Accounting for Partnership Firms: Basic Concepts/Fundamentals

 Topics covered:

v  Introduction of Partnership

v  Preparation of Profit and Loss Appropriation Account

v  Preparation of Capital Accounts

v  Calculation of interest on drawings

v  Calculation of interest on capital

v  Calculation of salary or commission to partners

v  Calculation of Interest on Partners’ Loan to Firm

v  Calculation of Capital Ratio

v  Treatment of Past Adjustments

v  Calculation of Guarantee to a partner

v  Treatment of Joint Life Policy

v  Introduction

In spite of sole proprietary concern, partnership firms and joint stock companies own a large number of business concerns. As regards accounting, there are certain peculiarities in the accounts of partnership than those of a sole proprietorship. The main peculiarities regarding to accounting of partnership firm, for example, relate to distribution of profits, the maintenance of the capital accounts, etc. In this chapter, we intend to make you understand the same, i.e., the fundamentals of partnership accounting.

v  Meaning of Partnership:

When two or more persons enter into an agreement for setting up a business, running it and sharing its profits and losses, it is a case of a partnership. According to Sec.4 of The Indian Partnership Act, 1932, defines the partnership as follows: “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.” The persons who have entered into a partnership with one another are called individually ‘partners’ and collectively a ‘firm’.

There are three types of partners:

1. Active Partners
2. Sleeping Partners
3. Others: Nominal and Partners by holding out.