PARTNERSHIP ACCOUNTS Introduction The necessity of partnership arises in order to remove the limitations of a sole trader like shortage

e of funds, unlimited person liability, uncertainty about existence, limited skill, etc. A partnership is created when a sole proprietor takes is one or more partners (co-proprietors) in common with a view to profit. In many countries a partnership is not a corporate entity, but a collection of individuals jointly carrying on business. Meaning Partnership is the association b/w 2 or more persons who agree to carry on the business and to share profits and losses arising from it and act both as an agent and principal of the firm. Definition According to Indian Partnership Act, 1932, partnership is the relation b/w persons who have agreed to share the profit of the business carried on by all or any of them acting for all. Features of a Partnership Persons: There must be at least 2 persons to constitute a partnership firm ( Max. 20 in business and 10 in banking). Agreement: There must be agreement b/w partners to have a partnership. Business: It includes trade, vocation and profession. The firm must be engages in a lawful business. Sharing of Profits: It is one of the important element to constitute a firm. Management: It can be done by all the partners or any one of them on behalf of all other partners.

THE PARTNERSHIP DEED OR AGREEMENT The document which contains the terms and conditions regarding the conduct of partnership business, is called partnership deed. The terms and conditions are inserted in the form of clauses in the deed.

THE PARTNERSHIP Deed A partnership agreement, which need not necessarily be in written form, will govern the relationships between the partners including: ---Name of firm ,the type of business, and duration ---Capital to be introduced by partners ---Division of profits between partners, including salary which is a device for calculating the division of profit, it is not a salary in the normal meaning of the term. ---Drawing by partners ---Arrangements for dissolution, or on the death or retirement of partners ---Settling of disputes ---Preparation and audit of accounts ---Authority of each partner ---Will some salary or commission or remuneration will be allowed to any of the partners. ---Interest on capital or Interest on Loan by partners.

Accounts of Partnership Firm Capital Accounts Capital of partners may be fixed or fluctuating Fixed Capital: When the Partners agree that the amount of the capital contributed by them shall remain fixed, are called as Fixed capital A/c. In Such case, Current A/cs are opened for the partners where adjustment regarding interest on capital, salary, commission, profit or loss will be made. Fluctuating Capital: When all adjustments regarding interest on capital, salary, commission, profit or loss is made in capital accounts, the balance of capital will be fluctuating from year to year. Loan Account When a partner gives some loan to the firm, it should be credited to a separate loan a/c. In absence of agreement, Partnership Act provides that interest @ 6% p.a. shall be allowed on such loan, irrespective of the profit. Interest on such loan should be credited either to Loan a/c or Current A/c. Interest on Capital It is allowed in those cases where capitals of the partners are equal but they share profits not in equal ratio or when capitals are unequal but they share profits and losses equally. This is necessary to balance capital a/cs equitably so that any of the partners may not enjoy an unfair advantage over others. Interest on Capital is loss or expense to the firm and thus debited to P & L Appropriation A/c. Partners Capital or Current A/cs are credited with the amount of interest as it is an income or gain to the partners. Drawings Partners may be allowed to draw either money or goods from the business to meet their private expenses. A separate drawings a/c for each partner is opened and closed by transferring its balance to capital a/c or current a/c. Interest on Drawings Interest on drawings is an income to the firm and should be credited to P & L Appropriation A/c. It should be debited to partners capital / current a/c being a loss to the partners. It is essential to know the amount of drawings, the period and rate of interest for calculation of interest on drawings. When drawings are made frequently, the interest on drawings can be calculated easily with the help of product method. The procedure is: Find out the no. of months from the date of drawings to the date of closure of the accounting year. Multiply the amount of drawings with their respective months; Find out the total of the products. Calculate the interest by the following formula Interest Total of Products X Rate of Interest on = ----------------------------------------Drawings 12 x 100 When the amount withdrawn is same and Drawings are made in the beginning of each month, interest can be calculated on the whole of the amount for 6.5 months; Drawings are made at the end of each month, the period of calculation of interest is 5.5 months for total amount. Drawings are made in the middle of each month, the period of calculation of interest is 6 months for total amount.

Partners Salary / Commission If a partner devotes more time 2 the working of the business R does some special work R renders service, then an additional benefit in the name of salary R some percentage of commission is allowed. Commission is payable either before charging such commission R after charging such commission. Salary / Commission is loss to the business and is debited 2 P & L Appropriation A/c and credited 2 the partners capital/current a/c being income to them. Distribution of Profits In case of sole traders final a/cs, the whole net profit is transferred to capital of the proprietor. But in case of Partnership, adjustments relating to Int. on capital, Int. on Drawings, Partners Salary or Commission are to be made in P & L Appropriation A/c after calculating the Net Profit of the firm. Then the remaining profit or loss will be divided among the partners in the profit sharing ratio. Admission of a Partner When additional capital or managerial skill or both are required in a business , a new partner may be admitted into partnership firm. On admission of a new partner acquires important rights, i.e the right to share in the assets of the business & right to share in profits in business. When the new partner brings in capital and goodwill the following entry is to be passed. Bank or Cash a/c Dr. To New Partners Capital a/c To Goodwill a/c Attention should be paid towards the following points at the time of admission of a partner. Treatment of Goodwill Adjustment of Undistributed Profits Revaluation of Assets and Liabilities Calculation of New profit sharing ratio Adjustment of capitals Goodwill Goodwill is the value of the reputation of a firm in respect of profits in expected in future. It is the property of partnership and it goes with the business. Accounting Treatment of Goodwill a. When the amount of goodwill is paid by new partner to old partners privately. Under this method no entry is made in the firms books. b. When the new partner brings goodwill in cash and is immediately withdrawn by the old partners. 1. When goodwill is bought in Bank / Cash a/c Dr. To Goodwill a/c 2. When goodwill is shared by old partners Goodwill a/c Dr. To Old partners Capital a/c 3. When goodwill is drawn by old partners Old partners Capital a/c To Bank/Cash a/c c. When the new partner brings goodwill in cash and is retained in the books of the firm. 1. When goodwill is bought in Bank / Cash a/c Dr. To Goodwill a/c 2. When goodwill is shared by old partners Goodwill a/c Dr. To Old partners Capital a/c

d. When the goodwill is created or raised in the books at full value Some times the new partner does not bring goodwill in cash. Then, the goodwill a/c must be raised and credited to old partners a/c. The following entry is passed Goodwill a/c Dr. To Old partners Capital a/c Revaluation of Assets & Liabilities On the admission of a partner the assets and liabilities of the firm are revalued as on the date of admission. These adjustments are done by opening a new a/c called Revaluation A/c. It is debited with any reduction to the value of assets and increase in the amount of liabilities and Vice versa. The Profit or Loss revaluation a/c is transferred to the Capital a/cs of old partners in the old profit sharing ratio.

The entries are as follows: a. For increase in the value of assets. Asset a/c Dr. To Revaluation a/c b. For decrease in the value of assets. Revaluation a/c Dr. To Asset a/c The entries are as follows: a. For increase in the value of liabilities. Revaluation a/c Dr. To Liabilities a/c b. For decrease in the value of liabilities. Liabilities a/c Dr. To Revaluation a/c The entries are as follows: a. For Transfer of Profit on revaluation Revaluation a/c Dr. To Old partners capital a/c