ACCOUNTING FOR PARTNERSHIP FIRMS – FUNDAMENTALS
Partnership is an extension of the
sole-proprietary concern. A Partnership is a business carried on by two or more
persons. They join hands together on the basis of an agreements, pool their
resources and run a lawful business. The main aim of such a business is to earn
profit to share it among themselves. In India partnership business is governed
by the Indian Partnership Act 1932.
According to the Section 4 of the
Indian Partnership Act 1932, Partnership may be defined as “ the relationship
between persons who have agreed to share the profits of a business carried on
by all or any of them acting for all”.
Features of Partnership
1.
Number of Persons
A minimum of two persons are
required to form a partnership. There is a limit on maximum number of persons
which constitute a partnership firm. The maximum number is 10 in the case of a
firm carrying on a banking business and 20 if it is engaged in any other business.
2. Agreement / Deed
A partnership is the result of an
agreement between two or more persons. The agreement may be written or oral. The written agreement is known as partnership
deed.
3. Business
The partners should carry some
business and should be some lawful business.
4. Sharing of Profits
The purpose of partnership must be
to earn profit. The profit should be shared by the partners in agreed ratio. If
there is no specific agreement in this regard, partners will share the profits
equally.
5. Utmost Good Faith
‘Good Faith’ is the essence of a
partnership. Hence each partner should be just and faithful to another.
6. Unlimited Liability
Liability of each partner is unlimited
. It means that partners are individually and collectively liable for all debts
of the firm.
7. No Separate Legal Existence
A partnership is not a legal entity
. It has no separate legal existence apart from the partners.
Partnership Deed
Partnership is the result of an
agreement between two or more persons. The agreement may be oral or written.
When the agreement is in written form it is known as partnership deed. It may
be defined as “A document containing the terms
of partnership as agreed by the
partners is called ‘Partnership Deed’ or ‘Articles of Partnership’.
Contents of Partnership Deed
•
Name of the firm
•
Name and addresses of all partners.
•
Nature and place of business.
•
Date of commencement of partnership.
•
Duration of Partnership , if any
•
Capital contribution by the partners.
•
The
amount Which can be withdrawn by each partner.
•
Rules regarding operation of bank accounts.
•
Division of profit or loss.
•
Interest on capital / drawings.
•
Interest in partner’s loan.
•
Salaries, commission , etc. if payable to any
partner.
•
Details of division of work among the
partners.
•
Ascertainment of goodwill on admission,
retirement & death of a partner.
•
Settlement of accounts on retirement or death
of a partner and on dissolution of a firm.
Rules Applicable in the Absence of Partnership
Deed
Normally
a partnership deed includes all matters relating to the mutual relationship
amongst partners. But in certain cases there will no such an express agreement
. In such cases the partners have to follow the following provisions in
their business.
1.Profit Sharing : Partners are entitled
to share equally the profits and losses of the firm , irrespective of their
capital contribution.
2. Interest on Capital : Partners are
not entitled to interest on capital. But if there is any agreement for
providing interest on capital , such interest is payable only out of the profit
of the business. If there is loss interest on capital need not be allowed.
3. Interest on Loan / Advances : If any partner has
advanced some money to the firm in addition to his capital then he will be
entitled to get an interest on the amount at the rate of 6 % per annum even if
there are losses.
4.Interest on Drawings : No interest will be
charged on drawings made by the partners.
5.
Remuneration to Partners : Partners are not entitled to any salary or other remuneration.
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