INTRODUCTION TO PARTNERSHIP

CHAPTER : 1          INTRODUCTION TO PARTNERSHIP

Write short notes..

(1) Partnership Deed :

The emergence of partnership is from the agreement. Partners undertake agreement within the provisions of partnership act. Partnership deed acceptable to all the partners is prepared at the time of the of the commencement of a partnership firm. The partnership agreement can be written or oral. A written agreement of partnership is known as partnership deed. A written partnership deed is desirable and advisable. So, that the solution of any misconception or dispute in future can be obtained on the basis of the provisions of partnership deed. Generally, the following content is included in the partnership deed.

 

1. Details of partners : The information about name, address, and other details of partners is included.
2. Details of firm : The details like name, address, objectives, etc. of business firm are included.
3. Type of business : The information about the type of business is also included.
4. Commencement of partnership : The information about the commencement date of the partnership firm is also covered in the deed.
5. Capital : The amount of capital introduced by each partner is mentioned in the deed. It is not compulsory for each partner to bring capital.
6. Interest on capital : On capital amount, whether interest is to be allowed or not is mentioned in this deed. If nothing is mentioned about the interest on capital, no interest on capital is allowed to partners
7. Drawings : Maximum amount which can be withdrawn by a partner from a firm is also mentioned in the partnership deed.
8. Interest on drawings : On drawings amount whether interest is to be charged or not is mentioned in this deed. If nothing is mentioned about the interest on drawings is to be charged from partners.
9. Distribution of profit and loss : In which proportion profit or loss of business will be distributed among the partners is provided in the partnership deed. If no provision is made in partner deed, as per the partnership act profit or loss is distributed in equal proportion.
10. Salary, Bonus, Commission and Remuneration to the partners : There is no provision in partnership act for the payment of salary, bonus, commission, and remuneration to the partners. If any partner takes active participation in the management of the partnership firm, a provision is made in the partnership deed for the payment of salary, bonus, commission and remuneration to the partners.
11. Interest on loan provided by partner to firm : The rate of interest is to be mentioned in the partnership deed, when any partner has lended a loan to the firm. If no provision is made in the partnership deed as per the partnership act, 6% p.a. interest will be paid on the loan given by the partner to the firm. Interest on partners loan is treated as an expense of the business. Thus, it is debited to the profit and loss account.
12. Goodwill : The computation to determine the value of goodwill at the time of the admission of a new partner and at the time of retirement or death of a partner is also mentioned in the partnership deed.
13. Admission – Retirement : The provisions pertaining to admission of a new partner and the retirement or death of a partner is also mentioned in the partnership deed.
14. Dissolution of firm : In what circumstances firm will be dissolved ? What procedure will be adopted ? etc. These points are mentioned in the partnership deed.

(2) Fluctuating Capital accounts of partners :

In this method, only one capital account is maintained to record all the transactions of the partner with firm. The closing capital balance and the opening capital balance differs. After recording the opening capital balance on the credit side of the capital account, additional capital brought during the year interest on capital, salary, bonus, share in divisible profit etc. are credited to the capital account whereas drawings, interest on drawings, share in divisible loss are debited to the capital account. The difference between the credit and the debit side of the capital account is then the closing capital balance. Capital account will generally have a credit balance under this method.

Date	Particular	Amt	Amt	Date	Particular	Amt	Amt
*****	To balance b/d	——	——	*****	By balance b/d	——-	——-
	To drawing A/c	——	——		By cash/bank/ any other assets A/c	——-	——-
	To interest on drawing A/c	——	——		By salary A/c	——-	——-
*****	To profit & loss appropriation A/c	——	——		By bonus A/c	——-	——-
*****	To balance c/d	——	——		By commission A/c	——-	——-
					By remuneration A/c	——-	——-
				*****	By profit & loss appropriation A/c	——-	——-
				****	By balance c/d	——-	——-
		——	——			——-	——-

 

• Balance b/d can be either debit balance or credit balance
• There can be either divisible loss or divisible profit
• Balance c/d can be either debit balance or credit balance

