___ is the basis of relationship between the partners to run the partnership business. (A) Offer (B) Agreement

Question

Q.______ is the basis of relationship between the partners to run the partnership business. (A) Offer (B) Agreement (C) Understanding (D) Acceptance

(OR)

At the time of change in profit sharing ratio among existing partners, 'Reserves' are transferred to Partners' Capital Accounts in the following ratio : (A) Sacrificing ratio (B) Gaining ratio (C) Old profit sharing ratio (D) New profit sharing ratio

CBSECBSE Class XII Board 2023MCQ· 1mImportance★★★★★

✓ Free question

Concept understanding — Partnership Deed Definition

Let’s start with something you already know. Suppose you and two friends decide to start a small business together — say, a tiffin service. You each bring in some money, you decide who will cook, who will deliver, and who will keep accounts. But after a month, one friend says, “I should get extra pay because I do all the cooking.” Another says, “I put in more money, so I should get more profit.” Without a written agreement, you’ll argue endlessly. That’s exactly why a Partnership Deed exists.

Everyday Intuition

A partnership deed is simply the rulebook that partners agree to follow. It’s like the constitution of the partnership. It answers questions like: How much capital did each partner bring? How will profits be shared? Will partners get a salary or interest on their capital? What happens if a partner wants to leave? Without this rulebook, the law (the Indian Partnership Act, 1932) steps in with default rules — but those may not suit your business.

Precise Meaning (as per NCERT Class-12 Accountancy)

A Partnership Deed is a written document that contains the terms and conditions of the partnership. It is signed by all partners and is legally binding. While the law does not compel a written deed (an oral agreement is also valid), a written deed is strongly recommended to avoid disputes.

The deed typically includes:

Name and address of the firm and partners
Nature of business
Capital contribution by each partner
Profit-sharing ratio
Interest on capital, drawings, and loans
Salary or commission to partners
Admission, retirement, or death of a partner
Method of valuing goodwill
Settlement of accounts on dissolution

Important

If no partnership deed exists, the Indian Partnership Act, 1932 applies default rules: profits/losses shared equally, no interest on capital, no salary to partners, interest on drawings at 6% p.a., and interest on partner’s loan at 6% p.a.

Why It Matters in Accounting

The partnership deed is the source document for all accounting entries related to partners. Every adjustment — interest on capital, salary, commission, profit share — is based on what the deed says. If the deed is silent, the Act’s default rules apply.

For example:

If the deed says “Interest on capital @ 10% p.a.”, you must calculate and record it.
If the deed says “Partner A gets a salary of ₹5,000 per month”, you must debit the Profit and Loss Appropriation Account.

Accounting Treatment

All items related to partners (interest on capital, salary, commission, profit share) are recorded in the Profit and Loss Appropriation Account (a special account that shows how net profit is distributed among partners). The final amounts are then transferred to the Partners’ Capital Accounts (or Current Accounts, if the firm uses fixed capital method).

Key Rules (NCERT-based):

Item	Debit	Credit
Interest on Capital	Profit & Loss Appropriation A/c	Partner’s Capital/Current A/c
Partner’s Salary	Profit & Loss Appropriation A/c	Partner’s Capital/Current A/c
Partner’s Commission	Profit & Loss Appropriation A/c	Partner’s Capital/Current A/c
Interest on Drawings	Partner’s Capital/Current A/c	Profit & Loss Appropriation A/c
Share of Profit	Profit & Loss Appropriation A/c	Partner’s Capital/Current A/c
Share of Loss	Partner’s Capital/Current A/c	Profit & Loss Appropriation A/c

Note

In the fixed capital method, partners have two accounts: a fixed Capital Account (unchanged except for additional capital or permanent withdrawal) and a Current Account (for all other transactions like salary, interest, drawings, profit share). In the fluctuating capital method, only one Capital Account is used, and all items are recorded there.

Format of Profit and Loss Appropriation Account (as per NCERT)

This is the proforma you’ll see in your textbook. It shows how net profit is appropriated (distributed) according to the partnership deed.

