Q.What is the status of a partnership firm from the viewpoint of Legal and Accounting?
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🔒 Start your 14-day free trial to unlock the full solution →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
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 |
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 …
Legally, a partnership firm has no existence separate from its partners, but for accounting purposes, the firm is treated as a distinct business entity separate from its partners.
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From the Legal viewpoint, a partnership firm is NOT a separate legal entity distinct from its partners; from the Accounting viewpoint, it IS treated as a separate business entity distinct from its partners.
Legal viewpoint: Under the Indian Partnership Act, 1932, a partnership firm has no separate legal existence apart from the partners constituting it. The firm and the partners are, in the eyes of law, one and the same. The firm cannot own property, sue, or be sued in its own name in the same way a company can — the partners jointly and severally bear unlimited liability for the firm's debts, and the firm is merely a collective/convenient name for the partners carrying on business together.
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Showing the 12 most recent of 94 on this concept.
- CBSE 2026Set 67/3/11 markMCQQ.(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 solutionSolution
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. …
- CBSE 2026Set 67/5/11 markMCQQ.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 …
- CBSE 2026Set MARCH1 markMCQQ.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.
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- CBSE 2026Set MARCH1 markQ.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.
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- CBSE 2026Set ANNUAL1 markMCQQ.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 bec …
- CBSE 2026Set ANNUAL1 markQ.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 …
- CBSE 2026Set ANNUAL1 markQ.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 …
- CBSE 2026Set ANNUAL1 markQ.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 …
- CBSE 2026Set ANNUAL1 markMCQQ.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).
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- CBSE 2026Set ANNUAL1 markMCQQ.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 …
- CBSE 2026Set ANNUAL1 markMCQQ._____ 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. …
- CBSE 2026Set ANNUAL1 markMCQQ.What is the maximum number of partners in a partnership firm as per Companies Act, 2013 ?(a) Two(b) Seven(c) Ten(d) Fifty
›Reveal solutionSolution
The maximum number of partners permitted in a partnership firm under the Companies Act, 2013 is 50.
Section 464 of the Companies Act, 2013 gives the Central Government the power to prescribe the maximum number of persons who may form an association or partnership, and the rules framed under it — the Companies (Miscellaneous) Rules, 2014 — fix this limit at 50 persons. This replaced the earlier limit under the Companies Act, 1956 (10 for banking business, 20 for any other business).
If a partnership (or any association/partnership for carrying on business for profit) is formed with more than 50 persons and is not registered as a company or formed under some other law, it becomes an illegal association, and its members become personally liable for all its obligations without the protection the Partnership Act would otherwise have given them.
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