(3) Fixed Capital accounts of partners :

Generally, under this method opening balance and closing balance of partners capital account remains identical. There can be change in opening balance and closing balance of partners capital account, if either additional capital is introduced or capital is withdrawn by the partners on the permanent basis. Under this method balance of partners capital account remains credit balance. The credit balance of the capital account is shown at the capital – liability side of the balance sheet. Transactions other than permanent capital are recorded in the current account. A specimen of partners capital accounts under fixed capital account method is as under ::

Date	Particular	Amt	Amt	Date	Particular	Amt	Amt
*****	To cash/ bank/ any other assets (withdrawn of capital )	——–	——-	*****	By balance c/d	——-	——–
*****	To balance c/d (closing credit balance)	——–	——-	*****	By cash/ bank/ any other assets A/c (Additional capital)	——–	——–
		——–	——–			——–	——–

(4) Current accounts of capital :

Under fixed capital account method the account prepared to record the transactions of the partner with the partnership firm, other than permanent capital is known as current account.

• At the credit side of the current account, opening credit balance of the current account, interest on capital, interest on credit balance of current account, salary, bonus, commission remuneration and shares in divisible profit are recorded.
• At the debit side of current account, opening debit balance of current account, drawings, interest on drawings, interest on debit balance of current account and share in divisible loss are recorded.
• The closing balance of current account can be either debit or credit balance
• If closing balance of current account is credit balance it is shown at the capital and the liability side of the balance sheet and debit balance is shown at the asset side. The specimen of partners current account is as under :

 

Date	Particular	Amt	Amt	Date	Particular	Amt	Amt
****	To balance b/d	——	——	****	By balance b/d	——	——-
****	To drawings A/c	——	——-	****	By interest on capital A/c	——-	——-
****	To interest on drawings A/c	——-	——-	****	By interest on credit balance of current A/c	——-	——-
****	To interest on debit balance of current A/c	——–	——–	****	By salary A/c	——-	——-
****	To profit – loss appropriation A/c	——-	——-	****	By bonus A/c	——-	——-
****	To balance c/d	——	——–	****	By commission A/c	——	——-
				****	By remuneration A/c	——-	——
				****	By profit – loss appropriation A/c	——-	——–
				****	By balance c/d	——	——–
		——–	——–			——-	——-

(5) Drawing accounts of partners :

When partners withdraw cash, goods, or assets from the partnership firm for his personal use, this amount is known as drawings of partner

• Withdrawal done by the partner from the partnership firm is debited to the drawing account
• If provision is made, then interest on drawings is also debited to the drawing account
• At the end of the year, in fluctuating capital account method drawing account is closed and the balance is transferred to the partners capital account
• In the fixed capital method it is debited to the partners current account

Journal entry is passed as follows in this regard: –

 

Date

Particular Partners capital A/c                               Dr To partners drawings A/c [Being partners drawings account is closed and transfer it to partners capital/current ac

L.F.

Debit ——-

Credit   ——–

The specimen of drawings account is as follows: –

Date	Particular	Amt	Date	Particular	Amt
*****	To cash A/c	——	*****	By capital / current A/c(closing balance is transferred to capital/ current account)	——-
*****	To bank A/c	——
*****	To Goods/ Assets A/c (drawings done during the year)	——-
*****	To interest on drawings A/c	——
		————–			————-

• When interest on drawings is debited to drawings account, it will not be debited to the capital/ current account.

(6) Distinguish Between :-

1. Fixed Capital account method & Fluctuating Capital account method.

 

