Accountancy · Ch 2 — Accounting for Partnership: Basic Concepts
Provisions of Partnership Act Relevant for Accounting
Provisions of Partnership Act Relevant for Accounting
The Indian Partnership Act, 1932, lays down the default rules that apply when the partnership deed is silent on a matter. For accounting, these default provisions determine how profits are divided, whether interest is paid or charged, and what a partner can claim as remuneration. You must know these rules because they directly affect the entries you pass in the Profit and Loss Appropriation Account and the partners' capital/current accounts.
Profit Sharing Ratio
If the partnership deed does not specify how profits and losses are to be shared, the Act says they must be shared equally by all partners. This rule applies regardless of how much capital each partner has contributed. So, a partner who put in ₹20,000 gets the same share of profit as a partner who put in ₹50,000, if the deed is silent.
Interest on Capital
No partner has an automatic right to interest on the capital they have contributed. Interest on capital is payable only if the partnership deed expressly provides for it. If the deed is silent, no interest on capital is credited to any partner. This is a common point of confusion — students often assume interest is always paid, but the Act makes it clear it is not a right.
Interest on Drawings
Similarly, the firm cannot charge interest on the drawings (money or goods taken out by a partner for personal use) unless the partnership deed specifically mentions it. If the deed is silent, no interest on drawings is charged.
Interest on Loan by a Partner
This is the one case where the Act gives a partner a definite right. If a partner has advanced a loan to the firm (separate from their capital contribution), they are entitled to interest on that loan at the rate of 6% per annum. This interest is payable even if the deed is silent. The firm must pay this interest before any profit is distributed among the partners. It is treated as a charge against profit, not an appropriation of profit.
Common mistake
Do not confuse interest on a partner's loan (6% p.a., compulsory) with interest on a partner's capital (only if agreed). Also, the rate for a partner's loan is fixed at 6% by the Act — not 12% or any other rate.
Remuneration for Firm's Work (Salary, Commission, etc.)
No partner is entitled to any salary, commission, or other remuneration for taking part in the business unless the partnership deed contains a provision for it. An active partner who works full-time cannot claim a salary if the deed is silent.
Other Provisions: Duty to Account for Secret Profits
The Act also specifies two important duties, even if the deed is silent: …