BOOK-KEEPING

&
ACCOUNTANCY
TOPIC:
Procedure
of
Formation Of
Partnership Final accounts.
 Partnership is an Organization where there is an
association of two or more persons coming together to
carry on a business with a view to share Profit or Loss of a
firm

Indian Partnership Act 1932 Section 4 defines the

Partnership as, “It is the relation between persons who
have agreed to share the profits of a business carried on
by all or anyone of them acting for all.”
According to Prof. Handy, “Partnership is the relation
existing between persons competent to make contract,
who agree to carry on a lawful business in common with a
a view to earn private gain
PARTNERSHIP FINAL ACCOUNTS
INTRODUCTION
 Final accounts gives an idea about the profitability and financial position of
a business to its management, owners, and other interested parties.
 All business transactions are first recorded in a journal. They are then
transferred to a ledger and balanced.These final tallies are prepared for a
specific period. The preparation of a final accounting is the last stage of
the accounting cycle. It determines the financial position of the business.
 Final accounts of a partnership firm are similar to that of a sole trader.
Only difference is that the profit is distributed among the partners whereas
in a sole proprietorship it is added to the proprietor’s capital.

Preparation of Partnership Final accounts which consists of

(a) Trading A/c (b) Profit and Loss A/c (c) Balance Sheet
 PARTNERSHIP FINAL ACCOUNTS
INTRODUCTION
Necessity of Preparation of Final Accounts :
 To find out the Gross Profit or Gross Loss incurred during the year.
 To find out the Net Profit or Net Loss of the business.
 To know the financial position of the business at the end of every year.
 To find out the amount of debtors and creditors.
 To prepare various accounts for future planning.
 To find the sources and application of fund.
 To find out the value of goodwill for the purpose of reconstruction of firm.
 To calculate various taxes of firm like income tax, etc.
FEATURES OF PARTNERSHIP FIRM
1. Aggreement : Partnership is a result of agreement between partners. It
could be written or oral. A written agreement is preferred so that it can be
used as a proof in the court of law & such written agreement is known as
“Partnership Deed”.
2. Number of Partners : Minimum two partners are needed to start
partnership firm and the maximum number of Partners are fifty according
to companies Act 2013.
3. Lawful Business : Business undertaken by partnership should be lawful. It
cannot undertake business which is not allowed by State. The definition of
Partnership also does not permit any illegal business.
4. Sharing of Profit and Losses : The purpose of partnership is to earn
maximum profits. Partners have to share profits & Losses according to the
ratio given in the agreement. If the agreement is silent about the ratio then
profit and Loss sharing will be equal.
FEATURES OF PARTNERSHIP FIRM

5. Unlimited Liability : The Liability of Partners is unlimited joint and several

that is, partners are liable till the last rupee in their pocket. If assets of business
is not sufficient to pay liabilities, then personal property of Partners can be used.
If anyone of the partner is declared to solve t then his Liability will be borne by
the solvent partner.
6. Registration : Registration of partnership firm is Compulsory only in the state
of Maharashtra with effect from 1st April 2005.According to Indian Partnership
Act, 1932, registration of partnership firm is optional it means a firm may or may
not be registered. Registration of firm merely certifies its existence and it is a
process of entering the name of Partnership Firm in the register of Register.
7. Joint Ownership & Management : Each partner is joint owner of the property
of the firm, so no partner can use property for personal use. All problems have
equal rights in managing the firm. So all partners are jointly responsible for the
management of firm.
FEATURES OF PARTNERSHIP FIRM

8. Principal and Agent : Each partner works in two fold capacities i. e.

Principal and agent. A partner acts as a principal of the firm with outsiders
and with other partners he acts as an agent.
9. Dissolution : A partnership firm can be dissolved through agreement
between the partner. If a partner wants to close the firm he can dissolve
the firm by giving fourteen days notice. The firm can also be dissolved if a
partner dies or retires, becomes insolent ir insane.
 PARTNERSHIP DEED
 The document containing the Partnership agreement among partners is called
Partnership Deed.
 It contains the terms and conditions which are agreed upon by all the partners.
 An agreement may be written or oral but when its written, it’s called a deed.
 The Partnership Act doesn’t make it Compulsory to have a written agreement.
 However, in case of dispute among the partners, it is always in the best course to have a
written agreement duly signed (by all the respective partners) and registered under the
Act.
 Partnership Deed contains the rules and egulation framed for the internal Management of
the firm. It is also an Article of Partnership.
IMPORTANCE
Partnership deed is a very important document because it is the written agreement which
contains all the terms and conditions of the partnership business. It forms the basis of
mutual relationship among the partner. Moreover, partnership deed regulates the rights,
duties and liabilities of all the partners as well as of firm. So by having partnership deed
partners disputes in future may be avoided. Hence, it is always in favour, to have a written
agreement i.e. Partnership Deed duly signed by all the partners and registered under the
India Partnership Act 1932.
 PARTNERSHIP DEED
CONTENTS

