Fundamentals of

Partnership firmS

CLASS 12
ACCOUNTANCY
 NOTES
Fundamentals of Partnership firm

Fundamentals of Partnership firm

According to Indian Partnership Act 1932, Section 4 "Partnership is the
relation b/w persons who have agreed to share the profits of a business
carried on by all or any of them acting for all .

Note - Accounting point of view - Partnership is separate legal entity.

Legal point of view - not a separate legal entity.
ie.. firm debts can be paid through private assets.

Features
-Two or more persons [ Exempt Minor, unsound mind etc ]
-Carried on by all or any one acting all.
-ie. Both agent as well as principle
-Limit of members → [2 -50]

Partnership deed
Written deed is not mandatory but it is desirable in order to settle
dispute.

In case of no written deed, provisions of IPA 1932 shall apply

Provisions → as per IPA 1932.
1) Sharing of Profit - Equally.
2) Interest on capital - not paid.
3) Interest on loan by a partner - 6%.p.a.
4) Interest on drawing - not changed.
5) Salary, commission to partner - not paid.

CLASS 12 ACCOUNTS
 NOTES
Fundamentals of Partnership firm

Note - Limited liability partnership [ Act, 2008] came into effect from
31st March 2009
- under this, liabilities of partners are limited.
- Partners are not liable for other partners action.

Note 2 - Minor can be admitted as partner but he will be partners in

benefit.

Profit and loss appropriation A/C

In case of Partnership.
Profit & loss appropriate a/c
balance sheet
p&L

[using Net profit as per P&L]

It shows the appropriation of profit among partners

It is an extension of P&L A/C.

Note - Two types of profits

net profit
divisible / distributable profit

CLASS 12 ACCOUNTS
 NOTES
Fundamentals of Partnership firm

Profit and loss App. A/C for the year ending

particulars ₹ particulars ₹

To P&L (Net loss) By P&L (N.P)* XX

To Part Sal / comm. [Profit-Any item of P&L]
A - xx By Int. on drawings
B - xx A - xx
XX
_______ B - xx XX
To Int. On capital ______
A - XX
B - xx
XX
________
To Reserve
XX
To Profit transferred)
Part. cap.
A - XX
B - XX
XX
_______ _____
____
XX
XX

Important points before making P&L App.

Amount of complete year should be taken. ie. p.a.
It any amount is already given, then it has to be taken back.
It any adjustment related to P&L exist. then it should be adjusted
firstly; [Before making P&L A/c].

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CLASS 12 ACCOUNTS
 NOTES
Fundamentals of Partnership firm
NOTE : Any amount payable to a partner is not a charge against profit
except Intrest on partner loan [if not mentioned in question]

→ Rent to a partner :
Treated as a charge (necessary to pay)
It is Debited to P&L A/c and credited to Part. current / cap A/c..
[if specified in question]
→ P&L A/C ______Dr
To Partners cap. A /c

Special aspects of partnership a/c

1. Partner's cap Accounts :-
Individually made for each partner.
Can be maintained by 2 methods :-
a) Fixed cap A/c's method.
It means that the cap. of partners remains fixed ie.. unalter
In this method capital & current a/c's are created.

i) Capital A/c: Show same bal. until and unless additional cap
introduced or Some cap is withdrawn

ii) Current A/c:- Bal. of this a/c fluctuates..

It is maintained to record the transaction other than introduction or
withdrawn of cap. ie..
Share of profit - credited
share of loss - Debited

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CLASS 12 ACCOUNTS
 NOTES
Fundamentals of Partnership firm
b) fluctuating capital A/c's method :-
only one account ie.. "capital a/c" is maintained for each partner
capital a/c is said to be fluctuating as balance alter.
under this method if capital a/c has
credit bal. - liability side
Debit bal. - Assets side.

Dr. Partners capital A/C 's Cr.

Particular x y Particular x y

To Bal b/d [when Dr.] - - By Bal b/d [when Cr. bal] - -

To Drawings A/c - - By cash / Bank A/C - -
To Int. on drawing A/c - - [Add. cap] - -
To P&L App. A/C - - By Int on capital A/c
- -
[Loss] By commission A/c
- - - -
To Bal c/d By Salary A/c
- - - -
By P&L App. A/C (Profit)
- -

The balance may be in credit side also

NOTE - Under fixed cap A/c method cap A/c always show Cr. balance
under fluctuating cap A/c with balance may be Cr. or Dr.

