Chapter - 1

1. Introduction to Partnership

 

Definition: A partnership is an agreement between two or more persons who agree to share the profits and losses of a business carried on by all or any one of them acting for all.
 

Features:
  - Association of Persons: Minimum two persons are required.
  - Agreement: Must be an agreement, oral or written.
  - Profit Sharing: Profits and losses are shared among the partners.
  - Mutual Agency: Every partner acts as an agent of the firm and other partners.

 

2. Partnership Deed

 

Definition: A written agreement among the partners is known as a Partnership Deed.

 

Contents:
  - Name of the firm
  - Names and addresses of all partners
  - Nature of business
  - Duration of partnership
  - Capital contribution by each partner
  - Profit-sharing ratio
  - Interest on capital, drawings, and loans
  - Salaries and commissions to partners
  - Rules regarding admission, retirement, death of a partner
  - Accounting period and audit of accounts

 

3. Types of Partners

- Active Partner: Takes active part in the management.
- Sleeping Partner: Does not take part in the day-to-day activities.
- Nominal Partner: Lends their name to the firm but does not invest or participate.
- Partner by Estoppel: Represents themselves as a partner by words or conduct.
- Partner in Profits Only: Shares profits but not the losses.

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4. Types of Partnerships

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- Partnership at Will: No fixed period; can be dissolved at any time.
- Particular Partnership: Formed for a specific purpose or venture.

 

5. Capital Accounts of Partners

 

Fixed Capital Method:
  - Fixed Capital Account: Capital remains constant except for additional capital introduced or permanent withdrawal of capital.
  - Current Account: Fluctuates with regular transactions like drawings, interest on capital, interest on drawings, salary, commission, and share of profit or loss.

Fluctuating Capital Method: Only one account is maintained for each partner, which is debited or credited with all transactions.

 

6. Accounting Treatment

 

Interest on Capital: Credited to partners’ capital accounts.
Interest on Drawings: Debited to partners’ capital accounts.
Partner’s Salary/Commission: Credited to the respective partner’s capital account.
Profit and Loss Appropriation Account: Prepared to show distribution of profit among the partners.
  - Debit Side: Interest on capital, partner’s salary, commission.
  - Credit Side: Net profit (from Profit and Loss Account), interest on drawings.

 

7. Preparation of Final Accounts

- Trading Account: To ascertain gross profit or loss.
- Profit and Loss Account: To ascertain net profit or loss.
- Profit and Loss Appropriation Account: To appropriate the net profit among partners.

 

8. Admission of a Partner
- Adjustment of Capital: New partner introduces capital.
- Revaluation of Assets and Liabilities: Assets and liabilities are revalued, and revaluation profit or loss is shared among old partners.
- Goodwill: Valuation and adjustment of goodwill are made.

 

9. Retirement/Death of a Partner
- Settlement of Accounts: Amount due to retiring/deceased partner includes their capital, revaluation profit/loss, share of goodwill, and profits till the date of retirement/death.
- Payment Mode: Can be paid in cash or through the creation of a loan account.

 

10. Dissolution of Partnership

 

Modes of Dissolution:
  - By agreement
  - Compulsory dissolution
  - On happening of certain events
  - By notice
  - By court order

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11. Insolvency of Partners

 

Insolvent Partner's Deficiency: Remaining partners have to bear the deficiency in their profit-sharing ratio.

Key Terms
- Partnership Deed: A document containing the terms and conditions of the partnership.
- Capital Account: Account showing the capital contributions of partners.
- Current Account: Account showing the regular transactions related to partners.
- Goodwill: The value of the reputation of the firm.
- Revaluation Account: Account prepared to record the revaluation of assets and liabilities.
- Dissolution: The process of terminating the partnership.

 

These notes cover the basic concepts of accounting for partnership firms, highlighting essential aspects and procedures involved.