Page 11 - ISCDEBK-12

1
C H A P T E R
C H A P T E R

Partnership Accounts—

Fundamentals

MEANING OF KEY TERMS USED IN THE CHAPTER
1. Partnership
Partnership is a relationship between persons who have agreed to share profits and losses of
business carried on by all or any of them acting for all.
2. Partners
Partners are the persons who have agreed to do business and share its profits and losses.
3. Firm
Partners carrying on the business are collectively known as firm. The name under which the
business is carried on is called firm’s name.
4. Partnership Deed
Partnership Deed is a written agreement among the partners detailing the terms and conditions
of the partnership.
5. The Indian Partnership Act, 1932
It is an Act that governs the partnership firms. In case, Partnership Deed is silent on any issue,
provisions of the Act apply.
6. Capital
Capital is the amount in credit of Partner’s Capital Account. It may be contributed by the partners
in the firm and/or credited by way of his or her share of profit, salary, commission and interest on
capital. Capitals of the partners may be fixed or fluctuating.
7. Fixed Capitals
Fixed Capitals mean that capitals of the partners remain fixed and change only with the introduction
or withdrawal of capital. When capitals are fixed two accounts for each partner are maintained, i.e.,
Capital Account and Current Account.
8. Fluctuating Capitals
Fluctuating Capitals mean that capitals of the partners do not remain fixed but change with each entry.
When capitals are fluctuating only one account is maintained for each partner, i.e., Capital Account.
9. Drawings
Drawings means withdrawal by the partner from the firm in cash or kind for his or her personal use.
10. Profit-sharing Ratio
Profit-sharing Ratio is the ratio in which the partners have agreed to share profits and losses of the
firm. In the absence of agreement, it is as provided in the Indian Partnership Act, 1932, i.e., equal.
11. Capital Ratio
Capital Ratio means the ratio in which the partners shall maintain their capitals in the firm.
12. Guarantee of Profit
Guarantee of Profit means minimum profit guaranteed to a partner or partners of the firm. Guarantee
may be given by a partner or partners or the firm.
13. Past Adjustments
Past Adjustments means adjustment made either for the errors or omissions in the books of the
firm or for the wrong or incorrect distribution of profits made in the past year or years.