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ACCOUNTANCY Chapter 1: Accounting for Partnership: Basic Concepts
(1) 01 ACCOUNTING FOR PARTNERSHIP : BASIC CONCEPTS Accounting for Partnership: Basic Concepts Meaning and Definition of Partnership Meaning ● Partnership is an association between two or more persons who agree to do business and share its profits and losses. ● Partnership is a business relationship among two or more persons to share profits and losses of the business, carried on by all or any of them acting for all. Definition: ● Partnership is defined by Indian Partnership Act, 1932, Section 4 as follows: "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." Essential Features or Characteristics of Partnership: Following are the essential features or characteristics of partnership: i. Two or more persons: To form a partnership, there must be at least 2 partners who are competent to contract and who are not minor, persons of unsound mind and persons disqualified by any law. The maximum number of the partners in the firm cannot exceed 50 vide Rule 10 of the Companies Rules, 2014 as prescribed by the Central Government. ii. Agreement: It is a legal document signed by all the partners. A written agreement containing the terms and conditions of partnership and because of which the partnership comes into existence is known as Partnership Deed. iii. Lawful Business: A partnership is formed to do a lawful business which includes trade, vocation and profession. Any type of charitable institution running as a not-for-profit organization will not be considered as a business. iv. Profit-Sharing: A partnership agreement specifies how the profits and losses of the firm will be shared by the partners. v. Business can be carried on by all or any of the Partners Acting for All: Since, the partners are the agents as well as principals of the firm, such business of the partnership firm can be carried on by all or any of the partners acting for all. Rights of Partners:
(2) 01 ACCOUNTING FOR PARTNERSHIP : BASIC CONCEPTS Every Partner has the right: i. to participate in the management of the business. ii. to be consulted about the affairs of the business. iii. to inspect the books of account and have a copy of it. iv. to share profits and losses with others in the agreed ratio. v. to receive interest on the loan advanced by him to the firm at an agreed rate of interest. Where the rate is not agreed, interest is paid at the rate of 6% p.a. as per the provisions of Indian Partnership Act, 1932. vi. to act according to his best judgment in case of emergency and be indemnified for the expenses incurred by him. vii. not to allow the admission of a new partner. viii. to retire from the firm after giving proper notice for the same. ix. to get indemnified against the expenses incurred by him on the business or incurred by him on behalf of the firm. Partnership Deed: A written document containing the terms and conditions of partnership and because of which the partnership comes into existence is known as Partnership Deed. It is a legal document signed by all the partners and has the following clauses: i. Description of the Partners: It contains names, description and addresses of the partners. ii. Description of the Firm: It contains name and address of the firm. iii. Principal Place of Business: It contains address of the principal place of business. iv. Nature of Business: It specifies the nature of business that the firm shall carry on. v. Commencement of Partnership: Date of commencement of partnership is specified in this clause. vi. Capital Contribution: It mentions the amount of capital that each partner contributes whether capital accounts are fixed or fluctuating. vii. Interest on Capital: It specifies the interest on capital if such interest is allowed to be paid. viii. Interest on Drawings: It specifies the rate of interest on drawings if such interest is charged on drawings. ix. Profit-Sharing Ratio: It specifies the ratio in which the profits and losses of the firm are shared by the partners. x. Interest on Loan: It specifies the rate of interest paid on the loan by the partner to the firm.
(3) 01 ACCOUNTING FOR PARTNERSHIP : BASIC CONCEPTS xi. Remuneration to Partners: It specifies the amounts of salary, commission, etc. payable to the partners. xii. Valuation of Goodwill: It specifies the method by which the goodwill of the firm will be valued in the event of reconstitution of the partnership. xiii. Valuation of Assets: It specifies the manner in which assets of the firm shall be valued in the event of reconstitution of the partnership. xiv. Settlement of Accounts: It specifies the manner in which the accounts of the partner(s) shall be settled in case of partners' retirement or death or in the event of dissolution of the firm. xv. Accounting Period: It specifies the date on which accounts of the firm are closed every year. xvi. Rights and Duties of Partners: It specifies the rights and duties of the partners. xvii. Duration of Partnership: It specifies whether the partnership is for a specified period or for a venture or at will. xviii. Bank Account Operation: It specifies how the bank accounts should be operated; whether by any of the partners or jointly by all partners. xix. Death of a Partner: It specifies whether the firm will continue or dissolve in the event of death of a partner. xx. Settlement of Disputes: It specifies how the disputes among the partners shall be settled, if any arises. Importance of Partnership Deed: i. An important legal document. ii. Defines relationship between the partners. iii. Governs the rights, duties and liabilities of each partner and therefore, avoids and settles possible disputes among the partners. iv. In case of any dispute among partners, partnership deed is considered as the basis for settlement of such dispute. v. Not essential but desirable to have a Partnership Deed vi. Where there is no partnership deed, provisions of Indian Partnership Act, 192 will be applied. Provisions Affecting Accounting Treatment in the Absence of Partnership Deed: Provisions of the Indian Partnership Act, 1932 shall be applicable when there is no Partnership Deed or if the Partnership Deed is silent. Following are the matters for which provisions of this Act