·
The partnership is an association of two
or more persons who have agreed to run the business and share its profit.
·
The Indian Partnership Act is silent
about the maximum number of partners, however, the Indian Companies Act, 2013
limits the number of partners to 50 [Sec. 464 along with rule no. 10 of Companies
(Miscellaneous) Rule, 2014].
·
Following persons cannot be admitted as
a partner:
(i) Persons
of unsound mind/ lunatic. (ii) Insolvent persons.
(iii) Any
individual disqualified by law. (iv) Minor in normal course.
·
According to provision of Partnership
Act, 1932 [Sec.30] a minor can be admitted as a partner for the benefit of
partnership with the consent of all the existing partners.
·
Partners are agents as well as
principals.
·
The partnership is the result of an
agreement, either written or oral. The agreement among partners if written is
termed as ‘Partnership Deed’.
·
It is not essential but desirable to
have a Partnership Deed. In case Partnership Deed does not exist or where exist
but it does not have a clause to this effect, provisions of the Indian
Partnership Act, 1932 will apply.
·
The provisions of the Indian Partnership
Act, 1932:
·
Profit and Loss Appropriation Account is
a nominal account. It is an extension of Profit and Loss Account to depict the
appropriation of profit among the partners. It is prepared by partnership
firms.
·
Charge against profit
means that it is an expense for the firm and is paid whether the firm earns
profit or incurs loss. Appropriation of profit means that they are
allowed, if the firm earns profit during the year.
·
Interest on Loan by Partner, Rent
Payable to a Partner and Manager’s Commission etc., are charge against profit.
It is debited to Profit and Loss Account.
·
Specimen of the Profit and Loss
Appropriation Account
Profit
and Loss Appropriation Account
For
the year ended……
·
Interest on Loan by the Partner-
Interest on loan by partner is
credited to his Loan Account and not to his Capital Account. Journal entries
passed are:
(i) To provide interest on Loan by
Partner:
Interest
on Loan by Partner A/c Dr.
To Loan by Partner A/c
(ii) To close the Interest on Loan
by Partner A/c:
Profit
and Loss A/c Dr.
To Interest on Loan by Partner A/c
Interest on Loan by the
firm to Partner-
A firm may give loan to a partner. It will charge
interest on the loan given at the rate agreed among the partners. If the
Partnership Deed does not provide for charging interest on loan given or
agreement to charge interest does not exist, interest is not charged on the
loan given.
If interest is charged on loan by the firm to a
partner, interest is transferred to the credit of Profit and Loss Account and
debit to Partner’s Capital Account or Partner’s Current Account. Journal
entries are:
(i) For charging interest on Loan to
Partner:
Partner’s
Capital/Current A/c Dr.
To Interest on Loan to
Partner A/c
(ii) For transfer of Interest on
Loan to Partner A/c:
Interest
on Loan to Partner A/c Dr.
To Profit and Loss A/c
·
Appropriations are more than available
profit- In this situation, profit available for distribution among partners is
distributed in the ratio of appropriation to be made.
· Fluctuating Capital Accounts Method
• Remuneration (Salary or Commission) to Partners-
(i) Percentage of Net Profit or Distributable Profit before charging commission:
Net profit or distributable profit before commission x Rate of Commission / 100
(ii) Percentage of Net Profit or Distributable Profit after charging commission:
Net profit or distributable profit before commission x Rate of Commission / 100 + Rate of Commission
• Interest on Capital-
Interest on capital is allowed to a partner to compensate for contributing capital to the firm in excess of the profit sharing ratio. Interest on partner`s capital is computed at the rate of interest mentioned in Partnership Deed with reference to time period. Thus, interest on capital is allowed on the opening balance of the Partners` Capital. If further capital is introduced by a partner or is withdrawn by a partner, interest is calculated with reference to time period of use of capital in the business.
In case opening capital is not given, it is calculated as follows:
(a) When capitals are fixed-
·
Interest on drawings is calculated for
drawings against profit. Drawings against capital is not considered for
calculating interest on drawings. Two cases of calculating interest on drawings
are:
Case
-1
When drawings are made at irregular period or of different amounts.
1.
Simple Method- In this method, interest on drawing is
calculated separately on each amount of drawing, from the date of drawing till
the date of accounting period. Interest on each amount of drawing is calculated
with the help of following formula:
Case-2
When drawings are made of same amount at regular intervals.
Note:
·
If date of withdrawal is not given, the
interest on total drawings for the year is calculated for Six Months on
the basis of time.
·
When rate of interest is given without
the word ‘per annum’, interest is charged without considering the time factor.
Past
Adjustments- Sometimes, after the final accounts
have been prepared and the partners` capital accounts are closed, it is found
that certain items have been omitted by mistake or have been wrongly treated.
These omissions and errors are rectified by two ways:
(a)
Pass an adjustment entry.
(b)
Pass adjustments entries through ‘Profit and Loss Adjustment Account’.
Guarantee
of Profits- Guarantee is an assurance that an
existing partner or an incoming partner will not get his share of profit less
than guaranteed amount. It means that, in case his share of profit is less than
the guaranteed profit, then he will be compensated for the deficit.
Such
a guarantee may be given either by:
(a)
All other partners in an agreed ratio.
(b)
One or more of the existing or old partners.
If
the question is silent about the burden of guarantee, then the deficiency is
borne by the remaining partners in their profit-sharing ratio.
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