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Unit -I
Introduction to
Partnership
Accounts
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An individual i.e., a sole proprietor may not be

in a position to cope with the financial and
managerial demands of the present business
world.
As a result, tow or more individuals may decide
to pool their financial and non-financial
resources to carry on a business.
The final accounts of partnership firm including
basic concepts of accounting for Admission,
Retirement and Death.
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h The Indian Partnership Act defines

partnership as
h Dz the relationship between persons who have
agreed to share the profit of a business
carried on by all or any one of them acting for
alldz

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1. An association of two or more persons;

2. An agreement entered into by all person
concerned;
3. Existence of business;
4. The carrying on of such business by all or any
one of them acting for all; and
5. Sharing of profit of the business (including
losses).
The persons who enter into such an agreement are
called partners and the business is called a firm.
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h It is usual therefore, to find the following

clauses in a partnership Deed which may or
may not registered

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1. Name of the firms and partners;
2. Commencement and duration of business;
3. Amount of capital to be contributed by each
partner;
4. Amount to be allowed to each partners as
drawings and the timings of such drawings;
5. Rate of interest to be allowed to each
partners on his capital and on his loan to the
firm, and to be charged on his drawings;
6. The ratio in which profits or losses are to be
shared;
7. Whether a partner will be allowed to draw
any salary; By Sunil Kumar Vishwakarma 5/3/2010 6
g. Any variations in the mutual rights and duties of
partners;
9. Methods of valuing goodwill on the occasions of
changes in the constitution of the firm;
10. Procedure by which a partner may retire and the
method of payment of his dues;
11. Basis of the determination of the executors of a
deceased partner and the method of payment;
12. Treatment of losses arising out of the insolvency
of a partner;
13. Procedure to be allowed for settlement of
disputes among partners;
14. Preparation of accounts and there audit.

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1. No partner has the right to a salary,
2. No interest is to be allowed on capital,
3. No interest is to be charged on drawings,
4. Interest at the rate of 6% is to be allowed on
a partnerǯs loan to the firm, and
5. Profit and losses are to shared equally.
note: In the absence of an agreement, the
interest and salary payable to a partner will
be paid only if there is profit.
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6. Admission of a New Partner :- without the
consent of all existing partners no new
partner can be admitted to the firm.
7. Each partner can participate in the conduction
of business.
g. Each partner can inspect the books of firm
and can take a copy of the same.
Note Ȃ partners may change any of the above
provisions by coming to a common
agreement.

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h There is not much difference between the accounts
of a partnership firm & that of sole proprietorship
(provided there is no change in the firm itself).
h The only difference to be noted is that instead of
one capital A/c there will be as many Capital A/c as
there are partners.
h When a partner takes money out of the firms for
his domestic purpose,
a) Capital A/c can be debited or
b) Separate A/c, named as Drawings A/c can be
debited

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h The profit of the partnership firm are divided

among the partners.
h Usually, for this purpose, the profit as per Profit &
loss A/c is transferred to a newly-opened account,
namely Dz profit & loss Appropriation Accountdz
h Entries for INTREST ON CAPITAL, interest on
Drawings, SALARY TO PARTNERS, and division of
profits among the partners will be passed only in
that account
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1. Entry for Interest on Capital (on allowing &
Closure)
2. Entry for Interest on Drawings (charging &
Closure)
3. Entry for salary or commission payable to
partner;
4. Entry for transferring a part of profit to reserve :
5. Entry for transfer of credit balance of profit and
loss Appropriation A/c (being profit)

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1. Partnersǯ Capital Accounts;

2. Interest on Partnersǯ Drawings;
3. Interest on partnersǯ Capital;
4. Salary or Commission to Partners;
5. Interest on Partnerǯs loan;
6. Capital Ratio; and
7. Guarantee of Profit.

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h 1. Fixed Capital Accounts
Means the Capital remain unaltered, under
this system the original capital remains
constant, unless;
Additional capital is introduced by an agreement.
When fixed capital method is adopted
All entries related to drawings, interest,
salary to partners, profit & loss etc., are
made in newly-opened account for each
partner, called Current /Drawings Account.
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h Under fluctuating Capital Method only one

account namely-ǯcapital accountǯ is maintained
for each partner.
h Amount of capital of each partner do not
remains fixed but alters with every credit or
debit.
h When this method is followed following Capital
accounts having credit balance are shown on
the liabilities side while capital accounts having
debit balances are shown on the assets side of
the balance Sheet.
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h Drawingsǯ means the amount withdrawn, by
partners, in cash or in kind, for their personal use.

Methods of calculating interest

1) Simple Method:-
IOD= Amount of Drawings * Rate of Interest * Months
100 12

2) Product Method:-
IOD= Total of products * Rate of Interest * 1
100 12

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A. If interest on drawing is to be calculated for the

year irrespective of period.(interest charged for
full year, irrespective of date)
B. If dates of withdrawals are not specified. (interest
should be charged for the average period-6
month)
C. Interest on monthly drawings. (If partners draw
money every month regularly either at the
beginning or end of the month)

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1. If amounts are withdrawn on 1st day of every
month throughout the year. ( 6.5 months)
2. If amounts are withdrawn on last day of every
month throughout the year. (5.5 months)
3. If amount is withdrawn in the middle of every
month or evenly throughout the year. (6 months)
4. When drawings of equal amount are made in
quarter:
a) In the beginning (7.5 months)
b) At the end of (4.5 months)
c) In the middle (6 months)
* Quarter means three months
By Sunil Kumar Vishwakarma 5/3/2010 19
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1 Nature It includes expenses to be It indicates distribution of net

deducted from profit while
calculating net profit or
loss.
2 Recording It is debited to profit and
loss Account.
profit to various heads.
It is debited to P & L
Appropriation Account.

3 Necessary It is necessary to make Appropriation are made only

or not charges against profits even when there is profit.
if there is loss.

4 Example Interest on partners Loan Interest on partners capital,

and rent paid to a partner. partners salary.

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