawings, interest, or profits; remains stable unless there is a change in capital. Current Account : Purpose : Tracks ongoing adjustments like interest on capital, drawings, share of profits, partner salaries, and commissions. Fluctuating Balance : Changes with each transaction, reflecting the partner’s active account balance.

15. Fluctuating (Floating) Capital Method Single Capital Account : Only one capital account is maintained per partner. Frequent Changes : Adjustments for drawings, interest, salary, commission, and profit/loss share are made directly in the capital account. Fluctuating Balance : The account balance changes with each adjustment, resulting in a different capital balance at the start and end of the period. This method reflects all partner-related transactions in a single account, allowing capital to vary over time.

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