Partnership Firm : Guide A to Z ( Nature Of Partnership And Partnership Deed ) Part 1
As the business expands, one needs more capital and larger number
of people to manage the business and share its risks. In such a situation,
people usually
adopt the partnership form of organisation. Accounting for
partnership firms has it’s own Peculiarities, as the partnership firm comes
into Existence when two or more persons come together to establish business and
share its profits. On many issues affecting distribution of profits, there may not be any specific agreement between the
partners. In such a situation the provisions of the Indian Partnership Act 1932
apply. Similarly, calculation of interest on capital, interest on drawings and maintenance
of partners capital accounts have their own peculiarities. Not only that a
variety of adjustments are required on the death of a partner or when a new
partner is admitted and so on. These peculiar situations need specific
treatment in
accounting that need to be clarified. The present chapter
discusses some basic aspects of partnership such as distribution of profit,
maintenance of capital accounts, etc. The treatment of situations like admission of partner, retirement, death and
dissolution have been taken up in the subsequent chapters.
Source : companyregistrationinsingapore
Nature of Partnership
When two or more persons join hands to set up a business and share
its profits and losses, they are said to be in partnership. Section
4 of the Indian Partnership Act 1932 defines partnership
as 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’. Persons
who have entered into partnership with one another are individually called ‘partners’ and collectively called ‘firm’.
The name under which the business is carried
is called the ‘firm’s name’. A partnership firm has no separate legal
entity,
apart from the partners constituting it. Thus, the essential features of partnership
are:
1.
Two or More Persons: In order to form
partnership, there should be at least two persons coming together for a common
goal. In other words, the minimum number of partners in a firm can be two.
There is however, a limit on their maximum number. If a firm is engaged in the
banking business, it can have a maximum of ten partners while in case of any other
business, the maximum number of partners can be twenty.
2.
Agreement: Partnership is the result of an
agreement between two or more persons to do business and share its profits and
losses. The agreement becomes the basis of relationship between the partners.
It is not necessary that such agreement is in written form. An oral agreement is
equally valid. But in order to avoid disputes, it is preferred that the partners
have a written agreement.
3.
Business: The agreement should be to carry
on some business. Mereco-ownership of a property does not amount to partnership.
For example, if Rohit and Sachin jointly purchase a plot of land, they become the joint owners of
the property and not the partners. But if they are in the business of purchase and sale
of land for the purpose of making profit, they will be called partners.
4.
Mutual Agency: The business of a
partnership concern may be carried on by all the partners or any of them acting
for all. This statement has two important implications. First, every partner is
entitled to participate in the conduct of the affairs of its business. Second,
that there exists a relationship of
mutual agency between all the partners. Each partner carrying on the business
is the principal as well as the agent for all the other partners. He can bind
other partners by his acts and also is bound by the acts of other partners with
regard to business of the firm. Relationship of mutual agency is so important
that one can say that there would be no partnership, if the element of mutual
agency is absent.
5.
Sharing of Profit: Another important element
of partnership is that, the agreement between partners must be to share profits
and losses of a business. Though the definition contained in the Partnership
Act describes partnership as relation between people who agree to share the
profits of a business, the sharing of loss is implied. Thus, sharing of profits
and losses is important. If some persons join hands for the purpose of some charitable
activity, it will not be termed as partnership.
a. Liability
of Partnership: Each partner is liable jointly with all the other partners and
also severally to the third party for all the acts of the firm done while he is
a partner.
b. Not
only that the liability of a partner for acts of the firm is also unlimited.
This implies that his private assets can also be used for paying off the firm’s
debts.
Partnership Deed
Partnership comes into existence as a result of agreement among
the partners. The agreement can be either oral or written. The Partnership Act
does not require that the agreement must be in writing. But wherever it is in
writing, the document, which contains terms of the agreement is called ‘Partnership
Deed’. It generally contains the details about all the aspects affecting the
relationship between the partners including the objective of business,
contribution of capital by each partner, ratio in which the profits and the
losses will be shared by the partners and entitlement of partners to interest
on capital, interest on loan, etc. The clauses of partnership deed can be
altered with the consent of all the partners. The deed should be properly
drafted and prepared as per the provisions of the ‘Stamp Act’ and preferably
registered with the Registrar of Firms.
Contents of the Partnership Deed
The Partnership Deed
usually contains the following details:
1.
Names and Addresses of
the firm and its main business;
2.
Names and Addresses of
all partners;
3.
Amount of capital to be
contributed by each partner;
4.
The accounting period
of the firm;
5.
The date of
commencement of partnership;
6.
Rules regarding operation
of Bank Accounts;
7.
Profit and loss sharing
ratio;
8.
Rate of interest on
capital, loan, drawings, etc;
9.
Mode of auditor’s
appointment, if any;
10.
Salaries, commission,
etc, if payable to any partner;
11.
The rights, duties and
liabilities of each partner;
12.
Treatment of loss
arising out of insolvency of one or more partners;
13.
Settlement of accounts
on dissolution of the firm;
14.
Method of settlement of
disputes among the partners;
15.
Rules to be followed in
case of admission, retirement, death of a partner; and
16.
Any other matter
relating to the conduct of business.
Normally, the partnership deed covers all matters affecting
relationship of partners amongst themselves. However, if there is no express
agreement on certain matters, the provisions of the Indian Partnership Act,
1932 shall apply.
