CBSE Class 12 Accountancy Accounting For Partnership Firms Fundamentals Notes

Accounting for Partnership Firms

Fundamentals

According to Section4 of the Indian Partnership Act, 1932 :

"Partnership is the relationship between persons who have agreed to the share the profits of a business carried on by all or any one of them acting for all"

Features of Partnership

1. There must be at least two persons to form a valid partnership. Section 11 of the Indian Partnership Act, 1932 restrict the (maximum) number of partners to 10 for carrying on banking business and 20 for other kind of business.

2. Partnership comes into existence by an agreement (either written or oral) among the partners. The written agreement among teh partners is called Partnership Deed.

3. A Partnership can formed for the purpose of carrying at sharing the profits or losses of the business

4. An agreement between the partners must be aimed at sharing the profits or losses of the business.

5. A partnership can be carried on by all or any one of them acting for all. PARTNERSHIP DEED

The partnership deed is a written agreement among the partners which contains the terms of agreement. A partnership deed should contain the following points:

1. Name and address of the firm.

2. Name and addresses of the partners.

3. Nature of the business

4. Terms of Partnership

5. Capital contribution by each partner.

6. Interest on capital

7. Drawings and interest on drawings.

8. Profit sharing ratio

9. Interest on loan.

10. Partner's Salary/commission etc.

11. Method for valuation of goodwill

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12. Accounting period of the firm

13. Rights and duties of partners.

Benefits of Partnership deed

(1) Helps to avoid dispute in future

(2) It is an evidence in the court 

(3) Facilitates functioning of business by avoiding misunderstanding

A Profit and Loss Appropriation Account is prepared to show the distribution of profits among partners as per the provision of Partnership Deed (or as per the provision of Indian Partnership Act, 1932 in the absesnce of Partnership Deed). It is an extension of Profit and Loss Acccount. It is nominal account.

The Journal Entries regarding Profit and Loss Appropriation Account are as follows:

1. For transfer of balance of Profit and Loss Account

Profit and Loss A/c Dr.

          To Profit and Loss Appropriation A/c

(Being net profit transferred to P & L Appropriation A/c)

2. For Interest on Capital

1. For allowing Interest on capital

Interest on Capital A/c

            To Partners' Capital/Current A/cs

(Being interest on capital allwoed @ ___ % p.a)

2. For transferring Interest on Capital to Profit and Loss Appropriation

Profit and Loss Appropriation A/c Dr.

               To Interest on Capital A/c

(Being interest on capital transferre to P & L Appropriation A/c)

3. For Salary of Commission payable to a partner

i.  For allowing Salary or Commission to a partner :

    Partner's Salary/Commission A/c Dr.

                 To Partner's Capital /Current A/cs

(Being salary/commission payable to a partner)

ii. For transferring Partner's Salary/Commission A/c to Profit and Loss Appropriation A/c :

   Profit and Loss appropriation A/c Dr.

              To Partner's Salary/ Commission A/c

4. For transfer of Reserves :

Profit and Loss Appropriation A/c Dr.

            To Reserve A/c

(Being reserve created)

5. For Interest on Drawings :

1. For charging interest on a partner's drawings :

           Partner's Capital/Current A/c Dr.

          To Interest on Drawings A/c

( Being interest on drawings charged @ ____%p.a.)

2. For transferring Interest on drawings to Profit and Loss Appropriation A/c : Dr.

            Interest on Drawings A/c

           To Profit and Loss Appropriation A/c

(Being interest on drawings transferred to P & L Apprpriation A/c)

6. For transfer to Profit (i.e. Credit Balance of Profit and Loss Appropriation Account

             Profit and Loss Appropriation A/c Dr.

             To Partners Capital A/cs

(Being profits distributed among partners)

SPECIMEN OF PROFIT AND LOSS APPROPRIATION ACCOUNT

                                Profit and Loss Appropriation Account

                              For the year ending on ________________

Partner's Capital Accounts : It is an account which represents the partner's interst in the business.

In case of partnership business, a separate capital account is maintained for each partner. The capital accounts of partners may be maintained by following any of the following two methods:

(1) Fixed Capital Accounts

(2) Fluctuating Capital Accounts

1. Fixed Capital Accounts

Under this method the following two accounts are maintained:

1. Capital Account

This account will always show a credit balance. Balance of Capital account remains fixed and only the following two transactions are recorded in the Fixed Capital Accounts:

                                  * Additional Capital Introduced

                                * Capital Withdrawn or Drawings out of Capital

2. Current Account

The Current account may show a debit or credit balance. All the usual adjustments such as Interest on Capital, partner's salary/commission, drawings (out of profits), interest on drawings and share in profits or losses etc. are recorded in this account

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