Meaning

Partnership is Defined by Indian Partnership Act,

1932, Section-4 as follows-
Partnership is the relation between person who have
agreed to share the profits of a business carried on
by all or any of them acting for all.
Minimum partner 2
Maximum partner 50 as per rule 10 of the companies
rules, 2014

Essential condition of Partnership

Business + Profits + Mutual agency

Chetan Sharma
❑ Partners:- The persons who have entered into a partnership with one another are individually are called
partners.
❑ Firm:- The collectively all a partner called firm.
❑ Firm Name:- The name under which the business is carried is called firm name.
❑ Partnership from the legal viewpoint, is not a separate legal entity from its partners since firms debts a
payable from personal assets of the partners, if the firm is unable to repay its liabilities.

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 Essential Features of Partnership
a) Two or more persons
b) Agreement (Oral or written)
c) Lawful business (Existence of business & profit motive)
d) Sharing of profits
e) Principle and Agent relationship
f) No separate existence (legal point of View)
g) Business can be carried on by all or any one of them acting for all.

Minor Partner:- A minor though not competent to contract, can be a partner in the firm but only in profits
of the firm and not in losses. A minor partner should accept or refuse the partnership in the firm within 6
months on becoming major, i.e. attaining 18 year of age. If he/she does not so decide, he/she becomes
liable for all the actions since he/she became partner

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 Rights of a partner

a) Right to participate in management

b) Right to inspect books of account and have a copy of it
c) Right to share profits or losses
d) Right to received interest on his/her loan to the firm @6% p.a. (Charge)
e) A partner has the right not to allow the admission of a new partner
f) After giving proper notice, a partner has right to retire from the firm

PARTNER

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 Partnership Deed
A partnership deed is an agreement between the partners of a firm that contains the terms and conditions
of partnership.
It is not mandatory.
It also called “Articles of partnership”
It is Prepared as per Stamp Act Provisions

It contains the following points

i) Name and Address of the firm & partners.
ii) Nature of business, capital contribution, profit sharing ratio,
Accounting period, Duration of partnership & settlement of Disputes.
iii) Interest on capital, salaries to partners, commission, etc.
iv) Rights and Duties of Partners.

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 IMPORTANT POINTS TO BE REMEMBERED

In partnership the liability of all partners are

unlimited
Registration of Partnership firm is not Compulsory.
Partnership is separate business entity from Accounting point of view.

(LLP ACT 2008)

LLP : Limited Liability Partnership Here liability of partners are limited
(Mix of Partnership and Company)

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 Format of Profit & Loss Appropriation A/c
Dr. Cr.
Particulars Amount Particulars Amount
To Profit & Loss A/c (Net Loss Transferred XX By Profit & Loss A/c (Net Profit Transferred XX
From P&L A/c) from P&L A/c)
To Interest on Capitals Less: Manager commission
A xx Less: Rent Paid to a partner (P.a.)
XX
B xx Less: Interest on Loan Paid to partners XX
To Partner’s Salaries (P.a.) Add: Interest on Loan Received from
A xx partners
XX
B xx
To Partner’s Commissions By Interest on Drawings
A xx A xx
B xx XX B xx XX
To Reserves XX
To Divisible Profit transfer to Partner’s XX To Divisible Loss transfer to Partner’s
Capital/Current A/c of Capital/Current A/c of
A xx A xx XX
B xx B xx
XX XX

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Partnership deed Vs. Partnership Act 1932

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In the absence of partnership deed (Partnership Act provisions
are applicable)
a) Profit sharing ratio will equal
b) No interest on capital, no salary, no interest on drawings, etc.
c) Interest on (partners loan to firm) @6% p.a.
d) Interest on (firm loans to Partners) – NO INTEREST
It is a charge against profit hence provided even in case of losses
e) Interest on capital & salary if given in partnership deed then it will Provided but only out of profits.