Profit and Loss Appropriation Account

(for the year ended ………)

Particulars	Amount (₹)	Particulars	Amount (₹)
To Interest on Capital:		By Net Profit (transferred from P&L A/c)	XXX
Partner A	XXX	By Interest on Drawings:
Partner B	XXX	Partner A	XXX
To Partner’s Salary:		Partner B	XXX
Partner A	XXX
To Partner’s Commission:
Partner B	XXX
To Profit transferred to:
Partner A’s Capital A/c	XXX
Partner B’s Capital A/c	XXX
Total	XXX	Total	XXX

Watch out

A common mistake: students forget that interest on drawings is credited to the Appropriation Account (it increases the profit available for distribution), while interest on capital and salary are debited (they reduce the profit).

Formula for Interest on Capital

If the deed provides for interest on capital, the formula is:

Interest on Capital = Capital × Rate of Interest × (Period / 12)

For example, if Partner A brings ₹1,00,000 as capital on 1st April, and the deed says interest on capital @ 10% p.a., the interest for the year ending 31st March is:

₹1,00,000 × 10/100 × 12/12 = ₹10,000

If capital is introduced during the year (say on 1st October), the period is 6 months:

₹1,00,000 × 10/100 × 6/12 = ₹5,000

Final Takeaway

The partnership deed is not just a legal formality — it is the blueprint for every accounting entry you will make in a partnership firm. Without it, you cannot decide how much interest to pay, who gets salary, or how to share profits. In exams, always read the question carefully: if a deed exists, follow its terms; if not, apply the default rules of the Indian Partnership Act, 1932.

(a) Basis of partnership = Agreement (B). (b) Reserves transferred in the Old profit sharing ratio (C).

Under the Indian Partnership Act, 1932, partnership arises from an agreement (oral or written) between persons to share the profits of a business. An offer (A) is a mere proposal, "understanding" (C) is not a legal term, and acceptance (D) is only one element of an agreement.

✓Final answer

(B) Agreement.

Concept understanding — Partnership Capital Accounting

Partnership Capital Accounting — A First Look

Think of a partnership like a group of friends pooling money to start a roadside food stall. Each friend brings in some cash — that’s their capital. But unlike a simple piggy bank, a partnership needs a clear record of who put in how much, because profits (and losses) are shared in a fixed ratio, and partners may withdraw money, lend extra funds, or take a salary.

That record is what Partnership Capital Accounting is about.

What It Really Means

In accounting, capital is the amount a partner contributes to the firm. But it’s not just a one-time number. Over time, a partner’s capital changes due to:

Additional capital introduced
Drawings (money or goods taken out)
Share of profit or loss
Interest on capital, interest on drawings, partner’s salary, commission

The Capital Account of each partner tracks all these changes. It answers: What does the firm owe to this partner at any point?

Why It Matters

Without proper capital accounting, you cannot:

Determine each partner’s claim on the firm’s assets
Calculate interest on capital correctly
Prepare the Profit and Loss Appropriation Account
Settle accounts when a partner retires or dies

The NCERT textbook emphasises that capital accounts are personal accounts of the partners — they show the firm’s liability towards each partner.

Two Methods of Maintaining Capital Accounts

The NCERT Class 12 Accountancy textbook (Part II, Chapter 2) describes two methods:

1. Fixed Capital Method

Under this method, the capital account remains constant (except when additional capital is introduced or capital is withdrawn permanently). All other transactions — share of profit, drawings, interest, salary — are recorded in a separate Current Account.

Note

In the Fixed Capital Method, the Capital Account shows only the permanent capital. The Current Account shows the fluctuating balance.

2. Fluctuating Capital Method

Here, all transactions are recorded directly in the Capital Account. The capital balance changes every year.

Accounting Treatment — Which Account is Debited/Credited

Let’s take the most common entries. I’ll show the journal entry first, then explain.

Entry 1: Capital Introduced

When a partner brings in cash or assets:

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
	Cash/Bank A/c	Dr.	xxx
	To Partner’s Capital A/c			xxx

Why? Cash comes in (asset increases — debit), and the firm’s liability to the partner increases (capital is a liability — credit).

