Nature of Partnership

• Defined by Section 4 of the Indian Partnership Act, 1932: relation between persons agreeing to share profits of a business carried on by all or any acting for all.
• Essential features:
  • Minimum 2 partners, maximum 50.
  • Agreement (oral or written).
  • Must carry on business (mere co-ownership ≠ partnership).
  • Mutual agency: each partner is both principal and agent.
  • Sharing of profits and losses.
  • Unlimited liability of partners.

Partnership Deed

• Written agreement preferred, though oral is valid.
• Contains details: firm name, partners’ names, capital contribution, profit-sharing ratio, interest rules, salaries/commissions, rights/duties, dispute settlement, dissolution rules, etc.
• If deed is silent, provisions of the Partnership Act apply.

Key Provisions of Partnership Act (Relevant for Accounting)

• Profit sharing: equal if deed is silent.
• Interest on capital: not allowed unless agreed.
• Interest on drawings: not charged unless agreed.
• Interest on loan: 6% p.a. if deed is silent.
• Salary/remuneration: not allowed unless agreed.
• Partners must account for profits derived from firm’s property or competing business.

Maintenance of Capital Accounts

Two methods:

1. Fixed Capital Method
   • Two accounts: Capital Account (fixed balance) and Current Account (records drawings, interest, salary, commission, profit share).
   • Capital account always shows credit balance.
   • Current account may show debit/credit balance.
2. Fluctuating Capital Method
   • Single Capital Account per partner.
   • All adjustments (drawings, interest, salary, commission, profit share) recorded directly.
   • Balance fluctuates and may show debit or credit.

Distinction:

• Fixed → two accounts, capital balance fixed, always credit.
• Fluctuating → one account, balance changes, may be debit.

Distribution of Profit

• Profits/losses distributed in agreed ratio; if silent, equally.
• Adjustments (interest, salary, commission, drawings) made via Profit and Loss Appropriation Account.
• Starts with net profit/loss from Profit & Loss Account.
• Journal entries handle transfer of profits, interest, salary, commission, and final distribution.

Profit and Loss Appropriation Account

• Debit side: interest on capital, salary, commission, distribution of profit.
• Credit side: net profit, interest on drawings.
• Final balance distributed among partners.

Illustration (Sameer & Yasmin)

• Capitals: Rs. 15,00,000 and Rs. 10,00,000.
• Profit-sharing ratio: 3:2.
• Transactions: additional capital, interest, drawings, salary, commission, profit share.
• Demonstrates recording under both fixed and fluctuating capital methods.