Accounting for Partnership : Basic Concepts Question Answers: NCERT Class 12 Accountancy

(i) Invalid
(ii) Invalid
(iii) Valid
(iv) Invalid

(i) True
(ii) True
(iii) True
(iv) False
(v) False
(vi) False

Jai Claims:

(i) Profit to the shared equally
(ii) Salary and Commission not given to partner
(iii) No interest allowed on capital and charged on drawings

Profit : Reena, Rs. 33,750
Raman, Rs. 33,750

Interest on capital; Rani, Rs. 9,000; Suman, Rs. 6,300

(a) Profit : Priya, Rs. 78,750; Kajal, Rs. 47,250
(b) Profit NIL. Interest on capital: Priya, Rs. 54.000; Kajal, Rs. 72,000

Partnership comes into existence as a result of agreement among the partners. The agreement can be either oral or written. The Partnership Act does not require that the agreement must be in writing. But wherever it is in writing, the document, which contains terms of the agreement is called ‘Partnership Deed’.

Partnership firm is an association between persons to carry out a business. The partners make an agreement to carry out the business which is known as partnership agreement. It states the agreed share of the profits of the business which might be carried out by all or by anyone of them acting on behalf of others.

The agreement may be oral or in writing. Under the Partnership Act, 1932 it is not at all binding to have a partnership agreement in writing. However in order to avoid misunderstandings and dispute among the partners it is recommended to have the agreement in writing. One more reason to have it in writing is, it helps in settling disputes as written agreement is often taken as a reference point. A written deed duly signed and registered under Partnership Act is considered as evidence by the court.

(i)When Capitals are fixed

The following items are credited in the Partner's Capital Account when capital accounts are fixed.

(a) Opening balance of capital
(b) Additional capital introduced during an accounting year

The following items are debited in the Partner's Capital Account when capital accounts are fixed.

(a) Part of capital withdrawn
(b) Closing balance of capital

(ii) When Capitals are fluctuating

The following items are credited in the Partner's Capital Account when capital accounts are fluctuating.

(a) Opening balance of capital.
(b) Additional capital introduced during an accounting year
(c) Salaries to the partners
(d) Interest on capital
(e) Share of profit
(f) Commission and bonus to the partners

The following items are debited in the Partner's Capital Account when capital accounts are fluctuating.

(a) Drawings made during the accounting period
(b) Interest on drawings.
(c) Share of loss.
(d) Closing balance of capital.

Profit and Loss Appropriation Account is merely an extension of the Profit and Loss Account of the firm. It shows how the profits are appropriated or distributed among the partners. All adjustments in respect of partner’s salary, partner’s commission, interest on capital, interest on drawings, etc. are made through this account. It starts with the net profit/net loss as per Profit and Loss Account.

Two circumstances in which the Fixed Capitals of the partners may change are:

1. If the partners bring in some additional capital during the course of the business of the firm.
2. If the partners withdraw some amount of their capitals through an agreement among themselves.

If a fixed amount is withdrawn on the first day of every quarter, then the interest is calculated on the amount withdrawn for a period of seven and half months. Example: If a partner withdraws Rs 1,000 in the beginning of each quarter and the interest is charged @ 10% on the drawings, then interest on drawings is calculated as:

Total drawings made by the partner during the whole year are Rs 4,000, i.e. Rs 1,000 × 4.

Interest on drawings = 4,000 x 10% x 7(1/2) / 12 = 1,250

(i) Sharing of Profit and Losses In the absence of partnership deed profit the sharing ratio among the pad maw will be equal.
(ii) Interest on Partner’s Capital In the absence of panama peru interest on partners capital will not be given.
(iii) Interest on Partner’s Drawings In the absence of partnership deed no interest will be charged on partners drawings.
(iv) Interest on Partners Loan In the absence of partnership deed if partner gives any loan to the firm he/she will be entitled to get a fixed percentage of interest @6% of annum.
(v) Salary of Partner In the absence of the partnership deed a partner will be entitled for getting any salary for his work even if the others are non working.

Partnership is defined as “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”.

The essential features of partnership are :

1. Two or More Persons: In order to form partnership, there should be at least two persons coming together for a common goal. In other words,the minimum number of partners in a firm can be two. There is however,a limit on their maximum number. By virtue of Section 464 of the Companies Act 2013, the Central Government is empowered to prescribe maximum number of partners in a firm but the number of partners cannot be more than 100. The Central government has prescribed the maximum number of partners in a firm to be 50.

2. Agreement: Partnership is the result of an agreement between two or more persons to do business and share its profits and losses. The agreement becomes the basis of relationship between the partners. It is not necessary that such agreement is in written form. An oral agreement is equally valid. But in order to avoid disputes, it is preferred that the partners have a written agreement.