1. Name and address of the firm and its main business.

2. Name and address of all partners and duration of the partnership.
3. Capital contribution of all the partners
4. Ratio in which profits (and losses) are to be shared.
5. Rights,duties and liabilities of the partners.
6. Provisions related to admission, retirement, death etc. of a partner.
7. Rate of interest on capital, loan, drawings etc.
8. Salaries, commission, etc. if payable to any partner.
9. Settlement of accounts on dissolution of the firm .
10. Method of settlement of disputes among the partners.
11. Any other matter relating to the conduct of business.
 PROVISION OF THE INDIAN
PARTNERSHIP ACT 1932
At the time of formation of partnership firm, a document is prepared called
as Partnership Deed and all terms and conditions are mentioned into the
deed, but if the Partnership Deed is silent about any point then this issue is
solved as per the provisions in Partnership Act 1932 Section no. 12 and 17 are
made applicable to determine the following issues.
1. Distribution of Profit : If the Partnership Deed is silent about the profit
sharing Ratio, then the profit and losses are distributed among the
partners is equal Ratio.
2. Interest on Drawings : As per the provision of Indian Partnership Act
1932, if the date of drawing is not given then average of six month’s
interest is charged on drawings.
3. Interest on Partner’s loan : If the partner provides additional amount to
the business as loan, but rate of interest on loan is not given then 6% p. a.
Interest is allowed.
 PROVISION OF THE INDIAN
PARTNERSHIP ACT 1932

5. Salary or Commission to Partners : As per the provision made in the

Indian Partnership Act 1932 no salary, commission, allowance or any
remuneration is to be given to any of the partners for any extra work
done for the firm, However, if any provision is made in Partnership
Deed, then partners are entitled to get commission or salary as per the
agreement.
6. Admission of a new partner : As per the provisions of the Indian
Partnership Act 1932, no outside person can be admitted into the firm as
a partner without the consent of other partners.
 PARTNERSHIP FINAL ACCOUNTS

