CLASS: XII ACCOUNTS PARTNERSHIP FUNDAMENTALS P. No.

: 1
What is Partnership?
Definition - Section 4 of Indian Partnership Act 1932 defines, "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."
Features/Characteristics/Elements : -
1. Two or more persons
2. Agreement (oral or in writing)
3. Lawful business
4. Profit sharing
5. Principal - agent relationship , i.e., business carried in by all or any of them; acting for all.
Partnership Agreement or deed : Partnership is formed by an agreement. It may by oral or in writing.
Though the law does not expressly require that the agreement should be in writing, it is desirable to have it in writing
to avoid disputes in future. A document which contains the terms of partnership, as agreed between the partners is
known as partnerships deed. Its important contents are (1) Name of the firm, (2) Name and addresses of the partners,
(3) Name and place of the business, (4) Capital to be contributed by each partner, (5) Profit-sharing ratio, (6) Safe
custody of books of accounts, (7) Rules regarding admission and retirement of a partner
Points applicable in the absence of an agreement :
1. No interest is allowed on partner's capitals.
2. No interest is charged on their drawing.
3. Interest at 6% p.a. is allowed on loans given by partners.
4. No partner is entitled to salary or remuneration for the work done for the firm.
5. Profit/loss is divided equally among the partners.
Accounting Treatment :
The journal Entries are passed for the following Adjustments:

1. Interest on Capital 2. Interest on Drawings

P/L (App.) A/c… Dr. Partner's Capital A/c…. Dr.
To Partner's capital A/c To P/L (App.) A/c
(being Interest provided on capital) (being Int. on drawing Dr. to capital A/c )

3. Salary payable to Partner 4. Interest on Loan

P/L (App.) A/c …. Dr. P/L (App.) A/c …. Dr.
To Partner's Capital A/c To Partner's Capital A/c
(being salary Cr. to Partners) (being Interest on loan given to Partner)

5. Profit given to partner 6. Loss of the firm

P/L (App.) A/c …. Dr. Partner's Capital A/c ….Dr.
To Partner's Capital A/c To P/L (App.) A/c
(being profit given to partner) (being loss Dr. to Capital A/c)

Fixed / Fluctuating Capital Accounts : Capital accounts may be fixed or Fluctuating. In case of fixed
accounts, a new account "Current Account" for each partner is also opened. the difference is as follows:

Fixed Fluctuating
1. Capital normally remains fixed, except in 1. Capital changes very frequently from period
extraordinary circumstances. to period.

2. Two accounts are maintained for each partner 2. Only one Capital Account is maintained
e.g., fixed capital Account and Current A/c.

3. All adjusting entries such as Interest on Capital / 3. All adjusting entries as mentioned earlier are
Drawings / Loan, Salary, share of Profit/loss, are made in Capital account.
made in current A/c and not in Capital A/c.
4. It never shows a debit balance. 4. It may shows a debit balance.
Different items of Fixed/Fluctuating Capital Accounts:
Fixed Capital Account
Dr. Cr.
Particular Amounts Particular Amounts
withdrawal of capital Opening balance
To balance c/d Additional or Fresh capital
introduced.

Fluctuating Capital Account

Dr. Cr.
Particular Amounts Particular Amounts
1. Drawings 2. 1. Opening balance
Interest on drawing 2. Additional Capital
3. Share of loss 3. Share of profit
4. To balance c/d 4 Interest on capital
5. Salary/Commission

Current Account
Dr. Cr.
Particular Amounts Particular Amounts
Drawing Opening Balance
Interest on Drawings Interest on capital
Share of Loss Share of profit
To balance c/d Salary Commission
Profit & Loss (Appropriation) Account: This is an account prepared for showing the distribution
of profit/loss among the partners. It is merely an extension of the P & L account. It shows profit/loss
which is credited/debited to capital account.
Profit & Loss (Appropriation) Account
Particular Amounts Particular Amounts
To Interest on capital By Profit of the year ----------
A's capital A/c ------- By Interest on drawings
B's capital A/c ------- --------- A's capital A/c -------
To Salary B's capital A/c ------- -----------
A's capital A/c -------
B's capital A/c ------- ---------
To Interest on Loan ---------
To Commission ----------
To net Profit t/f to
A's capital A/c -------
B's capital A/c ------- ----------
 Interest on Drawings: It is charged from the partners if specifically provided in the Deed. It is calculated
from the date of withdrawal to the date of closing of the accounts. The following are different method.
(i) When drawing are made on the 1st of every month for 12 months (13/24)
(ii) When drawing are made on the middle of every month for 12 months (12/24)
(iii) When drawings are made at the end of every months for 12 months (11/24)
(iv) When drawings are made of irregular amounts and periods, then it is calculated by product method.
(v) When drawings are made evenly throughout the year, then Interest is calculated for 6 months
Interest on Capital
It is calculate on opening balance of capital When closing balance is given then opening balance is calculated
by following formula:
Opening Capital = Closing Capital + Drawing and interest on drawing and Interest on capital - Additional
Capital - Profit Credited (or + loss)

Minimum Guaranteed Profit : Sometimes, a partner is guaranteed a minimum amount of profit. Such a
guarantee may be given to an existing partner or to a new partner at the time of admission. The guaranteed
amount shall be paid to such partner when his share of profit is less than the guaranteed amount. The
guarantee to an incoming partner may be given by all the old partners or any of them on an agreed basis.

Past Adjustments : Sometimes, after the final accounts have been prepared and capital accounts of the
partners have been closed, it is found that certain items, e.g., interest into account. Instead of changing the
Balance sheet, an adjusting entry is passed in the beginning of next year to rectify such mistakes.

Change in Profit - Sharing Ratio : When the partners decide to change their profit sharing ratio, some
partners will gain while others will lose. Hence the gaining partner has to compensate that partner who makes
sacrifice by paying the proportionate amount of Goodwill