Unit – 2

Accounting for Partnership

1. Q. Define the Partnership? Explain the characteristics of it.

Ans:- According to section 4 of the Indian Partnership Act, 1932, Partnership defines as ” the
relationship between persons who have agreed to share the profits of a business carried on by
all or any of them acting for all.”

Following are the important characteristics of partnership firm:

i) Minimum and maximum number of partners:

There must be a minimum of two persons to form a partnership.

The Indian partnership Act does not specify the maximum number of partners.

ii) Agreement:-

Partnership comes into existence on account of an agreement among the

partners.

iii) Mutual Agency:-

The partnership business may be carried on by all or any of them acting for all.

iv) Lawful Business:-

Partnership is formed for carrying on any lawful business.

v) Sharing of Profits:-

To constitute a partnership, the parties must have agreed to carry on a

business, and to share the future profits between them.

2. Q. Discuss the Rights and Duties of a Partner.

Ans:- The following are the Rights of a partner of a Partnership firm:

i) Right to take part in the management.

ii) Right to be consulted.

iii) Right of access of the accounts.

iv) Right to share profits.

v) Right to retire from the partnership.

 vi) Right to prevent the entry of any new partner.

The following are the general duties of partner for a partnership firm:

i) Duty to carry on the business to the greatest common advantage.

ii) Duty to render true accounts.

iii) Duty to provide full information.

iv) Duty to indemnify for loss caused by fraud in the conduct of the business of the firm.

3. Q. What are the essential elements of a Partnership firm?

Ans:- Following are the essential elements of Partnership Firm:

i) There must be an association of two or more persons ;

ii) There must be an agreement between all the persons concerned ;

iii) The object of the agreement must be to share the profits of a business ;

iv) The business must be carried on by all or any of them acting for all.

4. Q. What is Partnership Deed? State eight principal Clauses usually included in it.

Ans:- Partnership deed is a document in writing which contains the terms and conditions as
agreed between or among the partners. The deed must be properly drafted, signed by all the
partners and stamped as per the Stamp Act.

Partnership deed is a important document of the firm which defines relationship amongst the
partners. It is necessary to avoid disputes amongst the partners and can be presented in the
court as evidence.

Following are the principal/general clauses of partnership deed;

i) The name of the firm.

ii) The nature of the business.

iii) The name, addresses and occupation of all the partners.

iv) The duration of the partnership.

v) The internal management of the partnership business.

vi) Procedure for settlements.

vii) Amount of capital to be contributed by each partner.

viii) Profit or loss sharing ratio.

ix) Interest of capital, if provided the rate of interest must be specified.

x) Partner’s salaries and commission, if provided.

xi) Interest on drawings, if charged, the rate of interest should also be specified.

5. Q. What do you mean by Fixed and Fluctuating capital? Point out the difference
between them.

Ans:- Fixed Capital:

Fixed capital is that capital in which the balance of capital usually remains unchanged
except when there is an addition to or withdrawal of capital. In this case, all items affecting
partner accounts like interest on capital, salary, commission, share of profit or loss,
drawings etc. are not recorded in the partners’ capital accounts.

Fluctuating Capital:

Fluctuating capital is that capital in which the balance of capital keeps on changing on time
to time. In this case, all items affecting partner’s accounts like interest on capital, salary,
commission, share of profit or loss, drawings etc. are recorded in the partners’ capital
accounts.

Difference between Fixed and Fluctuating capital account are:

Basis Fixed Capital Fluctuating Capital

Number of For each partner two accounts viz. For each partner only one
accounts capital and current account are kept. account i.e., capital account is
kept.
Change in balance The balance of capital usually remains The balances of capital accounts
unchanged except when there is an keep on changing from time to
addition to or withdrawal of capital. time.
Nature of balance The fixed capital account never shows The fluctuating capital account
a negative balance. may show negative balance.
Specific mention If capital is fixed, then it should be It is not necessary to be
specifically mentioned in the deed. mentioned in the deed.
Closing capital The closing balance of capital The closing balances of partner’s
account always shows a credit capital account may be debit or
balance. credit.
Adjustment All adjustment relating to partner’s All such adjustments are made in
relating to capital capital accounts are made in current capital account itself.
account.
Current account Current accounts of partners are Current accounts of partners are
opened in this case. not opened in this case.
 6. Q. What is profit and loss appropriation account? What are its features?

Ans:- Profit and loss appropriation account is prepared after trading and profit and loss
account which is prepared to distribute the net profits into general reserve, salary,
commission, interest on capital etc. and remaining balance is also distributed to partners in
agreed ratio on the basis of the partnership deed.

Following are the features of profit and loss appropriation account:

i) It is prepared after operation of profit and loss account.

ii) It is an extension of the profit and loss account.

iii) It is prepared in terms of the partnership deed or partnership act.

iv) It is prepared by partnership firm and companies for distribution of profit among
partners.

7. Q. Write down the difference between profit and loss account and profit and loss
appropriation account.

Ans:- Following are the difference between profit and loss account and profit and loss
appropriation account:

Basis Profit and loss A/c Profit and loss Appropriation A/c
Sequence of It is prepared after trading account It is prepared after profit and loss
operation appropriation account.
Object It is prepared to ascertain net It is prepared with the object of
profit/net loss of the business. appropriating net profits among the
partners.
Necessity It is necessary for each and every The preparation of this is
business to prepare this account. necessary where appropriation
profits necessary.
Disclosure This account discloses how the It shows how the net profits is
profit is earned or loss is incurred. appropriated.

8. Q. What is current and capital account?

Ans:- Incase of partnership firm, Partner current account is prepared when capital is fixed.
Transactions such as drawings, salary, interest on capital or drawings are recorded. The
balance of this account fluctuates every year.

The capital is an equity account in the accounting records of a partnership. It contains initial
and subsequent contributions by partners to the partnership, profit and losses earned by the
business etc.
 9. Q. Write down the distinction between capital and current account.

Ans:- Following are the distinction between capital and current account:

Basis Capital Account Current Account

Nature of balance Capital a/c kept on fixed capital Current may show a credit or debit
method shows only credit balance. balance.
Transactions Amount invested by the partners is Transactions such as salary,
recorded recorded in this account. interest on capital or drawings etc.
are recorded.
Nature of accounts Capital account balance generally Current account balance
remains under fixed capital method. fluctuates from time to time.

10. Q. Give adjustments entries in connection with a partnership firm:

a) Gross Profit

Trading A/C …………. Dr.

To Profit and loss A/C

b) Net Loss:

Profit and loss appropriation A/C ……Dr.

To Profit and Loss A/C

c) Outstanding Salary:

Salary A/C ………. Dr.

To Outstanding Salary A/C

d) Prepaid Insurance:

Prepaid Insurance A/C …..Dr.

To insurance A/C