Revision: Introduction to Partnership and Partnership Final Accounts Accounts HSC Commerce (English Medium) 12th Standard Board Exam Maharashtra State Board

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 Trading Account indicates the results of buying and selling of goods while preparing this account, the general establishment charges are ignored and only the transactions related to goods are included." - J. R. Batliboi

"A Profit and Loss Account is an Account into which all gains and losses are considered in order to ascertain the excess of gain over the losses or vice versa." - R. N. Carter

Palmer defines Balance Sheet as, "The Balance Sheet is, a statement on a particular date showing on one side the traders property and possessions and on the other side the liabilities."

\[\text{Commission Amount}=\frac{\text{Rate of Commission}\times\text{Net~Profit}}{100+\text{Rate of Commission}}\]

\[\text{Commission Amount}=\frac{\text{Rate of Commission}\times\text{Net~Profit}}{100}\]

• 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.

                                                        Effects in Profit & Loss Account

Dr.                                                                                                                                                 Cr.

                                                 Partners' Current Account

Dr.                                                                                                                                         Cr.

A. Interest allowed on partner's capital

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

         To Partners Capital / Current A/c

(Being interest due on capital)

2. Profit and Loss A/c             ...Dr.

         To Interest on Capital A/c

(Being interest on Capital transferred to profit and loss account)

B. Salary or Commission allowed to partners:

1. Salary or Commission in Partner A/c        ...Dr.

        To Partners Current / Capital Account

(Being Salary or Commission due for payment)

2. Profit and Loss A/c         ...Dr.

       To Salaries / Commission A/c

(Being Salary/Commission transferred to Profit and Loss A/c)

C. Cash or Goods taken over by the partners for their personal use:

1. Drawing A/c             ...Dr.

         To Cash / Goods A/c

(Being cash or goods withdrawn for personal use)

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

      To Drawing A/c

(Being balance on account transferred to current A/c)

D. Interest charged on drawing of the partners:

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

        To Interest on Drawing A/c

(Being interest charged on Drawing)

2. Interest on Drawings A/c              ...Dr.

         To Profit & Loss A/c

(Being interest on Drawings transferred to profit and loss A/c)

E. Transfer to Net Profit:

Profit & Loss A/c                  ...Dr.

       To Partners Current / Capital A/c

(Being profit transferred to Partner's Current / Capital A/c)

F. Distribution of Net Loss:

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

       To Profit & Loss A/c

(Being loss adjusted to Partners Current/Capital A/c)

                                                     Partner's Capital Account

Dr.                                                                                                                                      Cr.

• Final Accounts of a partnership firm include the Trading Account, Profit and Loss Account, and Balance Sheet, prepared at the end of each financial year.
• They help determine the Gross Profit or Loss, Net Profit or Loss, and the business's financial position.
• Adjustments like closing stock, depreciation, outstanding expenses, bad debts, etc., are necessary for accurate final accounts.
• The process follows key steps: Journal entries → Ledger → Trial Balance → Final Accounts.
• Final Accounts are essential for tax calculation, fund planning, goodwill valuation, and understanding debtor-creditor balances.

                                                 Trading Account for the year ended.........

Dr.                                                                                                                                                                              Cr.

                                                                       Profit and Loss Account for the year ended.........

Dr.                                                                                                                                                                                                                                          Cr.

                                                                                  Balance Sheet as on......