Entry 2: Drawings

When a partner withdraws cash or goods for personal use:

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
	Partner’s Capital/Current A/c	Dr.	xxx
	To Cash/Bank/Purchases A/c			xxx

Why? The firm’s liability to the partner decreases (debit the capital/current account), and cash or goods go out (credit).

Entry 3: Interest on Capital

This is an appropriation of profit. The formula (as per NCERT) is:

Interest on Capital = Capital × Rate of Time × Time (in months)/12

Journal entry:

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
	Interest on Capital A/c	Dr.	xxx
	To Partner’s Capital/Current A/c			xxx

Then, at the end of the year, Interest on Capital is transferred to the Profit and Loss Appropriation Account:

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
	Profit and Loss Appropriation A/c	Dr.	xxx
	To Interest on Capital A/c			xxx

Entry 4: Partner’s Salary

If the partnership deed allows a salary:

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
	Salary to Partner A/c	Dr.	xxx
	To Partner’s Capital/Current A/c			xxx

Again, this is transferred to the Profit and Loss Appropriation Account.

Entry 5: Share of Profit

At the end of the year, after all appropriations, the remaining profit is distributed:

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
	Profit and Loss Appropriation A/c	Dr.	xxx
	To Partner’s Capital/Current A/c			xxx

Formats as per NCERT

Format of Capital Account (Fluctuating Method)

Particulars	Amount (Rs)	Particulars	Amount (Rs)
To Drawings A/c	xxx	By Balance b/d	xxx
To Interest on Drawings A/c	xxx	By Cash/Bank (additional capital)	xxx
To Balance c/d	xxx	By Interest on Capital A/c	xxx
		By Salary to Partner A/c	xxx
		By Share of Profit A/c	xxx
Total	xxx	Total	xxx

Format of Capital and Current Accounts (Fixed Method)

Capital Account (remains fixed unless permanent change):

Particulars	Amount (Rs)	Particulars	Amount (Rs)
To Balance c/d	xxx	By Balance b/d	xxx
		By Cash/Bank (additional capital)	xxx
Total	xxx	Total	xxx

Current Account (records all other transactions):

Particulars	Amount (Rs)	Particulars	Amount (Rs)
To Drawings A/c	xxx	By Balance b/d	xxx
To Interest on Drawings A/c	xxx	By Interest on Capital A/c	xxx
To Balance c/d	xxx	By Salary to Partner A/c	xxx
		By Share of Profit A/c	xxx
Total	xxx	Total	xxx

A Common Mistake to Avoid

Watch out

Many students debit the Profit and Loss Account directly for interest on capital or partner’s salary. That is wrong. These are appropriations of profit, not expenses. They go to the Profit and Loss Appropriation Account, not the Profit and Loss Account.

The Big Picture

Partnership Capital Accounting is simply a way to keep track of what the firm owes each partner. The two methods — fixed and fluctuating — are just different ways of organising that record. The NCERT textbook uses both, and you need to be comfortable with both formats.

Start with the intuition: Every partner is both an owner and a creditor of the firm. The capital account shows the owner’s stake; the current account (if used) shows the temporary claims. Once you see that, the debits and credits fall into place.

(a) Basis of partnership = Agreement (B). (b) Reserves transferred in the Old profit sharing ratio (C).

Accumulated reserves represent past profits earned under the existing (old) ratio. On a change in profit-sharing ratio they are transferred to Partners' Capital Accounts in the old profit sharing ratio, so no partner gains or loses on past profits. Sacrificing/gaining ratios are used for goodwill adjustment, not for distributing reserves.

✓Final answer

(C) Old profit sharing ratio.

Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

Showing the 12 most recent of 158 on this concept.

