Q.Define Partnership Deed.
A Partnership Deed is a written agreement among partners that governs the rights, duties, profit-sharing ratio, interest on capital/drawings, salaries, commissions, and other terms of their partnership. It is the foundational document for all accounting treatments in a partnership firm.
Concept and Accounting Treatment
A Partnership Deed is the formal, written contract that partners voluntarily enter into. It is not legally mandatory (partnerships can exist without one), but it is highly recommended because it prevents disputes and provides clear rules for accounting. Under the Indian Partnership Act, 1932, if no deed exists, the Act's default provisions apply (e.g., equal profit sharing, no interest on capital, no salary to partners).
The accounting treatment of every transaction in a partnership firm—whether it's interest on capital, drawings, partner's salary, or profit distribution—depends entirely on what the Partnership Deed says. The deed can make an item a charge against profits (like interest on loan from a partner, which is paid even if there is a loss) or an appropriation of profit (like interest on capital or partner's salary, which is paid only out of profits). This distinction is critical for preparing the Profit and Loss Appropriation Account.
When the deed is silent on a matter, the Act's default rules apply. For example, if the deed does not mention interest on drawings, no interest is charged. If it does mention it, the rate and method (simple or product method) must be followed as per the deed.
Required Accounting Statements
Since the question asks to "Define Partnership Deed" without providing specific figures or transactions, I will illustrate the accounting treatment with a standard example of how entries are passed and accounts are prepared under a typical Partnership Deed. Assume a firm with partners A and B sharing profits 3:2, with the deed providing for:
- Interest on capital @ 10% p.a.
- Interest on drawings @ 8% p.a.
- Salary to A: ₹2,000 per month
- Net profit for the year: ₹1,20,000
Journal Entries
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Profit and Loss Appropriation A/c Dr. | 1,20,000 | |||
| To Net Profit transferred to P&L Appropriation A/c | 1,20,000 | |||
| (Being net profit transferred to appropriation account) | ||||
| Profit and Loss Appropriation A/c Dr. | 24,000 | |||
| To A's Capital A/c (Salary) | 24,000 | |||
| (Being salary to A provided as per deed) | ||||
| Profit and Loss Appropriation A/c Dr. | 30,000 | |||
| To A's Capital A/c (Interest on Capital) | 18,000 | |||
| To B's Capital A/c (Interest on Capital) | 12,000 | |||
| (Being interest on capital @ 10% provided) | ||||
| A's Capital A/c Dr. | 4,000 | |||
| B's Capital A/c Dr. | 2,400 | |||
| To Profit and Loss Appropriation A/c | 6,400 | |||
| (Being interest on drawings charged @ 8% as per deed) | ||||
| Profit and Loss Appropriation A/c Dr. | 72,400 | |||
| To A's Capital A/c | 43,440 | |||
| To B's Capital A/c | 28,960 | |||
| (Being remaining profit distributed in 3:2 ratio) |
Profit and Loss Appropriation Account
| Particulars | Amount (₹) | Particulars | Amount (₹) |
|---|---|---|---|
| To A's Salary A/c | 24,000 | By Net Profit (transferred) | 1,20,000 |
| To Interest on Capital A/c: | By Interest on Drawings A/c: | ||
| A | 18,000 | A | 4,000 |
| B | 12,000 | B | 2,400 |
| To Profit transferred to: | |||
| A's Capital A/c | 43,440 | ||
| B's Capital A/c | 28,960 | ||
| Total | 1,26,400 | Total | 1,26,400 |
Partners' Capital Accounts
| Particulars | A (₹) | B (₹) | Particulars | A (₹) | B (₹) |
|---|---|---|---|---|---|
| To Drawings A/c | 50,000 | 30,000 | By Balance b/d | 1,80,000 | 1,20,000 |
| To Interest on Drawings A/c | 4,000 | 2,400 | By Salary A/c | 24,000 | — |
| To Balance c/d | 2,11,440 | 1,28,560 | By Interest on Capital A/c | 18,000 | 12,000 |
| By Profit & Loss App. A/c | 43,440 | 28,960 | |||
| Total | 2,65,440 | 1,60,960 | Total | 2,65,440 | 1,60,960 |
Working Notes
1. Interest on Capital
- A: ₹1,80,000 × 10% = ₹18,000
- B: ₹1,20,000 × 10% = ₹12,000
2. Interest on Drawings
- A: ₹50,000 × 8% = ₹4,000
- B: ₹30,000 × 8% = ₹2,400
3. Salary to A
- ₹2,000 × 12 months = ₹24,000
4. Divisible Profit
- Net Profit: ₹1,20,000
- Add: Interest on Drawings: ₹6,400
- Less: Salary: (₹24,000)
- Less: Interest on Capital: (₹30,000)
- Divisible Profit: ₹72,400
- A's share (3/5): ₹72,400 × 3/5 = ₹43,440
- B's share (2/5): ₹72,400 × 2/5 = ₹28,960
A common mistake is treating partner's salary or interest on capital as a charge against profit (like rent or wages). Unless the deed explicitly states otherwise, these are appropriations of profit—they are paid only if there is sufficient profit. If the firm incurs a loss, these items are not recorded at all (unless the deed says they are to be paid even in loss, which is rare).
To quickly check if an item is a charge or appropriation: if it is recorded in the Profit and Loss Account (above the line), it is a charge. If it appears in the Profit and Loss Appropriation Account (below the line), it is an appropriation. Interest on a partner's loan to the firm is always a charge; interest on capital is always an appropriation.
A Partnership Deed is the written agreement defining the financial and operational rules of a partnership. In the example above, the deed provided for interest on capital @ 10%, interest on drawings @ 8%, and salary to A of ₹24,000, resulting in a divisible profit of ₹72,400 shared between A (₹43,440) and B (₹28,960) in their 3:2 ratio.
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