Financial accounting

1. FINANCIAL ACCOUNTING -IV
UNIT – I
Prepared by:
S. RANJITH
AP / B.COM (PA)

2. DEFINITION OF PARTNERSHIP
“The relation between persons who
have agreed to share the profits of a
business carried on by all or any of
them acting for all”.
- Sec 4, Indian partnership Act 1932

3. Contents of Partnership Deed
Name of the firm
Names and address of all the partners.
Nature of the business.
Date of commencement of partnership.
The principal place of business.
Duration of partnership if any.
Capital contribution by each partner.
Amount permitted to be withdrawn by each partner.
The profit sharing ratio.
Amount of salary or commission, if any payable to
partners.
Rate of interest, if any on capital and drawings.
Rate of interest if any on loans and advances by the
partners.

4. Contents of Partnership Deed
Allocation of work among partners.
Rights, duties and liabilities of partners.
Provision regarding admission of new partners.
Settlement of accounts in the event of retirement or death
of partners.
Settlement of accounts on dissolution of the firm.
Method of computation and treatment of good will under
different circumstances.
In case of disputes between partners, the method of settling
it.
Rules regarding operation of bank accounts.
Provision relating to the maintenance and audit of books of
accounts.
Provision regarding the borrowings of the firm

5. RULES APPLICABLE IN THE ABSENCE
OF PARTNERSHIP DEED
Profit sharing ratio:
Profits and losses are to be shared equally amongst
partners.
Interest on loan:
On any loan (apart from capital) advanced by a partner,
he/she is entitled to interest on the same at 6% p.a.
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.

6. RULES APPLICABLE IN THE ABSENCE
OF PARTNERSHIP DEED
Salary to partners:
Partners are not entitled for any salary or any other
remuneration
Interest on drawings:
No interest is to be charged on drawings.
*It should be noted that partners may change any of the
points mentioned above by agreement.

7. INTEREST ON CAPITAL
Interest on partner’s capital is not allowed
unless the partnership deed so provides. It is
generally calculated on the opening balance of
partner’s capital. If the 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 items which have been subtracted.

8. INTEREST ON DRAWINGS
The amount of interest on drawings is
calculated on each separate withdrawal
from the date of the withdrawal to the date
the accounts are closed. The amount of
interest on drawings related to each partner
is calculated and debited to respective
partner’s capital or current accounts as the
case may be, the P&L appropriation
account as being credited.

9. Some partners devote more time or possess
better skills and experience in comparison
with their fellow partners. As a result they
should be followed a special compensation
either in the form of salary or in the form
of commission which are not treated as
business expenses but division of profits.
PARTNERS SALARY OR
COMMISSION

10. If a partner advances by way of a loan a
sum of money beyond the amount of
capital he has agreed to contribute, a loan
account of that partner should be opened
quite distinct from his capital account. In
the absence of any agreement to the
contrary, such a loan will carry 6% interest
irrespective of whether the capitals bear
any interest or not.
INTEREST ON PARTNERS LOAN

11. P&L account is an extension of usual P&L
account for the purpose of adjusting
transactions relating to the partnership
deed. Due to their peculiar nature these
transactions are treated separately without
mixing up with general trading
transactions.
PROFIT AND LOSS
APPROPRIATION ACCOUNT

12. In partnership there will be as many capital
accounts as the number of partners. Partners
capital is the amount invested or contributed
(Whether in cash of kind or both) by the partners
in the business.
The capital accounts may be prepared
under the following two methods.
Fixed capital method and
Fluctuating capital method
CAPITAL ACCOUNT

13. Under this method there are two accounts for each
partner
 Partner’s capital account:
 Partner’s current account:
Fixed capital method

14. Under this method there is only one account for
each partner
 Partner’s capital account:
Fluctuating capital method