Points of difference	Fixed Capital Account Method	Fluctuating Capital Account Method
Meaning	Where the opening balance and the closing balance of the partners capital account is reported unchanged is known as fixed capital account method	Where the opening balance and the closing balance of the partners capital account is reported flexible is known as fluctuating capital account method
Accounts	To record all the transactions of the partners with the firm, two accounts are opened in the books of the firm: (1) Capital account & (2) Current account	To record all the transactions of the partners with the firm only capital account is opened in the books of the firm
Treatment of transactions	In “ Capital Account “, capital and changes in capital are recorded. Transactions other than permanent capital are recorded in the current account	All transactions of capital and other than capital are recorded in the capital account
Interest on capital	Generally, the amount of capital remains unchanged, therefore interest on capital remains constant	The amount of capital keeps on changing, consequently interest on capital also keeps on changing
Balance of account	Balance of fixed capital account is always a credit balance. While current account can have a debit or credit balance	Generally, balance of capital account is a credit balance. But under this method, there can be debit balance of capital account
Treatment balance sheet	Since fixed capital account has credit balance, It will be shown at the capital- liabilities side of balance sheet. If current accounts has credit balance, it will be shown at the capital- liability side of balance sheet and debit balance at the asset side	If capital account has a credit balance, it will be show at the capital- liability side of the balance sheet and the debit balance at the asset side

 

2. Profit and Loss account and Profit and Loss appropriation account.

Points of difference	Profit & Loss Account	Profit & Loss Appropriation Account
Meaning	After the preparation of the trading account, the account which is prepared to know the net profit or loss of the business is known as profit and loss account	After the preparation of the profit and loss account, account which is prepared to distributed profit or loss among the partners, is known as profit & loss appropriation account
Prepared	All business entities prepare profit and loss account	Generally, partnership firm prepares profit & loss appropriation account
Opening entry of account	Gross profit or gross loss determined under trading account is shown as the opening entry of the profit and loss account	Net profit or net loss determined under profit and loss account is shown as the opening entry of the profit & loss appropriation account
Debit side	At the debit side of this account, expenses other than purchase are recorded for Eg.., administrative expenses, sales expenses, depreciation, interest on loan of partners, commission of manager, provision and other expenses and loss	At the debit side of this account interest on credit balance of current account, salary, bonus, commission and remuneration to the partners are recorded
Credit side	At the credit side of this account different revenues of business are recorded	At the credit side of this account interest drawings, interest on debit balance of current account are recorded
Result of account	From this account net profit or net loss of the firm is ascertained	From this account divisible profit or divisible loss of the firm is ascertained
Balance of account	The balance of this account is transferred to the profit & loss appropriation account	The ascertained divisible profit/loss is distributing among the partners in thei

 

Multiple Choice Questions: –

1. What is the interest on partners capital for a partner ?

(A) An Expense (B)  Liability  (C) Income  (D) Loss

2. Under which method, the interest on capital keeps on changing during the year due to the changes in the capital ?

• Fluctuating capital accounts method
• Fixed capital accounts method
• Current accounts method
• None of the above

3. In which account and on which side the share of partners share profit is recorded under the fluctuating capital account method ?

• Debit to capital account
• Credit to capital account
• Debit to current account
• Credit to current account

4. At the end of the year where will you transfer drawings account, in fixed capital account method ?

• To capital account
• To current account
• To profit & loss account
• To profit & loss account appropriation account

5. How would you consider the interest on debit balance of partners current account for firm ?

• (A) An expense (B) Liability  (C) Income (D) Loss

6. What is the interest on drawings of partners for a partner ?

• (A) An expense (B) Liability  (C) Income (D) Loss

7. Debit balance of profit & loss appropriation account means ——-

• (A) Gross profit (B) Gross loss (C) Divisible profit (D) Divisible loss

8. What percentage of interest will be paid, when no provision is made pertaining to interest on capital in the partnership deed ?

• (A) 6% (B) 9% (C) 12% (D) No interest

9. What percentage of interest will be paid on the loan lent by the partner to the firm, when no such provision is made in the partnership deed ?

• (A) 6% (B) 9% (C) 12% (D) No interest

10. The capital proportion A, B and C is 3 : 2 : 1 respectively. The divisible profit is Rs. 66,000

What will be the amount of profit of C ?