MUST CHECK IF PROFITS ARE SUFFICIENT OR NOT,

IF NOT DISTRIBUTE NET DIVISIBLE PROFITS
IN EXPENSE RATIO

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 Charge against profits & Appropriation of profits

Charge against profits means that it is an expense for the firm and it is paid whether the firm earn profit or
incurs loss.
✓ Manager Commission
✓ Interest on Partners Loan
✓ Rent to a Partner

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Q.1) Ram, Shyam and Payal were in partnership sharing profits and losses in the ratio of 2:2:1.
Their capital as follows:
Ram- 2,50,000
Shyam- 1,50,000
Payal- 1,00,000
Net profit of the firm is ₹25,000 and Interest on Capital @10% p.a.
Calculate interest on capital of each partner's.

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Q.2) Ram, Shyam and Payal were in partnership sharing profits and losses in the ratio of 2:2:1. Their capital
as follows:
Ram- 2,50,000
Shyam- 1,50,000
Payal- 1,00,000
Net profit of the firm is ₹25,000 and Interest on Capital @10% p.a. is a charge.
Calculate interest on capital of each partner's.

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 Decisions

Minor Major
(Majority) (100% Consent)

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Q.3) C, S and K are partners in a firm. They do not have a partnership deed. At the end of the first year of
the business, they faced the following issues:
a) C wants that interest on capital should be allowed to the partners but S and K do not agree.
b) S wants that the partners should be allowed to draw salary but C and K do not agree.
c) C and S want that K should pay interest on loan given to him by the firm but K does not agree.
d) C and S having contributed more capital, desire that the profits should be distributed in the ratio of
their capital contribution but K does not agree.
Calculation of Interest on Drawings

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Q.4) A and B are partners sharing profit equally. A drew regularly 4,000 in the beginning of
every month for six month ended 30 September,2022. calculate interest on drawings @ 5% p.a. for a
th

period of six month

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Q.5) The capital accounts of Alka and Archana showed credit balances of 4,00,000 and 3,00,000
respectively, after taking into account drawings and net profit of 2,00,000. the drawings of the partners
during the year 2022-23 were:
i) Alka withdrew 10,000 at the end of each quarter
ii) Archana’s drawings were:
31st May, 2022 8,000
1st November, 2022 7,000
1st February, 2023 5,000
calculate interest on partner’s drawings @ 6% p.a. for the year ended 31st March,2023
Q.6) Green and Orange are partners. Green draws a fixed amount at the beginning of every month. Interest
on drawings is charged @8% p.a. At the end of the year interest on Green's drawings amounts to ₹ 2,600.
Monthly Drawings of Green were ?

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 SPECIAL CASE

Q.7) T and K are partners sharing profits equally. K regularly withdrew 10,000 per month in the beginning of
the month for six months ended 30th September, 2024. calculate interest on drawing @10% p.a. for the year
ended 31st March, 2024

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Salary and Commission to partners
Practical problems

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Q.8) A and B are partners sharing profits equally. Their capitals as on 1st April, 2023 were 5,00,000 each.
Partners are allowed interest on capital @5%p.a. Drawings of each partner were 1,00,000. Salary is to be
allowed to B @ 5,000 per month. Net profit for the year ended 31st March, 2024 was 8,80,000. 10% of the net
divisible profit is to be set aside to General Reserve.
Prepare Profit and Loss Appropriation Account for the year ended 31st March, 2024.
INTEREST ON PARTNER’S CAPITAL

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Q.9) Amit and Bramit started business on 1 April, 2023 with capital of 15,00,000
st

and 9,00,000 respectively. On 1st October, 2023 they decided that their capitals should be
12,00,000 each. The necessary adjustments in capital were made by introducing or
withdrawing by cheque. Interest on capital is allowed @ 8% p.a. compute interest on
capital for the year ended 31st March, 2024

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Q.10) Ashish and Aakash are partners sharing profit in the ratio of 3 : 2. Their Capital Accounts showed a credit
balance of ₹ 5,00,000 and ₹ 6,00,000 respectively as on 31st March, 2023 after debit of drawings during the year
of ₹ 1,50,000 and ₹ 1,00,000 respectively. Net profit for the year ended 31st March, 2023 was ₹ 5,00,000.
Interest on capital is to be allowed @ 10% p.a. Pass the Journal entry for interest on Capital and
Prepare Profit and Loss Appropriation Account.

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Methods of partners capital
Account.

