This GSEB Class 12 Commerce Accounts Notes Part 1 Chapter 1 Introduction to Partnership covers all the important topics and concepts as mentioned in the chapter.
Introduction to Partnership Class 12 GSEB Notes
In case of sole proprietary firm, limitations like capital, working force, administrative skills, risk taking capacity, less chances of business development etc. are there. To overcome these limitations, concept of partnership takes place. In this chapter we will study the meaning of partnership, its form, partnership deed, methods of keeping capital accounts and profit and loss appropriation account etc.
Partnership:
As per Indian Partnership Act 1932, Section 4, defines partnership as, “Partnership is the relation between the persons who have agreed to share the profit of a business carried on by all or any one of them acting for all.”
Partnership Deed:
The partnership deed is a administrative constitution of partnership firm, where all provisions pertaining to firms administration are included.
Generally, following content is included in the partnership deed.
- The information relating to partners name, address and other details.
- The information relating to firm’s name, address, type of business, commencement date etc.
- Capital
- Interest on capital.
- Drawings.
- Interest on drawings.
- Profit and loss sharing ratio.
- Interest on loan provided by partner to the firm.
- Salary, Bonus, remuneration etc to the partners.
- Admission and retirement of a partner.
- Goodwill of the firm.
- Dissolution of partnership firm.
Capital Accounts of Partners:
There are two methods to maintain capital accounts:
- Fluctuating capital account method;
- Fixed capital account method.
Profit and Loss Appropriation Account:
To show the distribution of profit or loss among the partners, a special account is prepared which is known as profit and loss appropriation account. Which is a part of the profit and loss account. A separate preparation of this account is not mandatory.
While calculating sums of partnership accounts, consider the following points:
1. In the absence of partnership deed, as per partnership act 1932,
- It is not mandatory to bring capital for each partner,
- Interest on capital or drawing can not be calculated
- Salary, Bonus, commission or remuneration can not be paid to the partners,
- 6% p.a. interest is payable for the loan given by any partner to the firm,
- The distribution of profit and loss would remain in equal proportion
- In case of any reasonable expenses incurred by the partner for the firm the partner has the right to reimburse it.
2. Under fluctuating capital account method, only partners capital accounts are prepared and all the transaction between partners and firm are recorded in partners capital accounts. Under fixed capital account method, partners capital accounts’ and partners’ current accounts are prepared. Transaction other than permanent capital are recorded in partners current account.
3. Under fluctuating capital account method, at the end of the year, drawings account of is to be closed by transferring it to partners capital account.
4. Commission amount paid to manager and interest on loan paid to partners are business expenses, therefore it is to be debited to profit and loss account.
5. Calculate partner’s commission from profit of the firm as under.
(i) If commission is to be calculated before deducting commission from profit
Commission = Net Profit × \(\frac{\% \text { of Commission }}{100}\)
(ii) If commission is to be calculated after deduction of such commission –
Commission (before commission) = Net profit × + \(\frac{\% \text { of Commission }}{100+\% \text { of Commission }}\)
6. Interest on capital is to be calculated if provision for it is there in the partnership deed. But
(i) If provision for interest on capital is not there in the partnership deed, interest on capital can not be allowed.
(ii) If provision for interest on capital is there in the partnership deed, but if it is not clearly mentioned whether it is an expense of interest or distribution of profit than.
- In case of loss, interest on capital is not to be allowed.
- If profit of the firm is more than or equals to the interest on capital amount, then interest on capital is to be allowed.
- When profit amount is less than interest payable on capital, then amount equals to the interest on capital is to be distributed in capital ratio.
- In partnership deed if it is clearly mentioned that interest on capital is to be allowed.
- When profit amount is less than interest payable on capital, than amount equals to the interest on capital is to be distributed in capital ratio.
(iii) In partnership deed if it is clearly mentioned that interest on capital is to be allowed, then whether profit is there or loss is there, interest on capital is to be allowed.
While calculating interest on drawings, considered the following:
- When partner withdraw amount on 1st day of every month, then take N = \(\frac{78}{12}\)
- When partner withdraw amount on 15th day of every month then take N = \(\frac{72}{12}\)
- When partner withdraw amount on last day of every month, then take N = \(\frac{66}{12}\)
- If partner withdraw amount on jg day of every three months, then take N = \(\frac{30}{12}\)
- If partner withdraws amount of last day of every three months, then take N = \(\frac{1}{2}\)
By calculating interest on capital for a partner → Capital increases and Profit decreases.
By calculating interest on drawing for a partner → Capital decreases and Profit increases.