(A)
(B) (C)
TRADING
PROFIT & LOSS BALANCE SHEET
ACCOUNT
ACCOUNT
 PARTNERSHIP FINAL ACCOUNTS
Trading Account, Profit and Loss account and Balance Sheet can only be prepared with the
following adjustments :
 Closing Stock  Goods stolen
 Outstanding Expenses  Goods distributed as free samples
 Prepaid Expenses  Goods withdrawn by partners.
 Income received in advance  Unrecorded purchases and sales.
 Income receivable  Capital expenditure included in revenue
 Bad debts Expenses and vice versa
 Provision for doubtful debts  Bills receivable Dishonoured
 Reserve for discount on Debtors and  Bills payable Dishonoured.
Creditors  Deferred Expenses.
 Depreciation  Capital receipts included in revenue
 Interest on Capital, Drawings and Loan. receipts and vice versa
 Interest on Investments and loans given  Commission to working partners on the
basis of Gross Profit, Net Profit /Sales etc.
 Goods destroyed by fire/accident
 TRADING ACCOUNT
 Trading Account is a Nominal Account.
 Trading Account is opened in the trading organisation for the purpose to
find out the Gross Profit or Gross Loss incurred during the year.
 In the debit side of this account all direct expenses are recorded and in
the credit side of account all direct incomes of the firm’s are recorded.
 If the trading account’s credit side is more than debit side then account
shows the Gross Profit and vice versa. The Gross Profit or Loss is
transferred to Profit and Loss Account.
 J. R. BATLIBOI :
“The Trading Accout indicates the results of buying and selling of goods while
preparing this account, the general establishment charges are ignored and
only the transactions related to goods are included.”
 A trading account can be any investment account containing securities,
cash or other holdings.
 PREPARATION OF TRADING ACCOUNT
Item written on the Dr. side of the Trading Account:
(1) Opening Stock: Opening stock is the value of goods available for sale in the beginning of an accounting
period. In other words, the closing stock of the last year becomes the opening stock of the current year.
Opening Stock will include the following:
I. Opening Stock of Raw Material.
II. Opening Stock of Semi-finished goods.
III. Opening Stock of Finished goods.
(2) Purchases and Purchases Returns: When a business makes a purchase of goods that it trades in, the
entry for the same is passed through a purchases book. The corresponding entries for the same are passed
in the purchase return book, in case such goods are later returned. Purchase returns will be shown as a
deduction from Purchases on the debit side of the trading account. Purchases include cash as well as
credit purchases.
(3) Direct Expenses: All expenses incurred in purchasing the goods, bringing them to the godown and
manufacture of goods are called direct expenses. Direct expenses include the following:
I. Wages: Wages are paid to workers who are directly engaged in the loading, unloading and production of
goods and as such are debited to the trading account.
II. Carriage or Carriage Inwards or Freight: These expenses should be debited to trading account because
these are generally paid for bringing the goods to the factory or place of business. However, if any
carriage or freight is paid on bringing an asset, the amount should be added to the asset account and must
not be debited to trading account.
 PREPARATION OF TRADING ACCOUNT
III. Manufacturing Expenses: All expenses incurred in the manufacture of goods are
shown on the debit side of the trading account such as Coal, Gas, Fuel, Water,
Power, Factory Rent, Factory Lighting etc.
IV. Dock Charges: These are the charges levied on ships and their cargo while
entering or leaving docks. If dock charges are paid on import of goods they are
shown on the debit side of trading account.
V. Import Duty or Custom Duty: Custom Duty is paid on import as well as on export
of goods. Custom duty when paid on the purchase of goods is charged to trading
account. In the absence of specific instructions, these are debited to trading
account.
VI. Royalty: This is the amount paid to the owner of a mine or patent for using his
right or patent. However, if it is specifically stated in the question that the Royalty
is based on sales, it will be charged to Profit and Loss account.
Items written on the Cr. Side of the Trading Account:
(1) Sales and Sales Returns: The sales account will be a credit balance whereas,
the sales return account or returns inwards account will be a debit balance. Sales
return will be deducted out of Sales on the credit side of the trading account.
 PREPARATION OF TRADING ACCOUNT
(2) Closing Stock: The goods remaining unsold at the end of the year is known as
Closing Stock. It is valued at cost price or market price whichever is less. It
includes the closing stock of raw material, Closing Stock of semi-finished goods
and Closing Stock of finished goods.
Closing Entries Relating to Trading Account :
The preparation of the Trading Account requires that the balances of all such
accounts which are due to appear in the Trading Account are transferred to it.
The entries required for such transfer are termed as Closing entries. These will
be as follows:
1. Purchases Return Account is closed by transferring its balance to Purchase
Account.
2. The Sales Return Account is closed by transferring its balance to the Sales
Account.
3. Another Closing entry is needed to close the trading account itself. If the
credit side of the Trading Account exceeds the debit, the difference will be
Gross Profit. The Gross Profit will be transferred to the credit of a newly opened
account called profit and loss account.
 PROFIT AND LOSS ACCOUNT
 Profit and Loss Account is the type of Nominal Account.
 Profit and Loss account is a main account of income statement.
 It is prepared to ascertain the Net Profit earner or Net Loss suffered by a
business concern during the accounting year.
 All indirect expenses are to be recorded to the debit side, where as all
indirect incomes are to be recorded to the credit side of this account. The
