Accountancy · Ch 2 — Accounting for Partnership: Basic Concepts
Summary
Summary
- Nature of Partnership: A partnership is a relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all. Key features: minimum 2 partners, maximum 50 (as per Companies Act, 2013), unlimited liability, mutual agency, and no separate legal entity.
- Partnership Deed: A written agreement among partners covering profit-sharing ratio, interest on capital/drawings, salaries, and commissions. In its absence, the Indian Partnership Act, 1932 applies: profits/losses shared equally, no interest on capital or drawings, no salary/commission, and interest on loans at 6% p.a.
- Profit and Loss Appropriation Account: A modified P&L account that shows how net profit is distributed among partners. Items debited: interest on capital, partner's salary/commission. Items credited: interest on drawings, net profit transferred from P&L. The final balance is distributed in the profit-sharing ratio.
- Interest on Capital: Allowed only if the deed provides. Calculated on the opening capital for the period. If a partner introduces additional capital during the year, interest is computed from the date of introduction. If the deed is silent, no interest is allowed.
- Interest on Drawings: Charged only if the deed specifies. Common methods: simple average (for fixed amounts withdrawn at regular intervals) or product method (for irregular withdrawals). If the deed is silent, no interest is charged.
- Guarantee of Profit: A partner may be guaranteed a minimum share of profit by another partner or the firm. If actual share is less, the deficit is borne by the guaranteeing partner(s) in their agreed ratio.
- Past Adjustments: Errors or omissions (e.g., missed interest on capital, interest on drawings, or salary) discovered after a year's profit has already been distributed are corrected through a single adjustment entry in the partners' capital accounts — either via a Profit and Loss Adjustment Account or a direct net-effect entry — never by reopening the old accounts or changing the profit-sharing ratio itself. …