ACCOUNTANCY ISC- XII Solutions CLASS XII for PARTNERSHIP FUNDAMENTAL - CHAPTER AT A GLANCE

Definition of Partnership:

A partnership is a form of business organization where two or more individuals agree to carry on a business together with the objective of earning profits. They share the business’s profits, losses, responsibilities, and decision-making as per an agreement.

Key Features of Partnership:

Agreement-Based: Formed by an agreement (oral or written).

Profit Sharing: Partners share profits and losses in an agreed ratio.

Mutual Agency: Every partner acts as both an agent and principal of the firm.

Unlimited Liability: Partners are personally liable for the firm’s debts.

Number of Partners: Minimum 2, Maximum 50 (as per the Companies Act, 2013).

Common Management: Business is conducted jointly or by an appointed partner.

Is it mandatory to have a Partnership Deed?

Though it is not mandatory, but it is better to have a Partnership Deed. It is so because in case any dispute arises among the partners, the dispute shall be settled based on the Partnership Deed.

Rules Applicable in the Absence of Partnership Deed

In case partners do not have a Partnership Deed or Agreement, the provisions of the Indian Partnership Act, 1932 apply.

Treatments in absence of Partnership Deed are as follows:

(i) Profits and losses are to be shared equally among the partners.

(ii) Interest is not charged by the firm on Drawings by partners.

(iii) Interest on Capital is not allowed by the firm to partners.

(iv) Partners are not entitled for Salary and commission.

(v) Interest on loan by the firm to the partner is not charged.

(vi) Interest on loan by a partner to the firm is allowed @ 6% p.a.

(vii) New partner cannot be admitted without consent of all the partners.

Partnership firms prepare every year their financial statements, i.e., Trading Account, Profit & Loss Account, Profit & Loss Appropriation Account and Balance Sheet.

Trading Account determines Gross Profit or Gross Loss. Opening Stock, Purchases (Net) and Direct Expenses are transferred to the debit while Revenue and Closing Stock are transferred to the credit of Trading Account. Difference between the totals of two sides is either Gross Profit (if total of credit side is more) and Gross Loss (if total of debit side is more). Gross Profit is transferred to the credit side of Profit & Loss Account and Gross Loss is transferred to the debit side of Profit & Loss Account.

Profit & Loss Account is prepared to determine Net Profit or Net Loss. Expenses incurred whether paid or not are transferred to the debit while indirect incomes are transferred to the credit of Profit & Loss Account. Amounts payable to the partners which are charge against profit are also transferred to the debit and interest from partners on loan given by the firm are also transferred to the credit of Profit & Loss Account. Difference between the totals of two sides is either net profit (if total of credit side is more) and net loss (if total of debit side is more), which is transferred to Profit & Loss Appropriation Account.

Profit & Loss Appropriation Account is prepared to show the way distributable profit has been distributed. Profit & Loss Appropriation Account is credited with interest charged on drawings (if any) by partners and debited with remuneration (Salary and Commission) to partners, interest on capitals (if any), transfer to reserves and distribution of Divisible Profit. Appropriation of Divisible Profit is to Partners’ Capital/Current Account as per the terms of Partnership Deed or Agreement. If Partnership Deed or Agreement does not exist, it is appropriated as per the provisions of Partnership Act, 1932.

Format of Profit & Loss Account 

Format of Profit & Loss Account of a Partnership Firm (after expenses and incomes but before debit of payables to partners as a charge)

Important Journal Entries

Interest on Capital:

(i) Interest on Capital A/c ...Dr.

To Partner’s Capital/Current A/c a.)

(Interest allowed on capitals @ ... % p.a.)

(ii) Closing Entry of Interest on Capital A/c:

Profit & Loss Appropriation A/c ...Dr.

To Interest on Capital A/c

(Interest transferred to Profit & Loss Appropriation A/c)

(iii) Closing Entry for Interest on Drawings A/c:

Interest on Drawings A/c ...Dr.

To Profit & Loss Appropriation A/c

(Interest on Drawings transferred to Profit & Loss Appropriation A/c)

(iv) Salary or Commission Payable to Partner:

(Salary/Commission A/c ...Dr.

To Partner’s Capital/Current A/c

(Salary/commission credited to Partner’s Capital Account)

(v) Closing Entry for Salary/Commission:

Profit & Loss Appropriation A/c ...Dr.

To Salary/Commission A/c

(Salary/Commission transferred to Profit & Loss Appropriation A/c)

(vi) Transferring Profit to Reserve:

Profit & Loss Appropriation A/c ...Dr.

To Reserve A/c

(Profit transferred to Reserve)

(vii) Transferring Balance of Profit & Loss Appropriation Account:

Profit & Loss Appropriation A/c ...Dr.

To Partners’ Capital/Current A/c

(Profit/credit balance of Profit & Loss Appropriation Account

(viii) transferred to Partners’ Capita/Current Accounts)

Partners’ Capital/Current A/c ...Dr.

To Profit & Loss Appropriation A/c

(Loss/debit balance) 

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ACCOUNTANCY ISC- XII Class CLASS XII Pdf