CBSE 2026Set 67/3/11 markMCQ

Q. (a) Persons who have entered into partnership with one another are collectively called : (A) Firm (B) Partnership (C) Partners (D) Partners' firm

(OR)

(b) In the absence of partnership deed, partners are entitled to : (A) Interest on Capital (B) Share of profits/losses in the ratio of their capitals (C) Interest @ 6% p.a. on loans/advances by them to the firm (D) Remuneration for the firm's work

›Reveal solution

Part (a): (A) Firm — the collective name for the partners. Part (b): (C) Interest @ 6% p.a. on loans/advances — the only entitlement of the listed options when there is no deed.

Part (a)

Section 4 of the Indian Partnership Act, 1932 defines the terms precisely:

Partnership — the relation between persons who agree to share the profits of a business.
Partners — the persons who have entered into partnership, individually.
Firm — those persons collectively.
Firm name — the name under which the business is carried on.

The question asks for the collective name of the persons → Firm.

Watch out

Do not confuse "Firm" (the collective entity) with "Partnership" (the relationship). "Partners' firm" is not a term used in the Act.

✓Final answer

Part (a): (A) Firm .

Part (b)

When there is no partnership deed (or it is silent), Section 13 of the Act supplies default rules:

Option	Provision (Sec. 13)	Allowed?
(A) Interest on Capital	13(c)	No
(B) Profits/losses in capital ratio	13(b)	No — shared equally
(C) Interest @ 6% p.a. on loans/advances	13(d)	Yes
(D) Remuneration for firm's work	13(e)	No

A loan/advance by a partner (over and above capital) carries interest @ 6% p.a. even without a deed, because the partner is treated as a creditor for that amount.

✓Final answer

Part (b): (C) Interest @ 6% p.a. on loans/advances by them to the firm (Section 13(d)).

CBSE 2026Set 67/3/11 markMCQ
$Q. When capitals of the partners are fluctuating, then the adjustments for drawings, interest on drawings, interest on capital, partners' salary, etc. are shown in the ________. (A) Current Account of partners (B) Capital Account of partners (C) Drawings Account (D) Profit and Loss Appropriation Account$
›Reveal solutionSolution
When capitals are fluctuating, all adjustments for drawings, interest, salary, etc. are recorded directly in the Capital Account of partners (Option B).

Concept First: Why the Capital Account Gets Everything

In partnership accounting, the treatment of partners' capital depends on whether the capital is fixed or fluctuating.

Fixed Capital Method: The capital account remains unchanged (except for additional capital introduced or permanent withdrawal). All other transactions — drawings, interest on drawings, interest on capital, salary, commission, and share of profit — are recorded in a separate Current Account. The capital account shows only the fixed amount.

Fluctuating Capital Method: There is no separate current account. Every single transaction affecting the partner — drawings, interest, salary, profit share, etc. — is recorded directly in the Capital Account. This means the capital account balance changes (fluctuates) every year.

Watch out

A common mistake is to think that drawings and interest on drawings go into a Drawings Account permanently. In the fluctuating method, the Drawings Account is merely a temporary account that is closed by transfer to the Capital Account at the end of the year. The final resting place is the Capital Account.

The Rule of Debit and Credit

The rule is simple: anything that increases the partner's claim on the firm (interest on capital, salary, commission, share of profit) is credited to the Capital Account. Anything that decreases the partner's claim (drawings, interest on drawings, share of loss) is debited to the Capital Account.

Why the Other Options Are Wrong

(A) Current Account of partners — This is used only in the fixed capital method. The question specifically says "when capitals of the partners are fluctuating," so a current account does not exist.

(C) Drawings Account — This is a temporary account. Drawings are first recorded here, but at the end of the accounting period, the Drawings Account is closed by transferring its balance to the Capital Account. The final adjustment is in the Capital Account, not the Drawings Account.

(D) Profit and Loss Appropriation Account — This account shows how the net profit is distributed among partners (salary, interest, profit share). It does not record the individual partners' drawings or interest on drawings. Those are personal accounts of the partners.

Tip

A quick way to remember: Fluctuating = Capital does everything. Fixed = Capital stays put, Current does the moving.