• (A) 11,000 (B) 22,000 (C) 33,000 (D) 66,000

11. Credit balance of the profit & loss appropriation account means—–

• (A) Gross profit (B) Gross loss (C) Divisible profit (D) Divisible loss

12. In a partnership firm minimum two partners are required because—–

• In a partnership firm is more
• In a partnership firm liabilities are unlimited
• Partnership takes place through agreement
• More capital is required in partnership firm

13. For the partners Parth, Zalak and Kalpana capital ratio is 5 : 3 : 1. Divisible profit of their firm is Rs. 99,000. Then find out profit amount for Zalak.

• (A) 11,000 (B) 22,000 (C) 33,000 (D) 44,000

14. State the maximum number of the partners in a partnership firm.

• (A) 2 (B) 10 (C) 50 (D) 8

15. Interest on capital is to be recorded in which side of profit & loss appropriation A/c ?

• (A) Debit (B) Credit (C) Debit & credit (D) None of the given

16. What is interest on credit balance of partners current account for the partnership A/c ?

• (A) Expense (B) Debts (C) Income (D) Loss

17. In which method interest on capital remains unchanged as capital amount remains same every year?

• Fixed capital account method
• Fluctuating capital account method
• Current account method
• None of the given method

18. In fluctuation capital method, share of profit of a partner will be recorded in which account and on which side?

• Capital A/c – Debit side
• Capital A/c – Credit side
• Current A/c – Debit side
• Current A/c – Credit side

19. How many methods are there in partnership business for maintaining capital account ?

• (A) Two (B) Three (C) Four (D) Five

20. When partnership deed is silent for interest rate, _______ is the rate of interest on partners loan ?

• (A) 6% (B) 7% (C) 10% (D) 12%

21. Partners capital account have ________ balance.

• (A) Debit (B) Credit (C) Debit & Credit (D) None of the given

22. In which account, interest on drawing amount will be debited in fluctuating capital method ?

• (A) Current A/c (B) Trading A/c (C) Capital A/c (D) Drawing A/c

23. In partnership firm, partners liabilities are _______.

• Limited to capital amount
• Limited
• Unlimited
• Restricted

24. For the partnership firm, interest on debit balance of current account is ________.

• (A) Debt (B) Loss (C) Expenses (D) Income

25. For the partnership firm, interest on credit balance of current account is ________.

• (A) Debt (B) Expense (C) Loss (D) Income

26. When partnership deed is silent for interest rate ______ is the rate of interest on loan given by firm to the partner.

• (A) 6% (B) 9% (C) 10% (D) Interest is not be paid

27. Interest on drawing is ______ for business.

• (A) Expense (B) Income (C) Loss (D) Liability

28. Generally, partners current account has_____ balance.

• (A) Debit (B) Credit (C) Debit or credit (D) None of the given

29. Interest on drawing amount is shown on _______ side of profit & loss appropriation account.

• (A) Debit (B) Credit (C) Debit or credit (D) None of the given

30. Which amount is a part of profit and loss account ?

• (A) Capital A/c (B) Current A/c (C) Trading A/c (D) Profit & loss appropriation A/c

31. In a partnership firms final accounts, it is _______ to prepare profit & loss appropriation account.

• (A) Advisable (B) Voluntary (C) Compulsory (D) Not proper

32. In a fixed capital account method, permanent changes takes place in the capital is recorded in ______ account.

• (A) Fixed capital (B) Profit—loss (C) Current (D) Drawings

33. Credit balance of current account is to be shown on _______ side of balance sheet.

• Asset – receivables
• Capital – liabilities
• Other liabilities
• Under the debtors amount

34. In the fluctuating capital method, profit share of partner will be recorded to ______ account and on _____ side.

• (A) Capital, debit (B) Capital, credit (C) Current, credit (D) Current, debit

35. Debit balance of profit & loss account means ______.

• (A) Gross profit (B) Gross loss (C) Divisible profit (D) Net loss

36. In India, partnership act enforced in the year _______.

• (A) 1932 (B) 1947 (C) 1950 (D) 2010

37. Written partnership deed is _______.

• (A) Advisable (B) Compulsory (C) Useless (D) Not required

38. Interest on capital is _______ for business.

• (A) Income (B) Expense (C) Liability (D) Debt

39. Preliminary expense of a business is ______asset for business.

• (A) Real (B) Fictitious (C) Visible (D) Invisible

40. When partner withdraw equal amount in the beginning of every month, then, while calculating interest on drawings, N = _______.

