The document defines a partnership as a relationship between two or more persons who agree to share the profits of a business carried on by all or any of them. Key features of a partnership include a minimum of 2 partners, agreement to share profits, unlimited liability, and restrictions on transferring partnership interests. A partnership deed is a written agreement that outlines terms like capital contributions, profit/loss sharing ratios, duties, and dissolution terms. Maintaining partner capital accounts and distributing profits/losses according to the partnership agreement are important accounting aspects of partnerships.

1. Chapter -2
Accounting for Partnership Basic Concepts
Definition: Indian Partnership Act of 1932 defines partnership as “The relation
between persons, who have agreed to share the profits of the business carried on by all ,
or any of them acting for all.
Partnership is a type of business owned, managed and controlled by two or more
persons
Members of partnership are individually called partners and collectively the firm.
Features:
1. Two or more persons there should be a minimum of 2 persons, maximum limited to 10
in the case of banking business and 20 in other business
2. Agreement Relationship among the partners is based on an agreement which may be
oral or written or implied. A written agreement is called a partnership deed.
3. Unlimited liability
4. To form a partnership there must be an agreement. It may be oral or written. Written
agreement is known as PARTNERSHIP DEED
5. Sharing of profits – There must be the sharing of profits among the partners either
equally or on the agreed ratio. If there is loss the same treatment should be made as in
the case of profit
6. Restriction on Transfer of Interest-A partner is not entitled to transfer his interest in
the partnership to an outsider without the consent of other partners.
PARTNERSHIP DEED: A written agreement among the partners is called a Partnership
Deed or Articles of Partnership. A partnership Deed contains the terms and conditions of
partnership and is mutually agreed by all the partners and is stamped and signed by all of
them.
According to the Partnership Act a written agreement is optional, but it is advisable to
have a written partnership deed for the smooth functioning of the business.
Contents of a Partnership Deed
• 1 Name of the firm.
• 2 Names and addresses of all partners.
• 3 Nature and places of business.
• 4 Date of commencement of partnership.

2. • 5 Duration of partnership, if any.
• 6Capital contribution by the partners.
• 7Amount which can be withdrawn by each partner.
• 8 Rules regarding operation of bank accounts.
• 9 Division of profits or losses.
• 10 Interest on partner’s capital and drawings, if any.
• 11 Interest on partner’s loan to the firm.
• 12 Salary, commission, if any, payable to a partner.
• 13 Details of division of work among the partners.
• 14 The ascertainment of goodwill on admission, retirement and death of a
partner.
• 15 Settlement of accounts in the event of retirement or death of partners or on
dissolution of firm
Importance of partnership deed
Avoid disputes between the partners.
Avoid confutation for profit and loss
Clarity of salaries and commission to partners
Clarity of duties and responsibilities.
No disputes regarding interest on capital, interest on drawings and interest on loan
Rules applicable in the absence of Partnership Deed
profit and losses Equally,
irrespective of their capital contribution
interest on their capitals. Not allowed
Interest on drawings of the
partners.
Not charged
Interest on loans by partners @ 6%p.a
Salary/ Commission or any other
remuneration
Not allowed

3. Special aspects of partnership accounts
a) Maintenance of partner’s capital account.
b) Distribution of profit and loss among partners.
c) Adjustments for wrong appropriation of profits in the past.
d) Reconstitution of the partnership firm.
e) Dissolution of partnership firm.
Partner’s capital account
Partner’s capital account is a personal account. Partner’s capital account can be
maintained in two ways:
Debit Side Credit Side
• Drawings
• Interest on Drawings
• Share of Loss
• Opening Capital Balance
• Additional capital introduced
• Interest on capital
• Salary to partner
• Commission to partner
• Share of profit
Fluctuating Capital Method
➢ Under fluctuating capital method, there is only one account, i.e. the capital account
of each partner is maintained.
➢ All adjustments like drawings, interest on drawings, interest on capital, salary,
commission, share of profit or loss etc are recorded directly in capital account
itself.

