Q.Raju and Jai commenced business in partnership on April 1, 2019. No partnership agreement was made whether oral or written. They contributed ₹4,00,000 and ₹1,00,000 respectively as capitals. In addition, Raju advanced ₹2,00,000 as loan to the firm on October 1, 2019. Raju had met with an accident on July 1, 2019 and could not attend the business up to September 30, 2019. The profit for the year ended March 31, 2020 amounted to ₹50,600. Disputes have arisen between them on sharing the profits of the firm. Raju Claims:

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

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):

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

(for the year ended ………)

Formula for Interest on Capital

If the deed provides for interest on capital, the formula is:

Interest on Capital = Capital × Rate of Interest × (Period / 12)

For example, if Partner A brings ₹1,00,000 as capital on 1st April, and the deed says interest on capital @ 10% p.a., the interest for the year ending 31st March is:

₹1,00,000 × 10/100 × 12/12 = ₹10,000

If capital is introduced during the year (say on 1st October), the period is 6 months:

₹1,00,000 × 10/100 × 6/12 = ₹5,000

Final Takeaway

The partnership deed is not just a legal formality — it is the blueprint for every accounting entry you will make in a partnership firm. Without it, you cannot decide how much interest to pay, who gets salary, or how to share profits. In exams, always read the question carefully: if a deed exists, follow its terms; if not, apply the default rules of the Indian Partnership Act, 1932.