Revision: Accounting for Partnership Firms and Companies >> Accounting for Partnership Firms Accountancy Commerce (English Medium) Class 12 CBSE

A partnership is a form of business in which two or more persons come together to carry on a business and share its profits and losses as per an agreed-upon partnership deed.

• Section 4 of the Indian Partnership Act, 1932, defines partnership as ''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.'' 
• According to Prof. Handy, "Partnership is the relation existing between persons competent to make contract, who agree to carry on a lawful business in common with a view to earn private gain.

The document containing the partnership agreement among partners is called Partnership Deed.

• ''The term goodwill is generally used to denote the benefit arising from connections and reputation.'' - Lord Lindley
• ''Goodwill is nothing more than the probability that the old customers will resort to the old place.'' - Lord Eldon
• ''Goodwill may be said to be that element arising from the reputation, connections or other advantages possessed by a business which enables it to earn greater profits than the return normally to be expected on the capital represented by the net tangible assets employed in the business.'' - Spicer and Pegler 
• "When a man pays for goodwill, he pays for something which places him in the position of being able to earn more than he would be able to do by his own unaided efforts." - Dicksee

• Indian Partnership Act 1932, Sec. 39, provides that, "The dissolution of the partnership between all the partners of a firm is called the dissolution of a firm."
• "The act of process of ending an official organization or legal agreement."
• "The dissolution of partnership firm indicates the discontinuance function as a firm."

(i) Old Partner’s New Share = Old Share – Sacrificed Share

(ii) New Partner’s Share = Sum of Sacrificed Shares (as per agreed ratio)

(i) Old Partners’ New Shares = Remaining Share × Old Ratio

(ii) Remaining Share = 1 – New Partner’s Share

(i) New Partner's Share = Sum of Profit Shares Given by Old Partners

(ii) New Share of Old Partner = Old Share – Share Given to New Partner

Net Effect = Accumulated Profits + Reserves - Accumulated Losses.

Gaining Profit Share = New Profit Share - Old Profit Share

Gain in Profit Share = New Ratio - Old Ratio

New Profit Share = Old Profit Share + Gained Profit Share

Gaining Ratio = Existing Profit - Sharing Ratio

\[\text{Total Capital of the New Firm}=\frac{\text{Capital of the New Partner}}{\text{Share of Profit of New Partner}}\]

\[\text{Total Capital of the New Firm}=\frac{\text{Total adjusted Capital of Old Partners}}{\text{Total Profit Share of Old Partners}}\]

Retiring/Deceased Partner's Share of Goodwill = Value of Firm’s Goodwill × Share of Profit of Retiring/Deceased Partner

• Meaning: A partnership is when two or more people join to run a business and share profits as per a mutual agreement.
• Key Features: Based on agreement, profit-sharing, mutual agency, legal limit of 50 partners, and lawful business only.
• Nature: Treated as separate for accounting, but not legally—partners are personally responsible for the firm’s debts.
• Rights of Partners: Take part in business, share profits, check accounts, get interest on loans, and retire with notice.
• Liabilities: Unlimited; partners must use personal assets if needed and can’t keep personal gains made using the firm’s name/assets.

• Meaning: A written agreement between partners outlining terms—recommended but not compulsory.
• Contents: Includes firm name, partners' details, capital, profit-sharing, interest, salary, etc.
• Purpose: Avoids disputes by clearly defining partners' rights, duties, and liabilities.
• Disputes: Provides rules for admission, retirement, death, and dispute settlement.
• Importance: Ensures smooth functioning, legal clarity, and easy conflict resolution.

A. For capital brought in cash or by cheque

Cash A/c      ....Dr.

Bank A/c     ....Dr.

      To Partner’s Capital A/c

(Being the capital introduced in cash or by cheque)

B. For capital brought in kind (assets)

Machinery A/c     ...Dr.

Furniture A/c       ...Dr.

Purchases A/c      ...Dr.

       To Partner's Capital A/c

(Being the capital introduced in kind credited to his Capital Account at the agreed value)

                                             Profit & Loss Appropriation Account

                                                         For the year ended.....

Dr.                                                                                                                                     Cr.

A. Transfer of Net Profit/Net Loss:

1. If Net Profit:

Profit & Loss A/c     ...Dr.

