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Fundamentals.ppt

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Fundamentals.ppt

  1. 1. Financial Accounting Unit III - Partnership Account
  2. 2. Partnership Fundamentals Definition: 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 persons. (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.
  3. 3. Partnership deed: 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
  4. 4. • 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 rate • the amount of salary or some allowance if any payable to the partners • the amount which each partner can withdraw for his private expenses • 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.
  5. 5. Rules applicable in the absence of partnership deed 1. Profit sharing ratio: Profit and loss are to be shared equally among partners. 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 remuneration. 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.
  6. 6. 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 xxx Less: Interest on capital xxx xxx Less: Additional capital if any xxx xxx Less: Profit credited xxx Opening Capital xxx
  7. 7. Journal entries to adjust Interest on Capital: 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]
  8. 8. 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
  9. 9. 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]
  10. 10. 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 ]

Editor's Notes

  • 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.

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