CLASS 12 ACCOUNTS
 NOTES
Fundamentals of Partnership firm
3. Interest on partners capital
Computed on the opening Balance of partner's capital.
If additional cap. is introduced then intrest is calculated on it for the
time it remained in business.

Provision related to I.o.c

Case Provision
1.Partnership deed is silent -not allowed
2.Intrest on capital is given in -only allowed if there is profit
deed, but it is silent about the 1 loss → not allowed
treatment as a charge on 2. profit is more (-) allowed at an of
preparation = to int aggred ratio
3. profit is inadequate = int. is
allow to the extent of profit in the
ratio of int. on cap on each part.

3. I.O.C Is treated as charge - allowed even it is loss.

Journal entries Compound

I.O.C A/c ....Dr P&L A/c .....Dr.
To par. capital / current A/c To part. cap A/c
P&L App. A/c...... Dr
To I.O.C A/c

CLASS 12 ACCOUNTS
 NOTES
Fundamentals of Partnership firm
Calculation of opening capital :-

capital at the end - -

Add: loss during yr.
Drawing × I.O.D - -

less: Share of Profit

Add .cap [if any] - -
Int. on cap. - -

capital in the beginning of the yr. - -

4. Salary or commission to the partners:

It is provided if partnership deed permits.
commission is allowed to the partner either.

A) as a percentage of the net profit Before charging the comm.

→ Net Profit x Rate of commission
100
B) After charging
→ Net profit × Rate of comm.
100 + Rate of comm.
Journal entries
Partner's Salary / comm. A/c........ Dr
To Partner's current/ cap A/c..

P&L App. A/c......... Dr

To Partner's Salary/Comm A/c

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CLASS 12 ACCOUNTS
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Fundamentals of Partnership firm
5. Interest on part loan :-
In the absence of any agreement, Acc. to Partnership Act 1932, Interest
on Partners loan 6% P.A.
It is a charge against profit [Payable at all circumstances]

Journal entries
Int. on part loan A/C. ...... Dr
To Part loan A/c

P&L A/c.....Dr
To Int. on part. loan A/c.

→ Int .on loan does not. credited to part cap A/C

→ At the time of dissolution loan has priority offer capital to repay.

6. capital ratio
Sometime, Profit and loss is share in capital ratio.
when cap are fixed, profit will be distributed in that fixed ratio when
fluctuating capital exist average capital is taken as a base to find capital
ratio.

Average cap = capital [individually] × No. of months it remains in business

The resultent will be added, and total is taken as a base.

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Fundamentals of Partnership firm
Past adjustments
when it is found [after closing the books] that some adjustments were
not made then an adjustment entry is passed to rectify the error.
Step involved
1. Prepare an analytical table.
A B C D

Particulars Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.

2. loss to the partner = Dr. in his A/c

→ Profit to the firm Cr. in firm A/c
→ Profit to the partners = Cr. In his A/c
→ loss to the firm & Dr. in firm A/c
3. Bal. will be distributed to partner in profit showing ratio.
4. Total has been made..
5. Then a journal entry is passed
[Based on step 4].

NOTE: If the bal. after dividing profit. is on credit or on debit side then
in Journal entry it will recorded same side.

CLASS 12 ACCOUNTS
 NOTES
Fundamentals of Partnership firm

Guarantee of profit
Guarantee of minimum profit, Such guarantee can be given by :-
a) all the old partners at an agreed ratio, or
b) Some of the old partners

when all partners guarantee that one partner shall be given minimum
amount of profit, we have to calculate the following two amount
separately.

i)Share of profit as per new Profit Sharing ratio.

ii)Minimum guaranteed profit.

And the higher of the above 2 will be given to him and the remaining
balance will be shared in remaining partner in the profit sharing ratio.

when the new partner's share of profit > guaranteed amount

his actual share of profit is given to him instead of guaranteed amt.

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