     To Profit & Loss Appropriation A/c

(Being the net profit transferred)

2. If Net Loss:

Profit & Loss Appropriation A/c     ...Dr.

          To Profit & Loss A/c

(Being net loss transferred)

B. Interest on Drawings:

1. For Charging Interest on Drawings:

Partners' Capital/Current A/cs (Individually)     ...Dr.

       To Interest on Drawings A/c

(Being the interest charged on drawings)

2. For Transfer to P&L Appropriation A/c:

Interest on Drawings A/c     ...Dr.

        To Profit & Loss Appropriation A/c

(Being the interest on drawings transferred)

C. Interest on Capital

1. For Allowing Interest on Capital

Interest on Capital A/c     ...Dr.

        To Partners' Capital/Current A/cs (Individually)

(Being the interest allowed on partners' capital)

2. For Transfer to P&L Appropriation A/c

Profit & Loss Appropriation A/c     ...Dr.

        To Interest on Capital A/c

(Being the interest on capital transferred)

D. Partners' Salaries/Commissions 

1. For Allowing Partner’s Salary/Commission:

Partners' Salary/Commission A/cs     ...Dr.

        To Concerned Partners' Capital/Current A/cs

(Being the salary/commission allowed to partners)

2. For Transfer to P&L Appropriation A/c:

(ii) Profit & Loss Appropriation A/c     ...Dr.

        To Partners' Salary/Commission A/cs

(Being the salary/commission to partners transferred)

E. Transfer to General Reserve

Profit & Loss Appropriation A/c     ...Dr.

        To General Reserve A/c

(Being the amount transferred to Reserve)

F. Distribution of Profit / Loss among Partners:

1. If Profit:

Profit & Loss Appropriation A/c     ...Dr.

       To Partners' Capital/Current A/cs (Individually)

(Being profit distributed in a profit‑sharing ratio)

2. If Loss:

Partners’ Capital/Current A/cs      ...Dr.

        To Profit & Loss Appropriation A/c

(Being loss distributed in the profit‑sharing ratio)

Note: If the firm incurs a loss, no interest on capital, salary, or commission is allowed unless specifically stated in the question.

• Meaning: A partner is promised a minimum profit; shortfall is compensated.
• Given By: Guarantee can be by all partners, some partners, or the firm.
• If Partners Guarantee: Profit shared normally; deficit paid by guarantor(s) as per agreed ratio.
• If Firm Guarantees: The Guaranteed amount is credited first, and the balance profit is shared among others.
• In Case of Loss: Loss shared first; guaranteed partner still gets minimum profit, adjustment made through capital accounts.

• Meaning: Goodwill is the reputation of a business that helps it earn more than normal profits.
• Nature: It's an intangible but valuable asset, sold only with the full business. Only purchased goodwill is recorded.
• Features: Attracts customers, earns extra profits, value keeps changing, can't be sold alone, and hard to measure.
• When Valued: On partner admission, retirement, change in profit-sharing, sale, or merger.
• Factors Affecting: Management, location, age, profit trend, quality, licenses, and market conditions.

               Calculation of Gain/(Sacrifice) of each Partner

A. Distribution of Reserves and Accumulated Profits (in Old Ratio):

When distributing accumulated profits (e.g., General Reserve, Reserve Fund, P&L Credit Balance):

General Reserve A/c                          ...Dr.

Reserve Fund A/c                              ...Dr.

Profit & Loss A/c (Credit balance)   ...Dr.

      To Old Partner's Capital A/cs or Current A/cs

B. Distribution of Specific Reserves (Only Surplus):

If only the surplus amount is to be distributed (e.g., Workmen's Compensation Reserve, IFR):

Workmen's Compensation Reserve A/c      ...Dr.

Investment Fluctuation Reserve A/c           ....Dr.

           To All Partners' Capital A/c or Current A/c

C. Distribution of Accumulated Losses (in Old Ratio):

When accumulated losses (e.g., P&L Debit Balance, Advertisement Suspense A/c) are transferred:

All Partners' Capital A/c or Current A/c       ...Dr.

        To Profit & Loss A/c (Debit Balance)

        To Advertisement Suspense/Expenditure A/c

D. Adjustment of Reserves/Profits Through Gaining and Sacrificing Partners:

1. In Case of Net gain (Profit):

Gaining Partners' Capital/Current A/cs     ...Dr.

