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 persons2. Agreement (oral or in writing)3. Lawful business4. 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 DrawingsP/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 LoanP/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 firmP/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 extraordinary circumstances.

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

3. All adjusting entries such as Interest on Capital / Drawings / Loan, Salary, share of Profit/loss, are made in current A/c and not in Capital A/c.4. It never shows a debit balance.

1. Capital changes very frequently from period to period.

2. Only one Capital Account is maintained

3. All adjusting entries as mentioned earlier are made in Capital account.

4. It may shows a debit balance.Different items of Fixed/Fluctuating Capital Accounts:

Fixed Capital Account Dr. Cr.

Particular Amounts Particular Amountswithdrawal of capitalTo balance c/d

Opening balanceAdditional or Fresh capital introduced.

Fluctuating Capital Account Dr. Cr.

Particular Amounts Particular Amounts1. Drawings 2. Interest on drawing 3. Share of loss 4. To balance c/d

1. Opening balance2. Additional Capital3. Share of profit4 Interest on capital 5. Salary/Commission

Current Account Dr. Cr.

Particular Amounts Particular AmountsDrawing Interest on DrawingsShare of Loss To balance c/d

Opening Balance Interest on capital Share of profitSalary 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) AccountParticular Amounts Particular AmountsTo Interest on capitalA's capital A/c -------B's capital A/c -------To Salary 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 -------

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By Profit of the yearBy Interest on drawingsA's capital A/c ------- B's capital A/c -------

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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 CapitalIt 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