The Journal Entry Pattern

When a partner draws money, the entry is:

Debit: Drawings Account (temporary)

Credit: Bank/Cash

At year-end, the closing entry is:

Debit: Capital Account (of the partner)

Credit: Drawings Account

Similarly, interest on drawings is:

Debit: Capital Account

Credit: Interest on Drawings Account (which is then transferred to Profit and Loss Appropriation Account)

All these ultimately affect the Capital Account.

✓Final answer
$The correct answer is (B) Capital Account of partners . Under the fluctuating capital method, the Capital Account serves as the single repository for all adjustments — drawings, interest on drawings, interest on capital, partners' salary, and profit share — eliminating the need for a separate Current Account.$
CBSE 2026Set 67/5/11 markMCQ
$Q. Alok, Sarah and Aditya were partners in a firm sharing profits and losses in the ratio of 5 : 3 : 2. On 1st January, 2025 Alok advanced a loan of ₹ 2,00,000 to the firm. In the absence of a partnership agreement, the amount of interest on loan due to Alok on 31st March, 2025 will be : (A) ₹ 20,000 (B) ₹ 12,000 (C) ₹ 3,000 (D) ₹ 5,000$
›Reveal solutionSolution
In the absence of a partnership deed, interest on a partner's loan is payable at 6% p.a. under Section 13(d) of the Indian Partnership Act, 1932. For a loan of Rs 2,00,000 advanced on 1st January 2025, interest for 3 months (Jan-Mar 2025) is Rs 3,000. The correct option is (C) Rs 3,000.

Concept and Accounting Treatment

The Indian Partnership Act, 1932, provides default rules when partners have not signed a partnership deed (or the deed is silent on a matter). For interest on a partner's loan to the firm, Section 13(d) of the Act states that the loan shall carry interest at 6% per annum. This is a charge against profits — the firm must pay it even if it makes a loss. It is an expense of the firm, not an appropriation of profit.

The journal entry to record this interest is:

Debit Interest on Partner's Loan A/c (expense)

Credit Alok's Loan A/c (liability)

The rate is fixed by law at 6% p.a. when no deed exists, and interest runs from the date the loan was advanced to the balance-sheet date (or repayment date, whichever is earlier).

Solution

Working Note 1: Time Period

Loan advanced: 1st January, 2025

Interest due up to: 31st March, 2025

Number of months: January, February, March = 3 months

Working Note 2: Interest Amount

Principal: Rs 2,00,000; Rate: 6% p.a.; Time: 3/12 year

Interest = 2,00,000 x 6/100 x 3/12 = Rs 3,000

Watch out

A common mistake is to calculate interest for a full year (Rs 12,000) or to use a higher rate. In the absence of a deed the rate is the statutory 6% p.a., and here the period is only 3 months.

Journal Entry (for recording interest due)

Date Particulars L.F. Debit (Rs) Credit (Rs)
2025 Mar 31 Interest on Alok's Loan A/c Dr. 3,000
To Alok's Loan A/c 3,000
(Interest due on Alok's loan @ 6% p.a. for 3 months)

✓Final answer
$The amount of interest on loan due to Alok on 31st March, 2025 is Rs 3,000 . Hence, option (C) is correct.$
CBSE 2026Set MARCH1 markMCQ
$Q. In order to form a partnership, there should be atleast :$
(a) a) One person
(b) b) Two people
(c) c) Seven people
(d) d) Fifty people
›Reveal solutionSolution

A partnership requires a minimum of two persons, so the answer is (b) Two people.

Under the 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 word "persons" is plural, which means at least two are needed to enter into a partnership agreement.

✓Final answer
$Correct option: (b) Two people. One person alone forms a sole proprietorship, not a partnership. Hence the minimum number required to form a partnership is two .$
CBSE 2026Set MARCH1 mark
$Q. Partnership comes into existence as a result of __________ among the partners.$
›Reveal solutionSolution

Partnership comes into existence as a result of an agreement among the partners.

Under the Indian Partnership Act, 1932, partnership is the relation between persons who have agreed to share the profits of a business. It arises from a contract (agreement), not merely from status or birth. This agreement may be oral or written; when written, it is called the partnership deed.