      To Sacrificing Partner's Capital/Current A/cs

2. In Case of Net Loss:

Sacrificing Partners; Capital/Current A/c     ...Dr.

     To Gaining Partners' Capital/Current A/cs

A. Premium for Goodwill is paid privately:

No Entry is passed

B. Premium for Goodwill is brought in cash by the New Partner:

1. When the Premium for Goodwill brought in by the New Partner is Retained in the Business:

(i) Cash/Bank A/c     ...Dr.

     To Premium for Goodwill A/c

(Amount of goodwill/premium brought in cash by new partner) 

(ii) Premium for Goodwill A/c    ...Dr.

       To Old Partners' Capital A/cs

(Amount of goodwill/premium transferred to old partners' capital accounts in sacrificing ratio)

2. When Goodwill/Premium brought in by the New Partner is Withdrawn by the Old Partners:

Old Partner's Capital A/cs    ...Dr.

     To Cash/Bank A/c

(Amount of goodwill/premium withdrawn by the old partners)

C. Premium for Goodwill is brought in kind

1. For assets brought by the incoming partner:

Assets A/c      ...Dr.

     To Incoming Partner's capital A/c

     To Premium for Goodwill A/c

2. For giving credit for goodwill to sacrificing partners in their sacrificing ratio:

Premium for Goodwill A/c     ....Dr.

       To Sacrificing Partners' Capital/Current A/c

D. Premium for Goodwill is brought by New Partner and is withdrawn by the Sacrificing Partners either fully or partly:

1. For premium for goodwill brought in cash by the new partner:

Cash/Bank A/c     ...Dr.

      To Premium for Goodwill A/c

2. For sharing of premium for goodwill:

Premium for Goodwill A/c    ...Dr.

      To Sacrificing Partners' Capital/Current A/c

3. For withdrawal of premium for goodwill amount fully/partly

Sacrificing Partners' Capital/Current A/cs    ...Dr.

       To Cash/Bank A/c

E. New Partner cannot bring his share of Premium for Goodwill; adjustment is made through the Current account of the New Partner:

New Partners' Current A/c    ...Dr.

      To Sacrificing Partners' Capital/Current A/cs

F. New Partner brings a part of Premium for Goodwill in cash or by Cheque or in Kind:

1.Cash/Bank/Assets A/c     ...Dr.

     To Premium for Goodwill A/c

2. New Partners' Current A/c    ...Dr.

Premium for goodwill A/c        ...Dr.

       To Sacrificing Partners' Capital/Current A/cs

G. Goodwill appears (exists) in the Balance Sheet and Incoming Partner brings Premium for Goodwill in full or in part:

1. Write-off of Existing Goodwill

Old Partners' Capital/Current A/cs     ...Dr.

        To Goodwill A/c

2. Entry for Premium for Goodwill Brought by New Partner

Cash/Bank A/c      ...Dr.

      To Premium for Goodwill A/c

3. Distribution of Premium for Goodwill to Sacrificing Partners

Premium for Goodwill A/c       ...Dr.

        To Sacrificing Partners' Capital A/cs

4. Adjustment Entry for Premium Not Brought by New Partner

New Partner's Current A/c     ...Dr.

      To Sacrificing Partners' Capital/Current A/cs

H. Goodwill exists in the Balance Sheet and incoming partner is unable to bring his or her share of Premium for Goodwill in Cash or by Cheque:

1. Write-off of Existing Goodwill

Old Partners' Capital/Current A/cs     ...Dr.

       To Goodwill A/c

2. Adjustment for Incoming Partner’s Share of Goodwill Not Brought in Cash

Incoming Partner's Current A/c    ...Dr.

       To Sacrificing Partners' Capital/Current A/cs

                                                     Revaluation Account

Dr.                                                                                                                               Cr.

1. For a decrease in the value of assets : 

Revaluation A/c or Profit & Loss Adjustment A/c     ...Dr. 

           To Assets A/c

(Decrease in the value of assets) 

2. For an increase in the value of assets :

Assets A/c      ...Dr.

       To Revaluation A/c or Profit & Loss Adjustment A/c

(Increase in the value of assets) 

3. For an increase in the value of liabilities:

Revaluation A/c or Profit & Loss Adjustment A/c     ...Dr.

