Class 12th Subject Accountancy

PARTNERSHIP
(Fundamentals)

According to the section 4 of the Indian partnership Act, 1932, a partnership is a

business relationship among two or more persons to share profits and losses of the
business, carried on by all or any of them acting for all.
FEATURES:-
1. Number of persons:-
There must be at least two persons to form a partnership and all such persons must be
competent to contract, and a maximum number should not be more than 50.
2. Lawful Business:-
Partnership is a business. Business includes trade, vocation and profession. Therefore,
partnership is drawn.
3. Agreement:-
Partnership comes into existence by an agreement, either written or oral. The
agreement among the partners is the leases of their relationship. The written agreement
among the partners is known as partnership deed.
4. Profit Sharing:
The agreement between/among the partners must be to share profits or losses of the
business.
5. Mutual agency:-
Business of the partnership can be carried on by all the partners or by any of them
acting for all the partners. In other words, partners are agents as well as the principals.
PARTNERSHIP DEED:-
Partnership comes into existence by an oral or written agreement.
It is better to have written agreement to avoid any dispute. Their written document known
as partnership Deed details the terms and conditions of partnership. It is a legal document
signed by all the partners and has clauses on the followings:
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 i. Description of the partners.
ii. Description of the firm.
iii. Principal place of business.
iv. Nature of business.
v. Commencement of partnership.
vi. Capital contribution.
vii. Interest on capital.
viii. Interest on drawings.
ix. Profit – sharing ratio.
x. Interest on loan.
xi. Remuneration to partners.
xii. Valuation of goodwill.
xiii. Valuation of assets.
xiv. Settlement of amount.
xv. Settlement of account.
xvi. Accounting period.
xvii. Rights and duties of partners.
xviii. Duration of partnership.
xix. Bank amount operations.
xx. Death of a partner.
xxi. Settlement of disputes.
xxii. Provisions applicable in absence of partnership deed:
Matters Provisions of partnership Act, 1932
Sharing of profits/losses These are shared equally by partners.
Interest on capital It is not paid to partners.
Interest on drawings It is not charged from partners.
Interest on loan It is paid @6% p.a.
Remuneration to partners It is not paid to any partner.

Journal entries related to distribution of profit:

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1. For interest on capital:
Interest on capital a/c ________Dr.
To Partner’s Capital a/c...........................
(Being interest on capitals allowed @.....p.a.)

2. For transferring interest on capital to profit & loss appropriation account:

Profits & loss appropriation account .............. Dr.
To Interest on Capital a/c................
(Being the interest on capital allowed transferred to profit & loss appropriation
account)

3. For charging interest on drawings:

Partner’s capital a/c...................Dr.
To Interest on Drawings a/c ......................
(Being interest charged on drawings)

4. For transferring interest on drawings to profit and loss appropriation account:

Interest on drawings a/c .............. Dr.
To Profit and Loss appropriation account.....................
(Being the interest charged on drawings transferred to profit and loss appropriation
account)

5. For partner’s salary / commission:

Partner’s salary / commission a/c ............. Dr.
To Partner’s Capital a/c.......................
(Being the salary / commission allowed to partners)

6. For transferring partner’s salary / commission to profit & loss appropriation account:
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 Profit and loss appropriation a/c ........Dr.
To Partner’s Capital a/c..............................
(Being the salary / commission allowed to partners transferred to P&L appropriation
a/c).

7. For transferring share of profits to general reserves:

Profits and loss appropriation a/c ............Dr.
To general reserves a/c..............................
(Being the amount transferred to reserve)
8. For distributing share of Profit/Loss to the Partner’s.
a. Profit and Loss appropriation a/c ....................Dr.
To Partner’s Capital a/c
(Being the share of profit credited to partners capital a/c’s)

b. Partners capital a/c .........................Dr.

To profit and loss appropriation a/c
(Being the share of loss debited to Partners)

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