• (A) 66/12 (B) 72/12 (C) 78/12 (D) 1

41. When profit – loss ratio partners is not given, then in which ratio divisible profit be distributed among partners ?

• In capital ratio
• In drawings ratio
• Equal ratio
• None of the given

42. A partner withdraw Rs. 2000 on 1^st of every month. If interest on drawing is to be calculated at 12% then interest amount =Rs. ________.

• (A) 1230 (B) 1560 (C) 1320 (D) 1440

43. By giving interest on capital to the partners, profit of the firm ______.

• (A) Increases (B) Decreases (C) Will not change (D) None of the given

 

 

Answer the following questions….

1. In which year partnership act enforced in India ?

Answer : In the year 1932, partnership act was enforced in India

2. Define : Partnership

Answer : When two or more persons component to contract carry on a legal business, with an objective to earn profit, such arrangement is known as partnership

3. What is partnership firm ?

Answer : The business run collectively in partnership by two or more persons is known as partnership firm

4. What is partnership deed for the firm/business ?

Answer : Partnership deed is an administrative constitution of partnership firm/business

5. Which type of deed is advisable in partnership ?

Answer : Written partnership deed is advisable in partnership firm

6. What is partnership deed ?

Answer : The terms and conditions agreed upon by partners when presented in written form/agreement form, it is known as partnership firm

7. How many methods are there for maintaining capital accounts in partnership firm ? Which are they ?

Answer : Following two methods are there for maintaining capital accounts in partnership firm :

• Fixed capital method
• Fluctuating capital method

8. Where will you record divisible profit in case of fixed capital account method ?

Answer : On credit side of partners current account, divisible profit, in case of fixed capital account method will be recorded

9. Generally, which kind of balance partners capital and current account have ?

Answer : Generally, capital account have credit balance while current account may have debit or credit balance

10. Where will you show debit balance of partners current account in the balance sheet ?

Answer : On assets – receivables side of balance sheet, debit balance of partners current account will be shown

11. When there is no written/oral agreement among partners, is it possible to give salary, bonus, commission etc. to a partner ?

Answer : When there is no written/oral agreement among partners, it is not possible to give salary, bonus, commission etc. to a partner

12. Where will you record all the transactions between partners and partnership firm ?

Answer : All the transactions between partners and partnership firm will be recorded in partners capital account

13. What is fixed capital account method ?

Answer : When the opening balance and the closing balance of the partners capital accounts remains unchanged, it is known as fixed capital account method

14. Profit and loss appropriation account is a part of which account ?

Answer : Profit and appropriation account is a part of profit and loss account only

15. What is capital ?

Answer : When owner or partners of a business brought cash or any asset in the business from his own fund, it is known as capital of owner/partner in the business

In short, Capital = Total assets of the business — Total liabilities of the business

16. What is fluctuating capital account method ?

Answer : When the opening balance and closing balance of the partners capital account is reported flexible, is known as fluctuating capital account method

17. What debit balance and credit balance of profit and loss appropriation account suggest ?

Answer : Debit balance of profit and loss appropriation account means divisible loss and credit balance of profit and loss appropriation account means divisible profit

18. When there is no written agreement among partners, how administrative problems will be solved ?

Answer : As per provisions of partnership Act 1932, administrative problems will be solved when there is no written agreement

19. Where will you show credit balance of partners current account in the balance sheet ?

Answer : On capital liabilities side of balance sheet, credit balance of partners current account will be shown

20. State the main provisions of partnership act 1932

Answer : Main provisions of partnership act 1932 are as follows :

• The distribution of profit and loss would remain in equal ratio
• Interest on capital can not be paid and interest on drawings cannot be charged
• For active participation, salary, bonus, commission or remuneration cannot be paid to partners
• 6% p.a. interest on loan of partner is payable.