✓Final answer
$Partnership comes into existence as a result of AGREEMENT among the partners. This is why partnership is said to arise from contract and not from status.$
CBSE 2026Set ANNUAL1 markMCQ
$Q. Preparation of partnership agreement in written form is$
(a) Compulsory
(b) Voluntary
(c) Partly compulsory
(d) None of these
›Reveal solutionSolution

Writing the partnership agreement is voluntary - option (b).

A partnership arises from an agreement, which may be oral or in writing. The law does not compel the agreement to be in writing, so preparing a written partnership deed is voluntary. However, a written deed is strongly recommended because it serves as documentary evidence and helps avoid misunderstandings and disputes among partners.

✓Final answer
$(b) Voluntary.$
CBSE 2026Set ANNUAL1 mark
$Q. Fill in the blank: All the partners are collectively called as ________.$
›Reveal solutionSolution

Answer: A firm.

Under the Indian Partnership Act, 1932, the persons who have entered into partnership with one another are individually called partners and collectively called a firm. The name under which the business is carried on is the firm name.

✓Final answer
$A firm.$
CBSE 2026Set ANNUAL1 mark
$Q. State whether True or False: To prepare partnership deed is compulsory.$
›Reveal solutionSolution

The statement is False.

The law does not make a written partnership deed compulsory; a partnership can be formed even by an oral or implied agreement. A written deed is only strongly recommended to avoid disputes. Hence the statement is false.

✓Final answer
$False.$
CBSE 2026Set ANNUAL1 mark
$Q. Answer in one word/sentence: The provisions of which Act applies in the absence of partnership deed?$
›Reveal solutionSolution

Answer: Indian Partnership Act, 1932.

When there is no partnership deed, or it is silent on a point, the provisions of the Indian Partnership Act, 1932 apply - e.g. equal profit sharing, no interest on capital, 6% interest on a partner's loan.

✓Final answer
$The Indian Partnership Act, 1932.$
CBSE 2026Set ANNUAL1 markMCQ
$Q. Direction: In the next two parts of Question No. 1, there are two statements labelled as Assertion (A) and Reason (R). From the following options, select the correct answer. Assertion (A): A partnership firm does not pay interest on capital to the partners. Reason (R): The payment of interest on capital to the partners depends on mutual agreement between them.$
(a) Both A and R are correct and R is the correct explanation of A.
(b) Both A and R are correct but R is not the correct explanation of A.
(c) A is correct but R is incorrect.
(d) Both A and R are incorrect.
(a) Both A and R are correct and R is the correct explanation of A.
(b) Both A and R are correct but R is not the correct explanation of A.
(c) A is correct but R is incorrect.
(d) Both A and R are incorrect.
›Reveal solutionSolution

Both A and R are correct, and R correctly explains A.

This is an Assertion-Reason item; each statement must be checked independently first, then whether R explains A.

Checking Assertion (A): "A partnership firm does not pay interest on capital to the partners." Under the Indian Partnership Act, 1932, in the ABSENCE of a specific provision in the partnership deed, a partner is NOT entitled to interest on the capital he has contributed. So, as a general/default position, A is TRUE.

Checking Reason (R): "The payment of interest on capital to the partners depends on mutual agreement between them." This is also TRUE — interest on capital is purely a matter of agreement among partners; it is paid ONLY if the partnership deed specifically provides for it (and only out of profits, as an appropriation, never as a charge against profit that can create/increase a loss, as per the Act).

Does R explain A? Yes — A is true PRECISELY BECAUSE of what R states: since interest on capital is not an automatic statutory entitlement but depends on what the partners mutually agree in the deed, the default legal position (in the absence of such an agreement) is that no interest on capital is payable. R is thus the correct explanation of A.

✓Final answer
$The correct option is "Both A and R are correct and R is the correct explanation of A."$
CBSE 2026Set ANNUAL1 markMCQ
$Q. A partnership firm has 45 partners. Only _____ more partners can be admitted in the partnership firm according to the Companies Act, 2013.$
(a) 1
(b) 6
(c) 5
(d) 3
›Reveal solutionSolution
Under the Companies Act, 2013 a partnership firm's membership is capped at 50; with 45 existing partners, only 5 more can join.

