NATURE OF PARTNERSHIP
Definition (Sec 4): Relation between persons who have agreed to share profits of a business carried on by all or any of them acting for all.
Essential Features: Two or more persons (min 2, max 50), Agreement (written/oral), Lawful business, Sharing of profits, Mutual agency (every partner is agent of firm), Unlimited liability.
PARTNERSHIP DEED
Meaning: Document containing terms of partnership. Written deed preferable.
Contents: Name, address, nature of business, capital contribution, profit sharing ratio, interest on capital/drawings/loan, salary/commission to partners, admission/retirement/death rules, dispute resolution, dissolution settlement.
Provisions of Indian Partnership Act, 1932 (if Deed is silent): Profits & losses shared equally, No interest on capital, No interest on drawings, No salary/commission to partners, Interest on partner's loan @6% p.a.
PARTNERS' CAPITAL ACCOUNTS
Fixed Capital Method: Two accounts – Capital A/c (fixed) & Current A/c (for drawings, interest, salary, profit). Capital A/c remains fixed unless permanent change. Current A/c balance added to/deducted from capital in Balance Sheet.
Fluctuating Capital Method: One account – Capital A/c. All items (drawings, interest, salary, profit) recorded directly; balance fluctuates yearly.
PROFIT & LOSS APPROPRIATION ACCOUNT
Meaning: Shows distribution of net profit among partners. All adjustments (interest, salary, commission) made here before final division.
Debit Side (Appropriations): Interest on Capital, Partner's Salary, Commission.
Credit Side (Income): Interest on Drawings.
Final Figure: Remaining profit/loss transferred to partners' Capital/Current A/cs in profit-sharing ratio.
INTEREST ON CAPITAL
Allowed only if Deed provides. Calculated on opening capital + additional capital (from date of introduction). If opening capital missing, compute: Closing Capital + Drawings – (Additional Capital + Share of Profit + Salary/Commission).
If loss: No interest (unless deed specifically allows).
If profit < interest due: Interest restricted to profit amount & distributed in ratio of interest due.
INTEREST ON DRAWINGS
Charged only if Deed provides.
Methods:
- Simple (exact dates): Amount × Rate × Period/12.
- Product Method (different amounts & dates): Sum of (Amount × Months to year-end) × Rate / 12.
- Average Period (fixed monthly drawings): Total Drawings × Rate × Avg. Period/12. Avg. Period: Beginning of month = 6.5, Middle = 6, End = 5.5. For quarterly: Beginning of quarter = 7.5, End = 4.5.
IMPORTANT EXAM QUESTIONS
1. The written agreement of partnership is called? (Partnership Deed – 1 mark 2021 Mar).
2. Distinguish between Fixed Capital and Fluctuating Capital methods (2 marks – 2025 Mar).
3. The account prepared to distribute partners' salary, commission, profit or loss etc. is? (Profit and Loss Appropriation Account – 1 mark 2025 Say).
4. Navami and Jyothi are partners with no agreement. How are: a) Interest on loan given by Navami? b) Interest on drawings taken by Jyothi? (2 marks – 2025 Say).
5. Calculate interest on capital given opening capitals, additional capital, withdrawals (common problem).
6. Calculate interest on drawings using product method/average period method.
7. Syam and Sanal are equal partners with capitals ₹50,000 and ₹40,000. Calculate interest on capital @10% under: (i) profit ₹20,000 (ii) loss ₹5,000 (2 marks – 2025 Mar).