Page 30 - DEBKVOL-1

2.2 Double Entry Book Keeping—CBSE XII

CHAPTER SUMMARY

Meaning of Partnership as per Section 4 of the Indian Partnership Act, 1932
“Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or
any of them acting for all.”
Nature: A partnership firm has no separate legal entity apart from the partners constituting it.
‘Partners’, ‘Firm’ and ‘Firm Name’: The persons who have entered into partnership with one another are
individually called partners and collectively a firm. The name under which the business of the firm is carried
on is called the firm name.
Essential Elements (Main Features) of Partnership
1. There must be two or more persons.
2. There must be an agreement.
3. There must be lawful business.
4. There must be sharing of profits of business.
5. There must be a mutual agency, i.e., the business must be either carried on by all or any of them acting for all.
Partnership Deed
The document containing the terms and conditions of the agreement between partners is known as the
Partnership Deed. The Partnership Deed usually includes the following:
(i) Name and address of the firm.
(ii) Names and addresses of all partners.
(iii) Date of commencement of partnership.
(iv) Capital to be contributed by each partner.
(v) Whether interest is to be allowed on capitals.
(vi) Whether any partner is to be allowed salary.
(vii) Profit-sharing Ratio among partners.
(viii) The rights and duties of each partner.
(ix) Method of valuation of goodwill in case of admission or retirement or death of a partner.
(x) Mode of settlement of accounts in case of retirement/death of a partner or dissolution of the firm.
Benefits or Advantages of having a Partnership Deed
(i) It facilitates functioning of the business.
(ii) It is helpful in the settlement of disputes arising among partners.
(iii) It helps in avoiding misunderstandings among the partners.
Provisions Applicable in the Absence of Partnership Agreement/Partnership Deed
(i) Interest is not allowed on Partners’ Capitals or charged on drawings.
(ii) Partner is not entitled to salary or remuneration for the work done for the firm.
(iii) Interest @ 6% p.a. is allowed on the loans by any partner.
(iv) Profits or losses are divided equally among the partners.
• Interest on Partner’s Loan to the Firm: If a partner gives a loan to the firm, he is entitled to an 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 interest on loan @ 6% p.a. Such interest is a charge against the profit. It should be debited to
Profit and Loss Account.
• Rent Paid to Partner: Rent paid to partner, like interest on loan by a partner, is a charge against the profit and not an
appropriation of profit. It is, therefore, debited to Profit and Loss Account and credited to Rent Payable Account.
• Manager’s Commission and Partners’ Commission to be calculated on corrected Net Profit of Profit and Loss
Account, if the question is silent. It should be kept in mind that manager’s commission is a charge against the
profit whereas, partners’ commission is an appropriation of profit.