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The Chapter Goes Like This-
After studying this chapter, you will be able to-
- Define partnership and list its essential features
- Identify the provisions of the Indian Partnership Act 1932 that are relevant for accounting
- Prepare partners’ capital accounts under fixed and fluctuating capital methods
- Explain the distribution profit or loss among the partners and prepare the Profit and Loss Appropriation Account
- Calculate interest on capital and drawing under various situations
- Explain how guarantee for a minimum amount of profit affects the distribution of profits among the partners
- Make necessary adjustments to rectify the past er rors in partners capital accounts
- Prepare final accounts of a partnership firm
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The present chapter discusses some basic aspects of partnership such as distribution of profit, maintenance of capital accounts, etc. The treatment of situations like admission of partner, retirement, death and dissolution have been taken up in the subsequent chapters.
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.
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’.
2.1 Nature of Partnership
Persons who have entered into partnership with one another are individually called ‘partners’ and collectively called ‘firm’. The name under which the business is carried is called the ‘firm’s name’. A partnership firm has no separate legal entity, apart from the partners constituting it. Thus, the essential features of partnership are:
Two or More Persons: In order to form partnership, there should be at least two persons coming together for a common goal. In other words, the minimum number of partners in a firm can be two. There is however, a limit on their maximum number. By virtue of Section 464 of the Companies Act 2013, the Central Government is empowered to prescribe 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 partness in a firm to be 50.
Agreement: Partnership is the result of an agreement between two or more persons to do business and share its profits and losses. The agreement becomes the basis of relationship between the partners. It is not necessary that such agreement is in written form. An oral agreement is equally valid. But in order to avoid disputes, it is preferred that the partners have a written agreement.
Business: The agreement should be to carry on some business. Mere coownership of a property does not amount to partnership. For example, if Rohit and Sachin jointly purchase a plot of land, they become the joint owners of the property and not the partners. But if they are in the business of purchase and sale of land for the purpose of making profit, they will be called partners.
Mutual Agency: The business of a partnership concern may be carried on by all the partners or any of them acting for all. This statement has two important implications. First, every partner is entitled to participate in the conduct of the affairs of its business. Second, that there exists a relationship of mutual agency between all the partners. Each partner carrying on the business is the principal as well as the agent for all the other partners. He can bind other partners by his acts and also is bound by the acts of other partners with regard to business of the firm. Relationship of mutual agency is so important that one can say that there would be no partnership, if the element of mutual agency is absent.
Sharing of Profit: Another important element of partnership is that, the agreement between partners must be to share profits and losses of a business. Though the definition contained in the Partnership Act describes partnership as relation between people who agree to share the profits of a business, the sharing of loss is implied. Thus, sharing of profits and losses is important. If some persons join hands for the purpose of some charitable activity, it will not be termed as partnership.
Liability of Partners: Each partner is liable jointly with all the other partners and also severally to the third party for all the acts of the firm done while he is a partner. Not only that the liability of a partner for acts of the firm is also unlimited. This implies that his private assets can also be used for paying off the firm’s debts.
Partnership comes into existence as a result of agreement among the partners.
The agreement can be either oral or written.
The Partnership Act does not require that the agreement must be in writing.
But wherever it is in writing, the document, which contains terms of the agreement is called ‘Partnership Deed’.
It generally contains the details about all the aspects affecting the relationship between the partners including the objective of business, contribution of capital by each partner, ratio in which the profits and the losses will be shared by the partners and entitlement of partners to interest on capital, interest on loan, etc.
2.2 Partnership Deed
The clauses of partnership deed can be altered with the consent of all the partners. The deed should be properly drafted and prepared as per the provisions of the ‘Stamp Act’ and preferably registered with the Registrar of Firms.
Glimpses of the Chapter-
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Chapter 2- Accounting for Not for Profit Organisation
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Chapter 2- Accounting for Not for Profit Organisation
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