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Cbse, class12, accountancy, sample papers, practice papers with solution, 3 new ratios
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PART - A : ACCOUNTING FOR PARTNERSHIP FIRMS AND COMPANIESUNIT – I: ACCOUNTING FOR PARTNERSHIP FIRMS
CHAPTER-1
BASICS OF PARTNERSHIP
Meaning of Partnership,
Partnership Deed & Partners'
Topic-1 Capital Accounts
Concepts Covered Meaning of Partnership, Features/Characteristics of Partnership,
Concept and contents of Partnership deed, Types of Partners, Method of maintaining
Capital Accounts of Partners
Revision Notes
Meaning of Partnership : According to Indian Partnership Act, 1932, ''Partnership is 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.” The Act also
explains that persons who have entered into partnership with one another are individually called “partners” and
collectively “a firm.”
Characteristics of Partnership :
(i) Association of two or more than two persons : It is essential for the Partnership that there must be at least two
persons who are competent for agreement because less than two persons does not establish partnership.
(ii) Maximum number of partners : Rule 10 of Company (Miscellaneous) Rules, 2014 says that no association of
partnership shall be formed, consisting of more than 50 persons for the purpose of carrying on any business.
(iii) Existence of an agreement : Partnership is the outcome of an agreement between two or more persons to
carry on business. This agreement may be oral or in written. The Partnership Act, 1932 (Section 5) clearly states
that “the relation of partnership arises from contract and not from status.”
(iv) Existence of business : Partnership Act, 1932 [ Section 2(6)] states that a “Business” includes every trade,
occupation and profession. Business of course, must be lawful and its main object should be to earn profit.
Partnership Deed
According to Section 5 of the Indian Partnership Act, 1932, Partnership Deed is an agreement between two or
more than two partners for determining their mutual contractual relationship and its limitation for better and
effective operation of business. It contains rules and conditions for operation of business. It can be registered or
unregistered. It should be comprehensive to avoid disputes later on.
The document which contains terms of the agreement is called 'Partnership deed'.
Fundamental Fact
Partnership Business in India is regulated by the India Partnership Act 1932.
Contents of Partnership Deed
(i) Name and Address of all Partners
(ii) Name and address of the Firm
(iii) Nature of the Business
(iv) Capital to be contributed by each Partner
(v) Rate of Interest on Capital
(vi) Drawings allowed to the Partners
(vii) Rate of Interest on Drawings
,2 Oswaal CBSE Revision Notes Chapterwise & Topicwise, ACCOUNTANCY, Class-XII
(viii) Profit and Loss Sharing Ratio
(ix) Partner’s Salary and Commission
(x) Method of Valuation of Goodwill
(xi) Settlement on Dissolution of Firm
(xii) Duration of Partnership
(xiii) Methods of valuation of Assets and Liabilities
(xiv) Lending and Borrowing by the Partners
(xv) Admission and Retirement of Partners
(xvi) Duties of Partners
(xvii) Death of a Partner and his legal representative
(xviii) Insurance and its distribution
(xix) Relinquishment of Partnership
(xx) Arbitration Clause
(xxi) Maintenance of Accounts and their Audit
(xxii) Settlement of Disputes of the business
(xxiii) Treatment of loss arising out of insolvency of one or more partners
Different types of Partners in Partnership Firm are given below :
(i) Active Partner: A person who provides his share in capital and also takes active part in the management of the
business. The development of business depends upon the active partners.
(ii) Sleeping or Dormant Partners: These partners only provide capital and also share the profits and losses of the
business. A sleeping partner does not take active part in the management of a firm. These are not known to
public as partners.
(iii) Silent Partner: A silent partner is known to the public as a partner. He does not participate in the affairs of the
management. But he is liable to pay debts of the firm.
(iv) Secret Partner: He takes active part in the business but public does not know him as a partner of the firm. He
is liable to pay all the debts of the firm.
(v) Nominal Partner: These partners do not share the profits and losses of the firm. These partners do not
participate in the management of a firm. A firm only uses the name and reputation of the partners. So these
are called nominal partners.
(vi) Minor Partner: A minor may become a partner with the consent of all the partners. A minor is admitted in the
profits of the business only. He has no liability for losses.
(vii) Senior Partner: A person who is playing an important role in the management according to his ability,
experience and capital is called senior partner.
(viii) Junior Partner: A person who has small investment in the firm and has a limited experience of business is
called junior partner.
(ix) Limited Partner: A partner whose liability is restricted to his share only is called limited partner. He cannot
take part in the management of a firm.
(x) Unlimited Partner: When the liability of the partner is unlimited, he is called unlimited partner. The debts of
the firm can be paid even by using the personal property of that partner.
Applicable provisions of the Indian Partnership Act, 1932 in the absence of Partnership Deed:
(i) Interest on partner’s loan will be paid @ 6% p.a.
(ii) If deed is silent regarding interest on capital, no interest on capital is to be allowed.
(iii) If deed is silent regarding interest on drawings or charges on drawings by partners, no interest on drawings
is to be charged.
(iv) If deed is silent regarding salary or remuneration or commission of partners for their services, no salary or
remuneration or commission is to be allowed to any partner.
(v) If deed is silent regarding profit sharing ratio, profit will be distributed equally.
Example 1
Ram and Shyam are partners in a partnership firm. Partnership deed is not present. Some issues arrived
in their firm due to absence of partnership deed. Help them to resolve the following issues giving proper
judgement :
(i) Shyam has advanced a loan of ` 1,00,000 to the firm and demanding interest @ 12% p.a. on loan but Ram
is ready to charge interest @ 6% p.a.
(ii) Ram is an active partner and manages almost every managing activity. So he is demanding remuneration
for his work but Shyam is refusing.