         To Liabilities A/c

(Increase in the value of liabilities) 

4. For a decrease in the value of liabilities : 

Liabilities A/c     ...Dr.

      To Revaluation A/c or Profit & Loss Adjustment A/c

(Decrease in the value of liabilities)

5. For accounting unrecorded assets

Unrecorded Assets A/c     ...Dr.

       To Revaluation A/c

(accounting of unrecorded assets)

6. For accounting unrecorded liabilities

Revaluation A/c      ...Dr.

      To Unrecorded Liabilities A/c

(Accounting of unrecorded liabilities)

7. For transferring Gain (Profit):

Revaluation A/c     ...Dr.

     To Old Partner's Capital A/cs

(Gain on revaluation credited to Old Partner's Capital A/cs) 

8. For transferring loss: 

Old Partner's Capital A/cs    ...Dr.

      To Revaluation A/c

(Loss on revaluation debited to Old Partner's Capital A/cs)

A. Accounting Entry to Adjust Deficit Capital:

1. If amount is brought in cash or cheque:

Cash/Bank A/c      ...Dr.

     To Concerned Partner's Capital Account

2. If amount is transferred to Current Account of the partner:

Concerned Partner's Current A/c    ...Dr.

     To Concerned Partners Capital A/c

B. Accounting Entry to Adjust Surplus Capital:

1. If amount is paid:

Concerned Partner's Capital A/c     ....Dr.

     To Cash/Bank A/c

2. If amount is transferred to Current Account of the partner:

Concerned Partner's Capital A/c    ...Dr.

      To New Partner's Current A/c 

C. When a new partner brings certain assets towards his capital:

Assets A/c        ...Dr.

       To New Partner's Capital A/c

A. When Goodwill is Raised and Retained in the Business:

Goodwill A/c        ...Dr.

      To All Partners' Capital A/c        (Old Profit Sharing Ratio)

B. When Goodwill is Raised and Then Written Off:

1. Raise Goodwill:

Goodwill A/c        ...Dr.

      To All Partners' Capital A/c        (Old Profit Sharing Ratio)

2. Write Off Goodwill:

Continuing Partners' Capital A/c          ...Dr.

          To Goodwill A/c    (New Profit Sharing Ratio)

C. When Goodwill is Raised Only for Retiring/Deceased Partner’s Share (and Retained)

Goodwill A/c            ...Dr.

     To Retiring/Deceased Partner’s Capital A/c

D. When Goodwill is Raised Only for Retiring/Deceased Partner and Then Written Off:

1. Raise Goodwill

Goodwill A/c       ...Dr.

       To Retiring/Deceased Partner's Capital A/c

2. Write Off Goodwill:

Gaining Partners’ Capital A/c        ...Dr.

       To Goodwill A/c       (Gaining Ratio)

E. When Goodwill Already Exists in the Books (Written Off at Retirement/Death)

All Partners’ Capital/Current A/cs     ...Dr.

     To Goodwill A/c

(Being goodwill existing in the books written off)

F. Direct Adjustment of Goodwill (No Goodwill A/c Raised as per AS-26)

1. Gaining Partners Compensate Retiring/Deceased Partner:

Gaining Partners’ Capital/Current A/cs       ...Dr.

      To Retiring/Deceased Partner’s Capital/Current A/c

(Being the retiring partner’s share of goodwill adjusted)

2. If Sacrificing Partner is also Compensated:

Gaining Partners’ Capital (or Current) A/cs       ...Dr.

     To Retiring Partner’s Capital A/c

     To Sacrificing Partner’s Capital (or Current) A/c

3. General Adjustment Entry (No Goodwill A/c raised):

Continuing Partners’ Capital A/cs      ...Dr.

   To Retiring/Deceased Partner’s Capital A/c  

(Being the retiring/deceased partner's share of goodwill adjusted to the continuing partners)

1. For a decrease in the value of assets : 

Revaluation A/c or Profit & Loss Adjustment A/c     ...Dr. 

           To Assets A/c

(Decrease in the value of assets) 

2. For an increase in the value of assets :

Assets A/c      ...Dr.