3. Business: The agreement should be to carry on some business. Mere co-ownership of a property does not amount to partnership. For example, if Rohit and Sachin jointly purchase a plot of land, they become the joint owners of the property and not the partners. But if they are in the business of purchase and sale of land for the purpose of making profit, they will be called partners.

4. Mutual Agency: The business of a partnership concern may be carried on by all the partners or any of them acting for all. This statement has two important implications. First, every partner is entitled to participate in the conduct of the affairs of its business. Second, that there exists a relationship of mutual agency between all the partners. Each partner carrying on the business is the principal as well as the agent for all the other partners. He can bind other partners by his acts and also is bound by the acts of other partners with regard to business of the firm. Relationship of mutual agency is so important that one can say that there would be no partnership, if the element of mutual agency is absent.

5. Sharing of Profit: Another important element of partnership is that, the agreement between partners must be to share profits and losses of a business. Though the definition contained in the Partnership Act describes partnership as a relation between people who agree to share the profits of a business, the sharing of loss is implied.

The important provisions affecting partnership accounts are as follows:

(a) Profit Sharing Ratio: If the partnership deed is silent about the profit sharing ratio, the profits and losses of the firm are to be shared equally by partners, irrespective of their capital contribution in the firm.
(b) Interest on Capital: No partner is entitled to claim any interest on the amount of capital contributed by him in the firm as a matter of right.However, interest can be allowed when it is expressly agreed to by the partners. Thus, no interest on capital is payable if the partnership deed is silent on the issue.
(c) Interest on Drawings: No interest is to be charged on the drawings made by the partners, if there is no mention in the Deed.
(d) Interest on Loan: If any partner has advanced loan to the firm for the purpose of business, he/she shall be entitled to get an interest on the loan amount at the rate of 6 per cent per annum.
(e) Remuneration for Firm’s Work: No partner is entitled to get salary or other remuneration for taking part in the conduct of the business of the firm unless there is a provision for the same in the Partnership Deed.

Partnership is the relation between 2 or more people. The relationship between partners is determined through a document called partnership deed. Partnership deed need not be in writing.But it is advisable to be in writing to minimize the disputes if any arising among the partners. This written contract takes the form of a document and is collectively called as a partnership deed. It is a legal document signed by all the partners and contains every details of the partnership like:

1. Name of the partners.
2. Profits sharing ratio.
3. Powers and duties of the partners.
4. Term of duration of partnership.
5. Interst on capital,loans,drawings etc.

The partnership agreement may also provide for charging of interest on money withdrawn out of the firm by the partners for their personal use. As stated earlier, no interest is charged on the drawings if there is no express agreement among the partners about it. However if the partnership deed so provides for it, the interest is charged at an agreed rate, for the period money remained outstanding from the partners during an accounting year. Charging interest on drawings discourages excessive amounts of drawings by the partners. The calculation of interest in drawings under different situations are. When Fixed Amounts is Withdrawn Every Month : Many a times a fixed amount of money is withdrawn by the partners, at equal time interval, Aashish withdrew Rs. 10,000 per month from the firm for his personal use during the year ending March 31, 2006. The calculation of average period and the interest on drawings, in different situations would be as follows:

(a) When the amount is withdrawn at beginning end of each month
(b) When the amount is withdrawn at the end of each month
(c) When money is withdrawn in the middle of the month When money is withdrawn in the middle of the month, nothing is added or deduced from the total period. When Fixed Amount is withdrawn Quarterly. If the amount is withdrawn at the beginning of each quarter, the interest is calculated on the total money withdrawn during the year, for a period of seven and half months and if withdrawn at the end of each quarter it will be calculated for a period of 12 months.

Alternatively, the interest can be calculated on the total amount withdrawn during the accounting year, for a period of 12 months. When Varying Amounts are Withdrawn at Different Intervals. When the partners withdraw different amounts of money at different time intervals, the interest is calculated using the product method. When Dates of Withdrawal are not specified. When the total amount withdrawn is given but the dates of withdrawals are not specified, it is assumed that the amount was withdrawn evenly throughout the year.

The profits and losses of the firm are distributed among the partners in an agreed ratio. However, if the partnership deed is silent, the firm’s profits and losses are to be shared equally by all the partners. You know that in the case of sole partnership the profit or loss, as ascertained by the profit and loss account is transferred to the capital account of the proprietor. In case of partnership, however, certain adjustments such as interest on drawings, interest on capital, salary to partners, and commission to partners are required to be made. For this purpose, it is customary to prepare a Profit and Loss Appropriation Account of the firm and ascertain the final figure of profit and loss to be distributed among the partners, in their profit sharing ratio.