Accounting for Partnership: Basic Concepts
Class 12 Accountancy · Accountancy Part I · Chapter 1
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Economics
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Economics
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History
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History
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History
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Geography
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Geography
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Geography
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Home Science
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Summary
When two or more persons agree to carry on a business and share its profits and losses, they form a partnership, as defined in Section 4 of the Indian Partnership Act 1932. The essential features are an association of two or more persons (maximum 50), an agreement, a lawful business, mutual agency and the sharing of profits. The agreement among partners is recorded in a written partnership deed; where the deed is silent, the provisions of the Act apply, so profits and losses are shared equally, no interest is allowed on capital or charged on drawings, no salary is paid to any partner, and a partner who advances a loan to the firm earns interest at 6% per annum. Partners may keep their capital accounts under the fixed capital method (separate capital and current accounts) or the fluctuating capital method (a single capital account). Profits are distributed through a Profit and Loss Appropriation Account, which records interest on capital, partners' salary or commission, interest on drawings and the final division of the remaining profit in the agreed ratio. The chapter also explains the guarantee of a minimum profit to a partner and the use of a past adjustment entry to rectify errors or omissions in earlier appropriations.
Nature and features of partnershipPartnership deed and rules in its absenceFixed vs fluctuating capital accountsProfit and Loss Appropriation AccountInterest on capital, drawings and guarantee of profit
Key terms
Partnership
The relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all (Section 4, Indian Partnership Act 1932).
Partnership Deed
A written agreement among partners stating the terms governing capital, profit sharing, interest, salary and other matters.
Mutual Agency
The principle that each partner is both principal and agent, able to bind the firm and the other partners by acts done in the course of business.
Profit and Loss Appropriation Account
An extension of the Profit and Loss Account that distributes net profit among partners after charging appropriations such as interest on capital and salary.
Fixed Capital Method
A method in which each partner keeps a fixed capital account and a separate current account for adjustments like interest, salary and drawings.
Interest on Drawings
A charge made on amounts withdrawn by a partner for personal use, credited to the firm and debited to the partner.
Extra questions & answers
Try one from this chapter
Which Act defines partnership and applies when the partnership deed is silent?