Revision: Partnership Accounts >> Fundamentals of Partnership Accounts ISC (Commerce) Class 12 CISCE

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.

\[\text{Interest on Drawings}=\text{Total Drawings}\times\frac{\text{Rate of Interest}}{100}\times\frac{\text{Average Period}^*}{12}\]

\[\text{Average Period}=\frac{\text{Months Left after First Drawing}+\text{Months Left after Last Drawing}}{2}\]

If Period is in Months:

\[\text{Interest on Drawings}=\text{Amount of Drawings}\times\frac{\text{Rate of Interest}}{100}\times\frac{1}{12}\]

If Period is in Days:

\[\text{Interest on Drawings}=\text{Amount of Drawings}\times\frac{\text{Rate of Interest}}{100}\times\frac{1}{365}\]

\[\text{Net Profit (before Commission) or Sale}\times\frac{\text{Rate of Commission}}{100}\]

\[\text{Profit (before Commission) or Sale }\times\frac{\text{Rate of Commission}}{100+\text{Rate of Commission}}\]

• 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.

• Applicability: Provisions of the Indian Partnership Act, 1932, apply only when there is no Partnership Deed or when the deed is silent on a particular matter.
• Priority Rule: If there is a conflict, the terms of the Partnership Deed override the provisions of the Act.
• Profit & Interest Rules: In absence of a deed—profits and losses are shared equally, no interest on capital or drawings, and no partner gets salary or commission.
• Loan & Admission: Interest on partner’s loan is allowed at 6% p.a., and a new partner can be admitted only with the consent of all partners.
• Other Provisions: Registration of the firm is optional, a minor may be admitted for benefits, and the firm dissolves on the death of a partner unless otherwise agreed.

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)

1. When additional capital is introduced by a partners:

Cash/Bank A/c         ...Dr.

      To Partners Capital A/c

(Being additional capital introduced into the business)

2. When capital amount is brought in by a Partner in the form of Assets:

Assets A/c            ...Dr.

       To Partners Capital A/c

(Being additional capital brought in kind)

                                           Partners' Capital Account

Dr.                                                                                                                 Cr.

                                                     Partner's Capital Account

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.

                                             Profit & Loss Appropriation Account

                                                         For the year ended.....

Dr.                                                                                                                                     Cr.

                                               Calculation of Interest on Capital

• No Agreement Mentioned: If the partnership deed is silent about interest on capital, no interest is allowed.
• Agreement Allows Interest (No Profit = No Interest): If interest is allowed but not stated as a charge or appropriation, interest is given only when there’s profit.
• Case of Loss: If the firm faces a loss, then no interest on capital is given, even if the deed allows it.
• Profit ≥ Interest: If the profit is equal to or more than the interest, then full interest is given.
• Profit < Interest: If the profit is less than the interest, then interest is limited to the profit, and it is shared in proportion to the partners’ interest in capital.

A. Adjusting Entry to Allow Interest on Capital

Interest on Capital A/c                     ....Dr.

      To Partners' Capital A/c                               [In case of fluctuating capitals]

               or

      To Partners' Current A/c                               [In case of fixed capitals]

(Being the interest on capital allowed to partners)

B. Closing Entry to Close the Interest on Capital Account

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

      To Interest on Capital A/c

(Being the Interest on capital transferred to Profit & Loss Appropriation Account)

A. If Interest is allowed on the Current Account

1. Adjusting Entry:

Interest on Current A/c     ...Dr.

     To Partners' Current A/c (Individually)

(Being the interest on the Current Account allowed to partners)

2. Closing Entry:

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

       To Interest on Current A/c

(Being the interest on Current Accounts transferred to Profit & Loss Appropriation Account)

B. If Interest is charged on the Current Account

1. Adjusting Entry:

Partners' Current A/c (Individually)     ...Dr.

        To Interest on Current A/c

(Being the interest on the Current Account charged from partners)

2. Closing Entry:

Interest on Current A/c     ....Dr.

      To Profit & Loss Appropriation A/c

(Being the interest on Current Accounts transferred to Profit & Loss Appropriation Account)

    Statement Showing Calculation of Opening Capital

  Statement Showing Calculation of Opening Capital

A. Interest has been paid

Interest on Loan by Partner A/c     ...Dr.

          To Cash/Bank A/c

B. Interest is due, not paid, but is provided

Interest on Loan by Partner A/c     ...Dr.

          To Loan by Partner A/c

C. When Interest is transferred to Profit & Loss A/c

Profit & Loss A/c     ...Dr.

          To Interest on Loan by Partner A/c

1. To Charge Interest on a Loan to a Partner

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

          To Interest on Loan to Partner А/с

2. To Close the Interest on Loan to Partner A/c

Interest on Loan to Partner A/c     ...Dr.

       To Profit & Loss A/c

A. When Rent is Paid

1.Rent A/c     ...Dr.

     To Cash/Bank A/c

B. When Rent is Due but not Paid

1. Rent A/c     ...Dr.

     To Partner's Capital/Current A/c

C. When Rent is transferred to Profit & Loss A/c

2. Profit & Loss A/c     ...Dr.

         To Rent A/c

A. If Partners' Capital Accounts are Fixed

1. Adjusting Entry:

Partner's Current A/c     ...Dr.

        To Interest on Drawings A/c

(Being the interest charged on partners' drawings)

2. Closing Entry:

Interest on Drawings A/c     ...Dr.

      To Profit & Loss Appropriation A/c

(Being the interest on drawings transferred to Profit & Loss Appropriation A/c)

B. If Partners' Capital Accounts are Fluctuating

1. Adjusting Entry:

Partners' Capital A/c     ...Dr.

      To Interest on Drawings A/c

(Being the interest charged on partners' drawings)

2. Closing Entry:

Interest on Drawings A/c     ...Dr.

         To Profit & Loss Appropriation A/c

(Being the interest on drawings transferred to Profit & Loss Appropriation A/c)

1. On Allowing Salaries/Commissions:

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

        To Partners' Current A/cs                  [When Capitals are fixed.]

        To Partners' Capital A/cs                   [When Capitals are fluctuating.]

2. On Closing of Salaries/Commissions A/cs:

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

        To Partners' Salary/Commission A/cs

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

       To Reserve A/c (Say, Workmen Compensation Reserve/General Reserve)

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

                                                     Adjustment Table

• 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.