Provisions Relevant for
Accounting
The important provisions affecting partnership accounts are as
follows:
(a)
Profit Sharing Ratio:
If the partnership deed is silent about the profitsharing ratio, the profits
and losses of the firm are to be shared equally by partners, irrespective of
their capital contribution in the firm.
(b)
Interest on Capital: No
partner is entitled to claim any interest on the amount of capital contributed
by him in the firm as a matter of right. However, interest can be allowed when
it is expressly agreed to by the partners. Thus, no interest on capital is
payable if the partnership deed is silent on the issue. In case the deed
provides for payment of interest on capital but does not specify the rate, the
interest will be paid at the rate of 6 per cent per annum. Further the interest
is payable only out of the profits of the business and not if the firm incurs
losses during the period.
(c)
Interest on Drawings:
No interest is to be charged on the drawings made by the partners, if there is
no mention in the Deed.
(d)
Interest on Advances:
If any partner has advanced some money to the firm beyond the amount of his
capital for the purpose of business, he shall be entitled to get an interest on
the amount at the rate of 6 per cent per annum.
(e)
Remuneration for Firm’s
Work: No partner is entitled to get salary or other remuneration for taking
part in the conduct of the business of the firm unless there is a provision for
the same in the Partnership Deed. Apart from the above, the Indian Partnership
Act specifies that subject to contract between the partners:
(i) If a partner
derives any profit for him/her self from any transaction of the
firm or
from the use of the property or business connection of the firm or
firm name, he/she shall account for the profit
and pay it to the firm.
(ii) If a partner
carries on any business of the same nature as and competing
with that of the firm, he/she shall account
for and pay to the firm, all profit
made by
him/her in that business.
FAQs. Questions you
wanted to ask me, then comment down.
Q.Define Partnership.
When two or more persons enter into an agreement to carry on business and
share its profit and
losses, it is a case of partnership.
The Indian partnership Act, 1932, defines Partnership as
follows: "Partnership is the
relation between persons and who have agreed to share the profits of a business carried on by all or any of them
acting for all.
Q. main features of partnership.
Ans. Essential elements or main features of
Partnership :
i) Two or
more persons: Partnership is an association of two or more persons.
ii) Agreement:
The Partnership is established by an agreement either oral or in writing.
iii) Lawful
Business: A Partnership formed for the purpose of carrying a business, it
must be a legal business.
iv) Profit
sharing: Profit of the firm is share by the partners in an agreed ration, if
the
ratio
is not agreed then equally. Profit also includes loss.
Q. In the absence of a
partnership deed, how are mutual relations of partners governed?
Ans. In the absence of Partnership deed, mutual relations are
governed by the Partnership Act, 1932.
Q. Give any two reason in
favour of having a partnership deed.
Ans. i) In case of any dispute or
doubt, Partnership deed is the guiding document.
ii) It can specify the
duties and powers of each Partner.
Q. State the provision of 'Indian partnership Act 1932’ relating to
sharing of profits in absence of any provision in the partnership deed.
Ans. In the absence of any
provision in the Partnership deed, profit or losses are share by the Partners
equally.
Q. Why is it important to
have a partnership deed in writing?
Ans. Partnership deed is important
since it is a document defining relationship of among Partners thus is
assistance in settlement of disputes, if any and also avoids possible disputes:
it is good evidence in the court.
Q. What do you understand
by fixed capital of partners?
Ans. Partners' capital is
said to be fixed when the capital of Partners remain unaltered except in the
case where further capital is introduced or capital is withdrawn permanently.
Q. What do you understand
by fluctuating capital of partners?
Ans. Partner’s capital is
said to be fluctuating when capital alters with every transaction in the
capital account. For example, drawing, credit of interest, etc
Q. Give two circumstances
in which the fixed capital of partners may change.
Ans.Two circumstances in which the fixed capital of Partners may change
are :
i) When additional capital is introduced by
the Partners.
ii) When a part of the capital is permanently
withdrawn by the Partners.
Q. List the items that may
appear on the debit side and credit side of a partner's fluctuating capital
account.
Ans.On debit side: Drawing, interest on drawing, share of loss, closing
credit balance of the capital.
On credit side : Opening credit balance of capital,
additional capital introduced, share of profit, interest on capital, salary to
a Partner, commission to a Partner.
Q. Ramesh, a partner in
the firm has advanced a loan of a Rs. 1,00,000 to the firm and has demanded on
interest @ 9% per annum. The partnership
deed is silent on the matter. How will
you deal with it?
Ans. Since the Partnership
deed is silent on payment of interest, the provisions of the Partnership Act,
1932 will apply. Accordingly, Ramesh is
entitled to interest @ 6% p.a.
Q. The partnership deed
provides that Anjali, the partner will get Rs. 10,000 per month as salary. But, the remaining partners object to
it. How will this matter be resolved?
Ans. No, he is not entitled
to the salary because it is not so, Provided in the Partnership deed and
according to the Partnership act, 1932 if the Partnership deed does not
provided for payment of salary to Partners, he will not be entitled to it.
Q. Distinction between Profit and loss and profit and loss
appropriation account:
Ans.
Q. the partners decided that 5% of net profit of
the firm be spent every yr to provide school uniform to low income group
students admitted to private schools as per provisions of Right To Education
Act,2009.identify 2 values involved in making such a decision.
Ans.
1) sensitivity of firm towards
promotion of education among weaker sections of society
2)promotion of “Right To Education
Act ,2009”
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