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C H A P T E R

Accounting for Partnership Firms—

Fundamentals

MEANING OF KEY TERMS USED IN THIS CHAPTER

1. Partnership Partnership is a relation between persons who have agreed to share the
profits of a business carried on by all or any of them acting for all.

2. Partners Partners are the persons who have agreed to carry on a partnership
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 name.
4. The Partnership It is an Act that governs the partnership firms. In case, Partnership Deed is
Act, 1932 silent on an issue, provisions of the Indian Partnership Act, 1932 are applied.
5. Partnership Deed Partnership Deed is a written agreement among the partners detailing the
terms and conditions of the partnership.
6. Capital Capital is the amount contributed by the partners in the firm. Capital may
be fixed or fluctuating.

7. Fixed Capitals Fixed Capitals mean that capitals of the partners remain fixed and change
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, i.e., Capital Account is maintained for each partner.

9. Drawings Drawings mean 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.
11. Past Adjustments Past Adjustments refer to those adjustments which are related to past
period that occurred due to errors or omissions in the books of the firm or
giving effect to a new agreement with retrospective effect.
12. Guarantee of Profit Guarantee of Profit means minimum guaranteed profit given to a partner
or partners of the firm. It may be given by a partner or partners or by the firm.