Accounting for Partnership Firms

 Class 12 


                                       Chapter -2

 Accounting for Partnership Firms

* Meaning of Partnership

- When two or more persons join hands to set up a business and share its. Profits and losses, they are said to be in partnership.
- According to Section 4 of the Indian Partnership Act 1932 defines Partnership as 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 .- Personko< who have entered into partnership with one individually called "Partnership" and collectively called Firm.

* Feature / Characteristics of Partnership

1) Two or More Persons

- In order to form partnership, there should be at least two persons coming together for a common goal .
- Section 464 of the companies Act 2013 the central Government is empowered to prescrible maximum number of partners in a firm but the number of partners can not be more than 100 .
- The central government has prescribed the maximum number of partners in a firm to be 50 under Rule 10 of the Companies (Miscellaneous) Rules 2014, a partnership
firm cannot have more than 50 Partners.

2) Agreement

- Partnership is the result of an agreement between two or more persons to do business and share its profits and losses .
- Partnership agreement can be either oral or written.
- The partnership agreement is written, the document with contains terms of the agreement is called “Partnership Deed”.

>>> The Partnership Deed usually contains the following Details.

1. Name and Addresses of the firm and its main business, Name and Addresses of all Partners.
2. Amount of Capital to be Contributed by each partner.
3. The According period of the firm.
4. The date of Commencement of Partnership.
5. Rules regarding Operation of Bank Accounts.
6. Profit and Loss sharing ratio.
7. Rate of interest on Capital, Loan, drawings etc .
8. Mode of auditor’s Appointment, if Any.
9. Salaries, Commission, etc , if payable to any Partner.
10. The rights duties and liabilities of each partner.
11. Treatment or loss arising out of insolvency of one or more partners.
12. Settlement of accounts on dissolution of the firm.

(3) Business

- The agreement should be to carry on some business.
- Co – ownership of a property does not amount to partnership.

(4) Sharing of Profit

- Another important element of partnership is that the agreement between partners must be to share profits and losses of a business.

(5) Mutual Agency

- The business of a partnership concern may be Carried on by all the Partners or any of them acting for all.
- The statement has two important implications.
(a) First, every Partner is entitled to participate in the Conduct of the affairs of its business.
(b) Second, that there exists a relationship of mutual agency between all the partners each.

(6) Liability of partnership

- The liability of a partner for acts of the firm is also unlimited.
- Limited Liability Partnership (LLP) is an incorporated partnership formed and registered under the Limited Liability Partnership Act 2008 with limited liability and perpetual succession.

Salient features

1. Limited Liability partnership is a corporate and a legal entity separate from its Partners.

2. Every Limited Liability Partnership Shall have at least two partners and shall also have at least two individuals as designated Partners, of whom at least one shall be a resident of India.
3. The Indian partnership Act 1932 shall not be applicable to Limited Liability Partnership.
4. The Limited Liability partnership has a perpetual succession.
5. The central government has the power to investigate into the affairs of Limited Liability Partnership, if required by appointment of a competent Inspector for the purpose.

Partnership deed

- A partnership deed is a legal written document which conditions terms and conditions of a partnership between two or more individuals. It is also known as a partnership agreement or articles of partnership

.- The partnership agreement can be either oral or written.

- Partnership act is not required that the agreement must be writing.

The Partnership Deed usually contains the following details:

  1.  Names and Addresses of the firm ;
  2.  Names and Addresses of all partners;
  3. Amount of capital to be contributed by each partner;
  4. The accounting period of the firm;
  5.  Rules regarding operation of Bank Accounts;
  6. Profit and loss sharing ratio;
  7.  Salaries, commission, etc, if payable to any partner;
  8. The rights, duties and liabilities of each partner;
  9.  Treatment of loss arising out of insolvency of one or more partners.
  10. Settlement of accounts on dissolution of the firm.
  11.  Method of settlement of disputes among the partners.
  12.  Rules to be followed in case of admission, retirement, death of a partner; and
  13.  Any other matter relating to the conduct of business.

Provisions of Partnership Act Relevant for Accounting




Special Aspects of Partnership Accounts

- Accounting treatment for partnership firm is similar to that of a sole proprietorship business with the exception of the following aspects: 
• Maintenance of Partners’ Capital Accounts.
• Distribution of Profit and Loss among the partners.
• Adjustments for Wrong Appropriation of Profits in the Past.
• Reconstitution of the Partnership Firm.
• Dissolution of Partnership Firm. 























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