(iii) Shyam wants to charge interest on capital @ 10% p.a. but Ram is refusing for it.
(iv) Ram wants to charge interest on drawings @ 12% p.a. but Shyam is refusing.
, Oswaal CBSE Revision Notes Chapterwise & Topicwise, ACCOUNTANCY, Class-XII 3
Ans. (i) R am is correct in the first issue. In the absence of partnership deed, interest on partner’s loan is allowed
@ 6% p.a.
(ii) In this issue, Ram will not be paid any remuneration as in the absence of partnership deed, no salary to be
paid to partner.
(iii) Interest on capital will not be charged in the absence of partnership deed. So Ram is correct.
(iv) Interest on drawings will not be charged in the absence of partnership deed. So Shyam is correct.
Methods of Maintaining Capital Accounts of Partners
There are two methods by which the capital accounts of partners can be maintained. These are:
(i) Fluctuating Capital: When partners decide to maintain only Capital Accounts for each partner, all entries
regarding Interest on Capital, Interest on Drawings, Salary, Share in Profit or Loss and Drawings will be made
in the Capital Accounts. In this case, capital will be fluctuating from year to year. This is known as Fluctuating
Capital.
(ii) Fixed Capital: When partners decide that their capitals will remain fixed and it will not change due to Interest
on Capital, Interest on Drawings, Salary or Share of Profit or Loss and Drawings, it is termed as Fixed Capital.
In this case, there will be two accounts for each partner: Capital Account and Current Account. Entries for
Interest on Capital, Interest on Drawings, Salary, Share of Profit or Loss and Drawings will be made through
Current Account. However when there are frequent drawings, a separate Drawings Account may be opened
for each partner. At the end of accounting year, balance of each Partner’s Drawings Account will be transferred
to their respective Current Accounts.
Fundamental Fact
LLP Stands for Limited Liability Partnership in which the liability of all the partners (except one partner) is limited.
Proforma of Partner’s Capital Account under Fluctuating Capital Method
Dr. Partner’s Capital Account Cr.
Date Particulars Amount (`) Date Particulars Amount (`)
To Balance b/d By Balance b/d
(in case of debit opening (in case of credit opening
balance) .............. balance) ..............
To Drawings A/c .............. By Cash/Bank A/c
To Interest on drawings A/c ............. (Additional Capital) ..............
To Profit & Loss A/c By Interest on Capital A/c ..............
(Share in Loss) .............. By Commission A/c ..............
To Balance c/d By Partner's Salary A/c ..............
(Balancing Figure) .............. By Profit & Loss Appropria-
tion A/c ..............
(Share in Profit)
By Balance c/d ..............
(Balancing Figure)
.............. ..............
Proforma of Partner’s Capital Account under Fixed Capital Method :
Dr. Partner's Capital Account Cr.
Date Particulars Amount (`) Date Particulars Amount (`)
To Cash/Bank A/c By Balance b/d ..............
(Withdrawal of Capital) .............. By Cash/Bank A/c
To Balance c/d .............. (Additional Capital ..............
Introduced)
.............. ..............
, 4 Oswaal CBSE Revision Notes Chapterwise & Topicwise, ACCOUNTANCY, Class-XII
Proforma of Partner’s Current Account under Fixed Capital Method :
Dr. Partner's Current Account Cr.
Date Particulars Amount (`) Date Particulars Amount (`)
To Balance b/d By Balance b/d
(if there is old debit balance) .............. (if there is old credit balance) ..............
To Drawings A/c .............. By Interest on Capital A/c ..............
To Interest on Drawings A/c .............. By Salary A/c ..............
To Profit & Loss A/c By Commission A/c ..............
(Share in Loss) .............. By Profit & Loss Appropria-
To Balance c/d tion A/c ..............
(if credit side total is more) .............. (Share of Profit)
By Balance c/d ..............
(if debit side total is more)
.............. ..............
Preparation of Profit and Loss Appropriation
Account and Treatment of Goodwill
Topic-2 Concepts Covered Division of profits among partners, Preparation of profit and
loss appropriation account, Calculation of appropriation and charge items, Adjustment of
past adjustments, Guarantee of profit, Treatment of goodwill
Revision Notes
Division of Profits among Partners
The net profit as shown by the Profit and Loss Account of a partnership firm requires certain adjustments with
regard to interest on capitals, interest on drawings, etc., if provided under the terms of agreement. In fact, it is an
extension of the Profit and Loss Account and is credited with the net profits and interest on drawings and debited
with interest on capital, salary to partners, etc. The balance (if any) will be distributed among the partners in their
agreed ratio.
Journal Entries regarding Profit and Loss Appropriation Account are as follows :
1. Transfer of balance of Profit and Loss Account :
(a) If Profit & Loss Account shows a credit balance (Net Profit) :
Profit & Loss A/c Dr.
To Profit & Loss Appropriation A/c
(Being transfer of net profit to Profit & Loss Appropriation A/c)
(b) If Profit & Loss Account shows debit balance (Net Loss) :
Profit & Loss Appropriation A/c Dr.
To Profit & Loss A/c
(Being transfer of net loss to Profit & Loss Appropriation A/c)
2. Interest on Capitals :
(a) For crediting interest on capital to Partners’ Capital Accounts :
Interest on Capital A/c Dr.
To Partners’ Capital/Current A/cs
(Being interest on capital at ____% p.a. allowed to partners)
(b) For transferring interest on capital to Profit and Loss Appropriation Account :
Profit & Loss Appropriation A/c Dr.
To Interest on Capital A/c
(Being interest on capital transferred to Profit & Loss Appropriation A/c)
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