Unit III - Partnership Account
According to Section 4 of the Indian Partnership Act 1932, partnership is
defined as " the relationship between persons who have agreed to share the
profit of a business carried on by all or any of them acting for all". Persons
making an agreement to carry business for common purpose are called
partners individually and firm collectively. under which their business is
carried on the firm name.
Accordingly, the essential features of partnership are;
(i) There must be an agreement entered into between two or more
(ii) The object of the agreement must be share the profit of a business.
(iii) The business must be carried on by all or any of the person
concerned acting for all.
(iv) It is formed to carry on a lawful business.
(v) It is an association of two or more person i.e the number of persons
constituting a partnership must not exceed 10 in case of a banking
business and 20 in other business.
Partnership is, therefore, the result of an agreement between two or more
persons on a business jointly for the common benefit of all. it is not
legally necessary for a partnership agreement to be in writing. it is highly
desirable, however, that there be a written agreement between the
partners. the document the instrument, containing the agreement between
partners, is known as partnership deed.
Although no two partnership deed are alike, every partnership deed
should contain the following clauses:
• name of the firm and nature of the business
• name and address of the partners
• the duration, if any, of partnership firm
• the total capital of the firm and the share of each partners
• the ratio of sharing profit and losses
• whether capital are be fixed or fluctuating
• whether any interest is to be allowed on partners capital and if so
at what rate
• rate of interest on advances
• whether any interest is to be charged on drawings and if so at what
• the amount of salary or some allowance if any payable to the
• the amount which each partner can withdraw for his private
• the provision relating to keeping of proper book of accounts
• the period after which the final accounts are to be prepared
• the audit of the accounts
• admission of new partner and expulsion of the existing ones.
• the method of obtaining the share of goodwill of a partner on his
retirement or death
• weather decision in case of Garner vs Murray is to apply in case of
insolvency of a partner.
Rules applicable in the absence of partnership deed
1. Profit sharing ratio: Profit and loss are to be shared equally among
2. Interest on loan: On any loan (apart from capital) advanced by a
partner, he or she is entitled to interest on the same at 6% per annum.
3. Interest on capital: No interest is to be allowed on capitals. If under
the agreement, interest is to be paid, it will be allowed only when
there is profit. In case of loss, no interest can be allowed.
4. Salary to partners: Partners are not entitled for any salary or other
5. Interest on drawings: No interest is to be charged on drawings. It
should be noted that the partners may change any of the points
mentioned above by agreement.
Necessary adjustments in Accounts
1. Interest on Capital:
Interest on capital is generally calculated on the opening balance of
partners capital. If opening capital is not given, it is to be calculated by
subtracting those items which have been added to the capital and by
adding those item which have be subtracted.
Calculation of opening Capital
Capital at the end of the year xxx
Add: Drawings and interest on drawings xxx
Less: Interest on capital xxx
Less: Additional capital if any xxx
Less: Profit credited xxx
Opening Capital xxx
Journal entries to adjust Interest on
Interest on capital a/c Dr xxx
To Partners' capital or current a/c xxx
[For interest credited to partners
capital or current a/c]
P & L Appropriate a/c Dr xxx
To Interest on capital a/c xxx
[For transferring interest on capital]
2. Interest on Drawings:
Partners' capital or current a/c Dr xxx
To Interest on Drawings xxx
Interest on drawing a/c Dr xxx
To Profit & Loss appropriate a/c xxx
3. Partners, salary or commission:
P & L Appropriate a/c Dr xxx
To Partners capital or current a/c xxx
[For salary credited to capital or current account]
4. Interest on partner’s loan:
Interest or Partner's loan Dr xxx
To Partners loan a/c xxx
[Being provision for interest on partnets laon ]
In the event of the insolvency of a partner any losses should be shared in the ratio of the last agreed capital balances before the dissolution took place. This is known as the Garner v Murray rule.