Introduction

From Sole Proprietorship to Partnership

As a business grows, a single owner often finds it hard to raise enough capital and manage every risk alone. This is one of the most common reasons a business moves from a sole proprietorship into a partnership — bringing in more capital and more people to share both the work and the risk.

Accounting for a partnership firm has its own quirks that a sole proprietorship's books never have to deal with. Because more than one person has a stake in the business:

• Profits (and losses) must be distributed among the partners according to an agreed formula.
• Each partner's capital account has to be maintained, with rules for interest on capital and interest on drawings.
• The Indian Partnership Act, 1932 fills in the gaps whenever the partners haven't specifically agreed on something.
• Special adjustments are needed whenever a partner joins, retires, or dies.