Importance of Partnership Agreement:

A partnership agreement is vital to keep away the disagreement, confusion or any changes that
might occur in the course of business tenure. Below are a few points that describe why a partnership
agreement is essential:

 To form distinguished roles and responsibilities for each partner.

 To avoid tax problems, the tax status shows that the partner is dispensing profits to each
partner based on accounting practice and acceptable tax.
 To avoid liability and legal issue, if there is any with any of the partners.
 It helps to deal with any lifestyle or circumstance changes of any partners. They usually deal
with buy-out agreement with individual partners.
 To surpass non-compete agreements and conflict of interest with partners.
 To overrule the state law.

Partners Contribution & Percentage Distribution

 Partner contribution can be in a different amount and type, including cash, idea, partner’s
time on a job. In this regards, each partner’s contribution need not necessarily be in cash.
That means the partners may make uniform inputs to the business, have equal rights, but the
inputs may not be in cash but other different forms.
 Since each partner has distinct responsibilities and strength, partnership share is 100 per
cent impartial from a financial point of view.
 The partnership percentage can be estimated by calculating the total cash required to invest
in starting a new business and dividing each partner share with that total.
 The role each partner plays in starting a company and the amount of work and time
contributed can also dictate a percentage of proprietorship as much as financial offerings.
 If partners have a corporate entity, create a total stock that has equal worth as the business,
if 1000 stock is 100 per cent ownership divide and calculates each partner share.
For example, to get the estimated value of a share in a business, the cost of a company should be
divided by the total number of shares. If the business is worth ₹. 35,00,000/- with 1,000 shares, the
share value is ₹. 3,500/-.

Basic Concepts of Accounting for Partnership

Accounting for a partnership is imperative the same as is utilized for a sole proprietorship, excluding
that there are more owners. In extract, a distinct account follows each partner’s allocations,
investment and share of profits and losses.
As the business amplifies, one requires more capital and large number of people to regulate the
trade and split its risks. In such a scenario,

 People normally adopt the partnership form of establishment. Accounting for partnership
enterprises has its own attributes, as the partnership enterprise comes into being when 2 or
more people come together to begin business and allocate its profits.
  On several issues influencing the allocation of profits, there may not be specific accord
between the partners. In such a scenario the provisions of the Indian Partnership Act 1932 is
applicable.
 Likewise, computation of interest on capital, maintenance of partners capital accounts and
interest on drawings have their own distinctions.
 These distinct scenarios require specific treatment in accounting that has to be clarified.
 The treatment of scenarios like retirement of partner, admission, dissolution and death have
been elucidated in the upcoming chapters.

Indian Partnership
Act 1932
Most of the businesses in India adopt a partnership business, so
to monitor and govern such partnership The Indian Partnership
Act was established on the 1st October 1932.  Under this
partnership act, an agreement is made between two or more
person who agrees to operate the business together and
distribute the profits they gain from this business. 
The five important elements of The Indian Partnership Act 1932
are:

 Agreement for Partners – It is an association of two or

more individuals, and a partnership arises from an
agreement or a contract. The agreement (accord) becomes
the basis of the association between the partners. Such an
agreement is in the written form. An oral agreement is
evenhandedly legitimate. In order to avoid controversies, it is
always good, if the partners have a copy of the written
agreement.
 Two or More Persons –  In order to manifest a partnership,
there should be at least two (2) persons possessing a
common goal. To put it in other words, the minimal number
 of partners in an enterprise can be two (2). However, there is
a constraint on their maximum number of people. 
 Sharing of Profit – Another significant component of the
partnership is, the accord between partners has to share
gains and losses of a trading concern. However, the
definition held in the Partnership Act elucidates – partnership
as an association between people who have consented to
share the gains of a business, the sharing of loss is implicit.
Hence, sharing of gains and losses is vital.
 Business Motive – It is important for a firm to carry some
kind of business and should have a profit gaining motive.
 Mutual Business – The partners are the owners as well as
the agent of their firm.  Any act performed by one partner
can affect other partners and the firm. It can be concluded
that this point act as a test of partnership for all the partners.