expenses include administrative expenses, selling expenses, distribution
expenses etc.
 The credit balance on this account shows Net Profit which is to be
transferred to Capital Accounts credit side or added in capital. The debit
balance of this account shows, Net Loss which is to be transferred to
Capital Account debit side or deducted from Capital.
 An account in the books of an organization to which incomes and gains are
credited and expenses and losses debited, so as to show the net profit or
loss over a given period.
PREPARATION OF P & L ACCOUNT
Items written on the Dr. side of Profit & Loss Account:
(1) Gross Loss: Loss incurred after deducting the total cost of revenue from
the total revenue earned.
(2) Office and Administrative Expenses: Such as salary of office employees,
office rent, lighting, postage, printing, legal charges, audit fee etc.
(3) Selling and Distribution Expenses: Such as advertisement charges,
commission, carriage outwards, bad-debts, packing charges etc.
(4) Miscellaneous Expenses: Such as interest on loan, interest on capital,
repair charges, depreciation, charity etc.
Items written on the Cr. Side of Profit & Loss Account :
(1) Gross Profit: Gross profit is the profit a company makes after deducting
the costs associated with making and selling its products, or the costs
associated with providing its services.
PREPARATION OF P & L ACCOUNT
(2) Other Incomes and Gains: All items of incomes and gains, such as income
from investments, rent received, discount received, commission earned,
interest received, dividend received etc.
If the credit side of the profit and loss account exceeds that of debit side, the
difference is termed as net profit. On the other hand, the excess of the debit
side over the credit side is termed as net loss. Net profit is added to the
capital whereas net loss is deducted from the capital.
Closing Entries relating to Profit and Loss Account :
The preparation of profit and loss account requires that the balances of all
concerned items are transferred to it by passing the following closing
entries:
1. Accounts of various items of expenses and losses are transferred to the
debit side.
2. Balances of all the accounts of incomes and gains will be transferred to
the credit side.
 BALANCE SHEET
 Balance Sheet is a statement showing financial position of the firm on a
particular day.
 All liabilities are recorded to its left hand side where as all Assets are
recorded to its right hand side.
 The Balance Sheet is not an account but a statement showing the
financial position of a firms, as on a given date in the form of Assets
and liabilities.
 PALMER DEFINES BALANCE SHEET AS :
“The Balance Sheet is, a statement on a particular date showing on one
side the traders property and possessions and on the other side the
liabilities”.
 BALANCE SHEET
Characteristics of Balance Sheet:
(1) A Balance Sheet is a part of the Final Account. This is the reason that the Trading
and Profit &Loss Account and the Balance Sheet are together called ‘Final Accounts’.
However, the Balance Sheet is a statement and not an account. It has no debit or
credit side and as such the words ‘To’ and ‘By’ are not used before the names of the
accounts written therein.
(2) A Balance Sheet is a summary of the Personal and Real Accounts, which are still open
and have not been closed by transfer to the Trading and Profit & Loss Account. Debit
balances of all Personal and Real Accounts are put on the right-hand side known as Assets
side, whereas the credit balances are put on the left-hand side known as Liabilities side.
(3) The totals of the two sides of the Balance Sheet must be equal. If the totals are not
equal, there will be an error somewhere.
(4) Balance sheet is prepared on a particular date and not for a fixed period. As such, it
discloses the financial position of a business on a particular date and not for a period. It is
True only for the date on which it is prepared because even a single transaction would
cause a change in the assets and liabilities.
(5) It shows the financial position of the business according to the going concern concept.
 IMPORTANT POINTS TO PREPARE
FINAL ACCOUNTS
1. If a trial balance is not given in the question, it is better to prepare a Trial Balance
first of all. If there is a difference in the Trial Balance, the difference is placed to a
‘Suspense A/c’ and shown in the Balance Sheet.
2. It should be remembered that all items which appear in the Trial Balance should be
shown only once whereas items which appear outside the Trial Balance, known as
adjustments, have to be shown at two places.
3. The items which appear on the debit side of the Trial Balance should be shown
either on the debit side of the Trading or P and L A/c or on the Assets side of the
Balance Sheet.
4. The items which appear on the credit side of the Trial Balance should be shown
either on the credit side of the Trading or P & L A/c or on the Liabilities side of the
Balance Sheet.
IMPORTANT POINTS TO PREPARE
FINAL ACCOUNTS
5. All accounts relating to Goods such as Purchases, Sales, Purchase Returns and
Sales Returns are written in the Trading Account. In addition to these, the Trading
Account will also be debited with all expenses which are directly related to either
purchase or manufacturing of goods. All the remaining expenses or the balances of
the Nominal Accounts are shown in the Profit & Loss Account.
6. The balances of Personal and Real Accounts are always shown in the Balance
Sheet.
7. If the expenses in respect of ‘Rent’ and ‘Lighting’ are clearly stated as having
been incurred in respect of factory, these will be shown in the Trading Account,
otherwise these will be shown in Profit & Loss Account.
8. If a trial balance is not given in the question, and it is not clearly stated whether a
particular item is expense or income, it will be treated as expense such as Discount,
commission, Brokerage or Rent etc .
9. The total of both sides of the Balance Sheet will always be equal.