Partnership Accounts

Introduction:-

The Indian partnership act 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. The following are the features of partnership:-

  • 1)It is an organization formed with two or more people indulge in it.
  • 2)All the partners should agree to enter into the contract or agreement made out of them.
  • 3)The business should exist in the future.
  • 4)The business should be carried by all the partners or any of them acting for all.
  • 5)Partners should share profits and losses according to the percentage decided.

The agreement which is made before entering into the contract is known as the partnership deed. It should be comprehensive in nature to avoid grievances and conflicts later on in the future. The following

clauses should be there in the partnership deed:-

  • 1)The name of the entity and nature of business
  • 2)The duration of the business
  • 3)The amount of fixed as well as working capital contributed by all the partners
  • 4)The rate of interest to be charged on the loan taker and to be charged on his drawings taken for
  • personal use from companies finance
  • 5)The ratio in which the profit and loss will be shared between all the partners
  • 6)The amount should be fixed for allotting drawing to the partners
  • 7)If the salary should be given to the working partner
  • 8)Rights and duties of all the partners
  • 9)Goodwill to be calculated at the time of retirement or death of a partner
  • 10)Procedure at the time of retirement
  • 11)Due payments to be made at the time of retirement
  • 12)Loss arising at the time of insolvency of any of the partners
  • 13)Steps to be followed at the time of settlement of disputes among partners
  • 14)To prepare the books of accounts and their audit

The deeds have to be properly stamped and signed by all the partners.

Duties allotted to the partners:-

  • (a)Every partner has to carry in the business to the great advantages
  • (b)Every partner should be fair and faithful to each other
  • (c)A partner should give a true and fair view, proper, and correct statement of accounts to the partnership
  • (d)Every partner should share both profits as well as a loss at the same proportion of the ratio
  • (e)The partners should not use any of the company property for personal use
  • (f)A partner should act according to the scope of his authority
  • (g)No partner can share his partnership or can not transfer his partnership with any other person without telling all the partners

Powers of partners:-

The partners have full authority to take up the decisions related to business from dealing with customers to dealing with suppliers

The implied powers of partners are the following:-

  • ¤Buying and Selling of goods
  • ¤Receiving payments
  • ¤Drawing cheques
  • ¤Accepting and endorsing bills
  • ¤Borrowing money from relatives or financial institutions
  • ¤Engaging services for the business

In certain cases partners have no power in the following aspects:-

  • ¤Fines relating to the disputes in arbitration
  • ¤Opening bank account on behalf of the firm
  • ¤Withdrawal of a suit filed on behalf of the firm
  • ¤Admission of any liability
  • ¤Acquisition of immovable property
  • ¤Entering into partnership on behalf of the firm

The rights, duties, powers of partners can be changed by mutual consent.

Kinds of partners:-

  1. ☆Sleeping partner
  2. ☆Nominal partner
  3. ☆Profit-sharing partner
  4. ☆Partners by estoppel
  5. ☆Sub-partner
  6. ☆Incoming partner
  7. ☆Retiring partner
  8. ☆Minor partner
  9. ☆Sleeping partner:- Sleeping partner is the one who is in reality a partner but whose name does not appear in any way as a partner and who is not known to outsiders as a partner.
  10. ☆Nominal partner:- Nominal partner is a person whose name is used as if he is a member of the firm, but who, really is not a person. He is liable to third parties for all acts of the firm as if he were a real partner
  11. ☆Profit-sharing partner:- Partner in profit sharing only is the one who gets a share of the profits and does not share losses. He is liable to outsiders. He does not take part in the management and ongoing proceedings of the business.
  12. ☆Partner by estoppel:- Estoppel partner is the one who without being a partner behaves as to lead other partners and to make other partners believe. Similarly, if someone is declared to be a partner and does not disclaim the partnership, one will be treated as a partner by holding out
  13. ☆Sub-partner:- Sub partner is the one who gets profit from any one of the partners. They do not have any rights against the firm and he is liable for its debts.
  14. ☆Incoming partner:- The newly admitted to the firm from one of the partners is called an incoming partner. A sub partner is not liable for the debt.
  15. ☆Retiring partner:- Retiring partner or we can say outgoing partner continues to be liable for obligations incurred before his retirement and will continue to be liable even for future obligations if he does not give a public notice
  16. ☆Minor partner:- A minor can be admitted to the benefits of an existing partnership with the consent of all the partners. He has the right access to the statement of accounts of the firm including the right to examine and copy.
  17. Admission of a partner:- When a new partner is admitted into a partnership, certain adjustments in accounts become necessary. Suppose Mr. A. and Mr. B. are partners sharing profit in the ratio 3:2. If their profits are ₹20,000/- A will get ₹12,000/- and B will get ₹8000/-. If C is admitted and is given one-fourth share in profits then out of the ₹20,000/- he will get ₹5000/-. The remaining ₹15,000/- will be distributed between Mr. A and Mr. B