In MBOSE Class-12 Commerce (Accountancy) syllabus, the chapter-opening unit on Partnership recalls a key legal constraint carried over from company law: Section 464 of the Companies Act, 2013 empowers the Central Government to prescribe a maximum number of persons who can form an association/partnership for carrying on a business for profit. Exercising that power, Rule 10 of the Companies (Miscellaneous) Rules, 2014 fixes this ceiling at 50 persons for any partnership (other than one formed by professionals governed by a special Act, such as Chartered Accountants or Advocates, which has no such numeric cap).

Working:

Maximum partners allowed = 50

Partners already in the firm = 45

Additional partners that can be admitted = 50 − 45 = 5

If a firm tries to admit more than this, the "partnership" automatically ceases to enjoy the protection of being treated as a partnership under the Act and must be converted/registered differently (e.g., as a company).

✓Final answer
$Option (c) "5" — only 5 more partners can be admitted since the Companies Act, 2013 (via Rule 10 of the Companies (Miscellaneous) Rules, 2014) limits a partnership firm to a maximum of 50 partners.$
CBSE 2026Set ANNUAL1 markMCQ
$Q._____ is the basis of relationship between the partners to run the partnership business.$
(a) Offer
(b) Agreement
(c) Understanding
(d) Acceptance
›Reveal solutionSolution
Partnership is purely contractual — it is "Agreement," not status or custom, that creates the relationship between partners.

Under Section 4 of the Indian Partnership Act, 1932, partnership is defined as "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." This definition makes clear that:

Partnership arises only from a contract (agreement), whether oral, written, or implied by conduct — never automatically from birth, inheritance, or status (unlike, say, a Hindu Undivided Family, where membership is by birth).

This agreement, when reduced to writing, is called the Partnership Deed, which lays down the mutual rights, duties, profit-sharing ratio, interest on capital/drawings, and other terms governing the partners.

An "Offer" and its "Acceptance" are only the building blocks of how any agreement/contract (including a partnership agreement) is formed under the Indian Contract Act — they are not, by themselves, the basis of the partner relationship. "Understanding" is too informal/non-binding to create a legally enforceable partnership.

In the MBOSE Class-12 Commerce Accountancy syllabus on Partnership Basic Concepts, this is the very first foundational idea a student learns before moving to profit-sharing, interest on capital, and the Profit & Loss Appropriation Account.

✓Final answer
$Option (b) "Agreement" — a partnership is founded purely on the agreement (partnership deed) between the partners, as per Section 4 of the Indian Partnership Act, 1932.$

Date	Particulars	Debit (Rs)	Credit (Rs)
2025 Mar 31	Interest on Alok's Loan A/c Dr.	3,000
	To Alok's Loan A/c		3,000
	(Interest due on Alok's loan @ 6% p.a. for 3 months)

Q.______ is the basis of relationship between the partners to run the partnership business. (A) Offer (B) Agreement (C) Understanding (D) Acceptance

Concept understanding — Partnership Deed Definition

Everyday Intuition

Precise Meaning (as per NCERT Class-12 Accountancy)

Why It Matters in Accounting

Accounting Treatment

Key Rules (NCERT-based):

Format of Profit and Loss Appropriation Account (as per NCERT)

Formula for Interest on Capital

Final Takeaway

Concept understanding — Partnership Capital Accounting

Partnership Capital Accounting — A First Look

What It Really Means

Why It Matters

Two Methods of Maintaining Capital Accounts

1. Fixed Capital Method

2. Fluctuating Capital Method

Accounting Treatment — Which Account is Debited/Credited

Entry 1: Capital Introduced

Entry 2: Drawings

Entry 3: Interest on Capital

Entry 4: Partner’s Salary

Entry 5: Share of Profit

Formats as per NCERT

Format of Capital Account (Fluctuating Method)

Format of Capital and Current Accounts (Fixed Method)

A Common Mistake to Avoid

The Big Picture

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