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Q.11) X and Y are partners sharing profits and losses in the ratio of 7:3. Their Capital Accounts as at 1st April,
2023 were X 5,00,000; Y 4,00,000. Partners are allowed interest on capital @5% p.a. Drawings of the partners
during the year ended 31st March, 2024 were 72,000 and 50,000 respectively. Profit for the year before
allowing interest on capital and salary to Y @ 5,000 per month was 8,00,000. 10% of the net profit is to be set
aside to General Reserve.
Prepare Profit and Loss Appropriation Account for the year ended 31st March, 2024 and Capital Accounts of
the partners.

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Q.12) A and B are partners sharing profits and losses in the ratio of 3:1. on 1st April,2022 their capital were:
A: 5,00,000 and B: 3,00,000. During the year ended 31st March, 2023 the firm earned a net profit of
5,00,000. the terms of partnership are:
a) Interest on capital is to be allowed @ 6% p.a.
b) A will get a commission @ 2% on net sales
c) B will get a salary of 5,000 per month
d) B will get a commission of 5% on profits after deduction of all expenses including such commission.
Partnership drawings for the year were: A 80,000 and B 60,000. Net sales for the year was 30,00,000. After
considering the above facts. You are required to prepare profit and loss appropriation account and partner's
capital accounts

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PAST ADJUSTMENTS

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Q.13) Azad and Benny are equal partners. Their capitals are 40,000 and 80,000
respectively. After the accounts for the year had been prepared. It was noticed that
interest @5% p.a. as provided in the partnership deed was not credited to their capital
account before distribution of profits. It is decided to pass an adjustment entry in the
beginning of the next year. Record the necessary journal entry.
Q.14) Ram, Shyam and Mohan were partners in a firm sharing profits and losses in the ratio of 2:1:2. Their capitals were
fixed at 3,00,000; 1,00,000 and 2,00,000. For the year ended 31st march, 2023 interest on capital was credited to them
@9% instead of 10% p.a. the profit for the year before charging interest was 2,50,000 show your working notes and
pass the necessary adjustment entry.

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Q.15) Sharma and Verma were partners in a firm sharing profits and losses in the ratio of 3:2. Their fixed capitals were
14,00,000 and 10,00,000 respectively. The partnership deed provided for the following:
(i) Interest on capital @ 10% per annum.
(ii) Interest on drawings @ 12% per annum.
During the year ended 31.03.2023, Sharma withdrew 2,00,000 and Verma withdrew 1,00,000. After preparing the
accounts for the year ended 31.03.2023, it was realised that interest on capital was not allowed and interest on
drawings was not charged.
Showing your working notes clearly pass necessary journal entries in the books of the firm to rectify the above error.

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Q.16) A, B, and C were partners. Their fixed Capitals were ₹ 60,000, ₹ 40,000, and ₹ 20,000 respectively. Their profit-
sharing ratio was 2 : 2 : 1. According to the Partnership Deed, they were entitled interest on capital @ 5% p.a. In
addition, B was also entitled to draw a salary of ₹ 1,500 per month. C was entitled to a commission of 5% on the profits
after charging the interest on capital, but before charging the salary payable to B. The net profits for the year, ₹ 80,000,
were distributed in the ratio of their capitals without providing for any of the above adjustments. Showing your
workings clearly, pass the necessary adjustment entry.

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 GUARANTEE OF PROFITS TO A PARTNER

In case of guarantee of profit any deficiency arising to such partners is born by the remaining partner in their
Profit sharing ratio.

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Q.17) Maanika, Bhavi and Komal are partners sharing profits in the ratio of 6:4:1.
Komal is guaranteed a minimum profit of 2,00,000. The firm incurred a loss of 22,00,000
for the year ended 31 March,2018. Pass necessary journal entry regarding deficiency
st

borne by Maanika and Bhavi and prepare Profit and Loss appropriation Account.

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Q.18) Amay, Anmol and Rohan entered into partnership on 1st July, 2022 to
share profits and losses in the ratio of 3:2:1. Amay guaranteed that Rohan’s
share of profit after charging interest on capital @ 6% p.a would not be less
than ₹ 36,000 p.a. Their fixed capital balances are: ₹ 2,00,000, ₹ 1,00,000 and
₹ 1,00,000 respectively. Profit for the year ended 31st March, 2023 was
₹1,38,000. Prepare Profit and Loss Appropriation A/c.

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