       To Revaluation A/c or Profit & Loss Adjustment A/c

(Increase in the value of assets) 

3. For an increase in the value of liabilities:

Revaluation A/c or Profit & Loss Adjustment A/c     ...Dr.

         To Liabilities A/c

(Increase in the value of liabilities) 

4. For a decrease in the value of liabilities : 

Liabilities A/c                          ...Dr.

      To Revaluation A/c or Profit & Loss Adjustment A/c

(Decrease in the value of liabilities)

5. For accounting unrecorded assets

Unrecorded Assets A/c          ...Dr.

       To Revaluation A/c

(accounting of unrecorded assets)

6. For accounting unrecorded liabilities

Revaluation A/c               ...Dr.

      To Unrecorded Liabilities A/c

(Accounting of unrecorded liabilities)

7. For transferring Gain (Profit):

Revaluation A/c              ...Dr.

     To Old Partner's Capital A/cs

(Gain on revaluation credited to Old Partner's Capital A/cs) 

8. For transferring loss: 

Old Partner's Capital A/cs       ...Dr.

      To Revaluation A/c

(Loss on revaluation debited to Old Partner's Capital A/cs)

• Dissolution of a partnership firm means a change in the agreement; the business may continue. Dissolution of a firm means complete closure of business (Sec. 39).
• After the firm's dissolution, assets are sold, liabilities are paid, and the remaining balance is shared among partners.
• Modes of dissolution: Without Court Order and By Court Order.
• Without Court: Occurs by mutual agreement, partner insolvency, unlawful business, expiry of term, completion of venture, or notice if the partnership is at will.
• By Court: Happens if a partner is of unsound mind, permanently disabled, guilty of misconduct, breaches the agreement, the firm runs at a loss, or if the court finds it just and fair.

• Realisation A/c: Records asset sales and liability payments; shows profit/loss on dissolution.
• Capital A/c: Shows partner balances, adjusted for reserves and realisation results.
• Current A/c: Used under fixed capital method; balance moved to capital account.
• Loan A/c: Partner loans are repaid after outside liabilities; debit loans are adjusted via capital/current A/c.
• Cash/Bank A/c: Tracks all receipts and payments; final balance paid to partners.

                                                     Adjustment Table

A. Adjustment Entry for Withdrawal of Profit (Old Profit Distribution):

Partners' Capital/Current A/cs             ...Dr.

          To Profit & Loss Adjustment A/c

B. Adjustment Entry for Items to be Credited to Partners’ Capital/Current A/cs:

1. For Interest on Capital not allowed or short allowed:

Interest on Capital A/c                        ...Dr.

        To Partner's Capital/Current A/c

2. For Partners' Remuneration (Salary) not allowed or short allowed:

Partner's Salary A/c                           ...Dr.

        To Partner's Capital/Current A/c

3. For Interest on Drawings excess charged:

Interest on Drawings A/c                  ...Dr.

      To Partner's Capital/Current A/c

C. Adjustment Entry for Items to be Debited to Partners’ Capital/Current A/cs:

1. For Interest on Capital excess allowed:

Partners’ Capital/Current A/c           ....Dr.

     To Interest on Capital A/c

2. For Partner’s Remuneration (Salary) excess allowed:

Partners’ Capital/Current A/c           ...Dr.

     To Partner’s Salary A/c

3. For Interest on Drawings less charged or not charged:

Partners’ Capital/Current A/c          ...Dr.

       To Interest on Drawings A/c

D. Transfer to Profit & Loss Adjustment A/c:

1. When amounts are to be debited to Profit & Loss Adjustment A/c:

Profit & Loss Adjustment A/c        ...Dr.

     To Interest on Capital A/c 

     To Partner’s Remuneration (Salary) A/c

     To Interest on Drawings A/c

2. When amounts are to be credited to Profit & Loss Adjustment A/c:

Interest on Capital A/c                   ...Dr.

Partner’s Salary A/c                       ...Dr.

Interest on Drawings A/c               ...Dr.

      To Profit & Loss Adjustment A/c

E. Final Balance Transfer from Profit & Loss Adjustment A/c:

1. If there is Profit:

Profit & Loss Adjustment A/c     ...Dr.

        To Partners’ Capital/Current A/cs

2. If there is a Loss:

Partners’ Capital/Current A/cs    ...Dr.

      To Profit & Loss Adjustment A/c