The problem of compensation is the chief problem while dealing with the admission of a partner. This is tackled through goodwill

Goodwill:-

Goodwill is the value of the reputation of a firm in respect of profits expected in the future over and above the normal rate of profits.

(i)Goodwill raised

  • Cash a/c           dr
  • To capital a/c
  • Goodwill a/c       dr
  • To capital a/c

(ii)Goodwill raised and immediately written off

  • Capital a/c       dr
  • To goodwill a/c

(iii)Goodwill brought in cash

  • Cash a/c     dr
  • To capital a/c

Retirement of a partner:-

Retirement means the partner wants to discontinue the partnership. The reason for a partner discontinuing may be illness, old age, or misunderstanding between the partners. Once the partner retires, his all relations with the firm and other partners get terminated. On the retirement of a partner, the partnership dissolves.

Accounting treatment of undistributed profit and losses:-

(a)For distribution of reserve and profits

  • General reserve a/c          dr
  • Profit and loss a/c            dr
  • To partners capital a/c

(b)For distribution of past losses

  • All partners capital a/c         dr
  • To profit and losses a/c

Settlement of total amount due to the retiring partner:-

¤Amount to be paid off immediately:-

  • Retiring partners capital a/c     dr
  • To cash/ bank a/c

¤For transferring to loan a/c:-

  • Retiring partners capital a/c         dr
  • To retiring partners loan a/c

¤For the amount of interest:-

  • Interest a/c       dr
  • To retiring partners loan a/c

¤For the payment of installment:-

  • Retiring partners capital a/c     dr
  • To cash/bank a/c

Death of a partner:-

The problem which arises in case of death of a partner is similar to those of a retiring partner except that the death of a partner may occur at any time, anywhere, anyhow whereas the retirement of a partner is planned i.e he/she is allowed to retire on the last date of an accounting period.

The amount due after the death of the partner is as follows:-

  • ¤Credit of his capital
  • ¤Interest on capital
  • ¤share in goodwill
  • ¤share in the revaluation of asset
  • ¤share in the revaluation of liabilities
  • ¤share in general reserve
  • ¤share in undistributed profit
  • ¤share in a joint life policy
  • ¤salary if any amount of it is due till the date of his death.

Joint life policy:-

A joint life policy is an assurance policy taken on the joint lives of all the partners. If any partner dies the amount of the policy is paid by the life insurance company. The amount can be very well used to settle the account of the executors of the deceased partner without distributing the position of the business.

The following journal entries will be passed:-

1st and subsequent years:-

(i)On payment of premium:-

  • Insurance premium a/c     dr
  • To bank a/c

(ii)Premium amount transferred to profit and loss a/c:-

  • Profit and loss a/c             dr
  • To insurance premium a/c

Last year:- Repeat the first 2 entries

(iii)Amount of policy realized:-

  • Bank a/c             dr
  • To joint life policy a/c

(iv)When the amount realized on policy transferred to all partners in their profit sharing ratio:-

  • Joint life policy a/c        dr
  • To bank a/c

(v) When the premium is paid on policy:-

  • Joint life policy a/c     dr
  • To bank a/c

(vi) When JLP is brought down:-

  • Profit and loss a/c     dr
  • To Joint life policy a/c

(vii)When the amount of policy is realized:-

  • Bank a/c       dr
  • To joint life policy a/c

(viii)Balance of policy is transferred:-

  • Joint life policy a/c      dr
  • To all partners capital a/c

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