This chapter introduces the basic concepts of a partnership firm and how to account for transactions between partners, based on the Indian Partnership Act, 1932.
Meaning of Partnership:
A partnership is a relationship between two or more persons who have agreed to share profits of a business carried on by all or any of them acting for all.
Defined under Section 4 of the Indian Partnership Act, 1932.
Key Terms:
Partners – Individuals who enter into a partnership.
Firm – The collective name of the partnership.
Partnership Deed – A written agreement between partners defining terms and conditions.
Contents of a Partnership Deed:
Name and address of firm/partners
Capital contributions
Profit-sharing ratio
Interest on capital/drawings
Salary or commission to partners
Rights and duties of partners
Rules for admission, retirement, or dissolution
Provisions (Rules) Applicable in Absence of Partnership Deed (as per Indian Partnership Act):
| Particulars | Rule (if no agreement) |
|---|---|
| Profit sharing | Equally |
| Interest on capital | Not allowed |
| Interest on drawings | Not charged |
| Salary/commission to partners | Not allowed |
| Interest on loan by partner | 6% p.a. |
Capital Accounts of Partners:
Fixed Capital Method:
Two separate accounts maintained:
Capital Account: Shows permanent capital.
Current Account: Shows regular transactions like salary, drawings, interest, etc.
Fluctuating Capital Method:
Only one account is maintained per partner.
Balance changes with every transaction (common method used in exams).
Important Adjustments in Partnership Accounts:
Interest on Capital
Interest on Drawings
Partner’s Salary/Commission
Sharing of Profits or Losses
Past Adjustments:
If any item (e.g., interest or salary) was omitted or wrongly recorded, the error is rectified through an adjusting journal entry.
Guarantee of Profit:
Sometimes a partner is guaranteed a minimum amount of profit. The deficiency, if any, is borne by other partners as agreed.