(i) A partnership firm is an association of two or more persons who agree to share the profits of a business. (ii) The key elements of a partnership are a minimum of two persons, agreement to conduct business together and share profits/losses, mutual agency where each partner can bind the others, and sharing of profits. (iii) A partnership deed is not required but is recommended to outline the terms of the partnership like capital contributions, profit/loss sharing ratios, treatment of goodwill, and dissolution.

1. ACCOUNTING FOR
PARTNERSHIP
FIRM
Dr.V.S.Mege
Dept of Commerce
AAC

2. Meaningof Partnership
• A partnership firm is an association of two
or more persons to carry on a legal business
and share its profits or losses. The persons
who join hands together to do a business are
individually known as partners and
collectively a firm.

3. .
• According to Sec 4 of the Indian
Partnership Act, 1932, "the term
partnership is the relation
between two or more persons
who have agreed to share the
profit of the business carried
on by all or any of them acting
for all

4. Essential elements of
Partnership
•1. At least two persons: There must be at least
two persons to form a partnership and all such
persons must be competent to contract.
•2. Agreement: There must be an agreement to form
a partnership. This agreement can be oral or
written.
•3.Legal Business: An agreement should be for
the purpose of carrying on the business or
profession. The business to be carried on by the
partners should be legal.

5. 4.Profit sharing : Profits and losses can be
shared equally or in an agreed ratio.
5.Mutual agency: There should be a mutual
agency relationship among the partners.
'Mutual Agency' relationship means that each
partner is both an agent and the principal.
Each partner is an in the sense that he can
bind the other partners by his acts done.
6. Number of partners: The minimum limit of
the partners in a firm is two and maximum
number of partners in a banking firm should
be 10 and in the other firm should be 20.

6. MeaningofPartnership Deed
• Partnership is formed by an agreement.
This agreement can be oral or written.
Though the law does not expressly
require that there should be an agreement
in writing but the absence of written
agreement may be the source of problem
in managing the affairs of the partnership
firm.

7. Contents of Partnership
deed
• 1.Name of the firm.
• 2.Name and addresses ofallthe
partners.
• 3.Nature and place of the business.
• 4.Duration of partnership.
• 5.Date ofcommencement of
partnership.
• 6.Amount ofcapital contributed by each
partners.
• 7.Ratio inwhich profits and losses
are tobeshared.

8. • 8. Interest on partner's capital and drawings.
• 9. Interest on loan by the partner to the firm.
• 10. Salary, Commission, etc. if any payable to a
partner.
• 11. Method of computation and treatment of
Goodwill on the reconstitution of the firm.
• 12. Mode of settlement of accounts in case of
retirement/death of a partner.
• 13. Mode of settlement of accounts in case of
dissolution of the firm.

9. • (i) The partners will share the profits and
losses in the equal ratio.
• (ii) Interest on loan will be given @ 6% p.a. to the
partners.
• (iii) No interest is allowed to partners on the capital
invested by them.
Rules in the absence of
Partnership Deed

10. • (iv) No partner is to get any
remuneration such as
salary, commission etc for
participating in the
business.
• (v) No interest will be
charged on drawings
made by the partners.

11. • Profit and Loss Appropriation Account
is an extension of Profit and Loss
Account that is prepared to distribute
the net profit among the partners. All
adjustments relating to partners like
interest on capital, interest on drawings,
commission to partners etc. are made
in this Account.
Profit and Loss Appropriation
Account

12. Purpose of Profit & Loss
Appropriation Account:
• The main purpose of preparing Profit
& Loss Appropriation Account of a
Partnership concern is to calculate
and distribute the divisible Profit &
Loss.

14. AccountingTreatment
Items Accounting Entries
Capital contributed in cash Dr. Cash
Cr. Partners’ Capital Accounts
Share of profits Dr. Profit and Loss Appropriation
Cr. Partners’ Current Accounts
Share of losses Dr. Partners’ Current Accounts
Cr. Profit and Loss Appropriation
Interest on capital Dr. Profit and Loss Appropriation
Cr. Partners’ Current Accounts
Partners’ salaries Dr. Profit and Loss Appropriation
Cr. Partners’ Current Account

15. Items Accounting entries
Interest on partners’ loan Dr Profit and loss
appropriation
Cr Partners’ current
Partners’ drawings Dr Partners’ current
Cr Partners Drawings
Interest on drawings Dr Partners’ current
Cr Profit and loss
appropriation

16. Methods of maintaining
capitalAccounts of the
Partners
• The partner's Capital Accounts are
maintained according to Fluctuating
Capital Method or Fixed Capital Method.

17. Fluctuating Capital Method
• Under fluctuating capital method, only
one account viz. capital account for
each partner is maintained and all the
transactions relating to a partner are
recorded in his capital account. As a
result, the balance in the Capital
Account keeps on fluctuating.

18. PARTNER’S CAPITAL A/C
Particulars Rs
.
Particulars Rs
.
To balance b / f
To cash/bank A/c
( withdrawl ]
To drawings
To interest on drawings
To Profit & Loss A/c
(share
of loss)
To balance c/f
****
****
****
****
****
****
By balance b/f
By cash/bank (additional
capital) By interest on capital
By salary
By Commission
By P&L Appropriation A/c (share
of
profits)
By balance c/f
****
****
****
****
****
****
****
**** ****

19. Fixed Capital Account:
• Under Fixed Capital method, two
accounts viz. capital account and current
account for each partner are maintained.
The transactions relating to introduction
or withdrawal of capital are recorded in
Capital Account and other transactions
like interest on capital, salary, interest on
drawings, drawings are recorded in
Current Account.

20. ,
Particulars Rs
.
Particulars Rs
.
To cash/bank
A/c
(withdrawal)
To balance c/f
****
****
By balance b / f
By cash/bank
(additional
capital)
By balance c/f
****
****
****
**** ****
Dr. Partner's CapitalAccount Cr.

21. .
Particul
ar
Rs
.
Particul
ar
Rs
.
To balance
b/f To
drawings
To interest on
drawings To Profit &
Loss A/c (share of
loss)
To balance c/f
****
****
****
****
****
By balance b/f
By interest on capital
By salary
By Commission
By P&L Appropriation A/c
(share of profits)
By balance c/f
****
****
****
****
****
****
**** ****
Dr. Partner's Current Account Cr.

22. Calculation of Interest on drawings:
• The drawings are usually made by
the partners at regular intervals.
Thus, the interest on drawings is
calculated with reference to the time
period involved. It can be worked out
by few methods:

23. Interest on Partner's Loan to a
Firm
• Rate of Interest- In case any partner
has given loan to the firm; he is entitled to
interest on such loan at an agreed rate of
interest. If there is no agreement as to the
rate of interest on loan, the partner is
entitled to rate of interest on loan @ 6%
per annum.