Partnership Fundamentals Notes1

Study Material & Notes for the Chapter 1

Partnership - Fundamentals

I.   PARTNERSHIP BASICS

A.  Partnership-Definition

          The Indian Partnership Act 1932, Section 4   

      “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.”

  • Relation between persons
  • Who have agreed (written/oral)
  • To share the profits (losses)…business with a motive to earn profits
  • Of a business…legal business (theft/cheating, scam)
  • Carried on by all or
  • Any of them acting for all
B.  Nature of Partnership
Table 2.1.B1.1
C. Nature of Partnership
  • To share profits in an agreed ratio
  • To take part in the conduct of the business
  • Right to be consulted
  • Right to inspect the books of accounts
  • Right to retire from the firm
  • To disallow admission of new partners (Imp).
D. Contents of Partnership Deed
  • Partnership agreement is the mutual understanding on which Partners decide to do a legal business to earn profits.
  • It may be oral or written.
  • The written, signed and registered version of the agreement is also called partnership deed
  • Deed is optional/non mandatory/non compulsory but recommended
  • Profit will be distributed/apportioned as per the agreement
  • Agreement once made needs to be honoured in all the conditions
  • The Partnership Deed may contains basically two types of matters:
     E. Provisions relevant for Accounting
F. Interest on Loan given by Partner
  • Is a charge against profit (accrued even if no Profits)
  • Interest rate is as provided in the Partnership deed
  • If no partnership deed or not provided in partnership deed – @6% p.a.
  • Interest = Amount of Loan X Rate of Interest X Time
  • Interest is credited to Partner Loan Account (and not to Partner Capital/Current A/C)
Journal Entry
G. Rent Payable to Partner
  • Is a charge against profit (accrued even if no Profits)
  • Charge since rent is paid for using property for business purpose
  • Rent is credited to Rent Payable Account (and not to Partner Capital/Current A/C) Capital/Current A/C)
Journal Entry
H. Remuneration to Partner – Salary/Commission
  • Payable only if provided in the partnership deed
  • If loss – it is not payable, If sufficient profits – Fully allowed
  • If insufficient profits – Profits are distributed in the ratio of Salary/Commission to be allowed

  • Salary/Commission is credited to Partner’s Capital/Current Account
Journal Entry

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