4. ➢ As a result, the capital balance of a partner at the end of the year will be different
from that at the beginning of the year.
➢ So it is called fluctuating capital method. In the absence of any instruction, the
capital account should always be fluctuating.
Fixed Capital Method
➢ Under fixed capital method, two accounts are prepared for each partner, i.e.
Partner’s Capital Account and Partner’s Current Account.
➢ Adjustments like drawings, interest on drawings, interest on capital, partner’s
salary, commission, share of profit or loss etc are not recorded in capital account,
but in a separate account known as partner's current account.
➢ Original capital investment, additional capital contribution and capital withdrawals
only are recorded in partner's current account. In this case capital Account balance
will remain unaltered unless additional capital introduced or withdrawn.

5. Note: 1. capital accounts of partners will be shown at the same balance from year to year
unless some amount of capital is introduced or withdrawn.
Note: 2. at the end of the year current account may show debit or credit balance.
If it shows a debit balance it should be shown on the asset side of the balance sheet.
If it is a credit balance it should be shown on the liability side of the balance sheet.
Note: 3. in fixed capital method both capital and current account balance should be
shown separately in Balance Sheet.

6. Partners drawings.
Withdrawal by a partner in the form of money or money’s worth from the firm is called
Drawings. When cash or goods are withdrawn by a partner, drawings account is debited
and cash or purchase account is credited.
At the end of the period, drawings account is closed by transfer to capital account or
current account of the partner concerned.
NB: If some amount is withdrawn out of capital, it is recorded in capital account and not
in drawings account.
Journal Entries
1. When cash or goods withdrawn by a Partner
Partner’s Drawings A/c Dr
To Cash / Purchase A/c
2. For close drawings account by transfer to capital account
Partner’s Capital / Current A/c Dr
To Partner’s Drawings A/c
3. When some amount is withdrawn by a Partner out capital
Partner’s capital A/c Dr
To Cash A/c
Distribution of Profit among Partners
The profits and losses of the firm are distributed among the partners in an agreed ratio.
For this purpose, it is customary to prepare a Profit and Loss Appropriation Account of
the firm.
a. Profit and Loss Appropriation Account
Profit and Loss Appropriation Account is an extension of the Profit and Loss Account of
the firm. It shows how the profits are distributed among the partners. All adjustments in
respect of partner’s salary, partner’s commission, interest on capital, interest on
drawings, etc. are made through this account. It starts with the net profit/net loss as per
Profit and Loss Account.
Journal Entries
1. Transfer of the balance of Profit and Loss Account to Profit and Loss Appropriation
Account:
(a) If net profit:
Profit and Loss A/c Dr.
To Profit and Loss Appropriation A/c

7. (b) If net loss:
Profit and Loss Appropriation A/c Dr.
To Profit and Loss A/c
2. For interest on capital:
a) Interest on capital allowed
Interest on capital a/c dr
Partner’s capital a/c
(b) interest on capital transferred to profit and loss appropriation a/c
Profit and Loss Appropriation A/c Dr.
To Interest on Capital A/c
3. Interest on Drawings:
a) Interest on drawings charged
Partner’s capital a/c dr
Interest on drawings
b) interest on drawings transferred to profit and loss appropriation a/c
Interest on Drawings A/c Dr.
To Profit and Loss Appropriation A/c
4. Salary or commission payable to a partner
a) Salary or commission allowed
Salary/commission a/c dr
Partner’s capital a/c
b) salary/commission a/c transferred to profit and loss appropriation a/c
Profit and loss appropriation a/c dr
Salary/commission a/c
6. Reserve created out of profit .
Profit and loss appropriation a/c dr
Reserve a/c
7. Share of Profit or Loss after appropriations:
a. If Profit:
Profit and Loss Appropriation A/c Dr.
To Partner’s Capital/Current A/c’s (individually)
b. If Loss:
Partner’s Capital/Current A/c’s (individually) Dr.
To Profit and Loss Appropriation A/c

8. Format of P&L Appropriation A/c