) ACCOUNTING FOR PARTNERSHIP FIRM CHAPTER 01

LILHA EDUCATION CENTRE

CLASS XII

ACCOUNTING FOR PARTNERSHIP FIRMS




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, Chapter-1

Accounting For Partnership Firms-fundamentals

1. Definition Of Partnership-Section 4 of the Indian Partnership Act,1932, defines
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.”

2. Main features or Essential or Characteristics of Partnership
 Two or More Persons
 Agreement
 Existence of Business and Profit Motive
 Sharing of Profits
 Relationship of Principal and Agent
 Business Carried on by all or any of them acting for all
 No Separate Existence

3. Rights of a Partner:
 Every Partner has the to share profits or losses with other partners in the agreed ratio.
 Every Partner has the right to take part in the conduct of the business.
 Every Partner has the right to be consulted in the matters related to partnership business.
 Every Partner has the right to inspect and have a copy of the books of accounts.
 Every Partner has the right to disallow the admission of a new partner.
 Every Partner is the joint owner of the partnership property.
 If a partner has given loan to the firm, he has a right to receive interest at agreed rate. If
the rate of interest is not agreed, it is paid @6%p.a.
 If a Partner incurs expenses or makes payment on behalf of the firm, he has a right to be
indemnified by the firm.
 Every partner has a right to retire from the firm after giving a proper notice.

4. Limited Liability Partnership(LLP) – The Limited Liability Partnerships (LLPs) in
India came into existence with the enactment of ‘Limited Liability Partnership Act, 2008’
whi8ch lay down the law for the formation and regulation of Limited Liability
Partnerships.

5. Definition-Limited Liability Partnership means a partnership formed and registered under
this Act.

,6. Nature of limited Liability Partnership(LLP)
 A LLP is a Body corporate formed and incorporated under this Act.
 It is legal entity separate from that of its partners.
 A LLP shall have perpetual succession.
 Any change in the partner of a LLP shall not affect the existence, right or
liabilities of the LLP.

Indian Partnership Act, 1932 shall not apply to a LLP.

7. Distinction between an Ordinary Partnership Firm and an LLP

S.No Basis of Distinction Partnerships LLPs
1. Applicable Law Indian Partnership Act,1932 The Limited Liability
Partnership Act,2008.
2. Registration Optional Compulsory with Registrar
of Companies.
3. Creation Created by an Agreement Created by Law

4. Body Corporate Body Corporate cannot Body Corporate can become
become a Partner. its partner.
5. Separate Legal Entity It is not a separate legal It is a separate legal entity.
entity.
6. Perpetual Succession Partnerships do not It has perpetual succession
perpetual succession. and individual partners may
come and go.
7. Number of Partners Minimum 2 and Maximum Minimum 2 but no
50. Maximum limit.
8. Ownership of Assets Firm can not own any The LLP as an independent
assets. The partners own the entity can own assets.
assets of the firm.
9. Liability Unlimited Limited to the extent of their
contribution towards LLP.

8. Partnership Deed Since partnership is the outcome of an agreement, it is essential that
there must be some terms and conditions agreed upon by all the partners. Such terms and
conditions may be either oral or written. The law does not make it compulsory to have a
written agreement. However, in order to avoid all misunderstandings and disputes, it is
always the best course to have a written agreement duly signed and registered under the
Act. Such a written document which contains the terms of agreement is called ‘Partnership
Deed’. It is also called ‘Articles of Partnership’.
 The name and address of the Firm.

,  Name and Address of the Partners
 The type and nature of the business firm proposes to do.
 Amount of capital to be contributed by each partner
 Interest on Capitals
 Drawings
 Interest on Drawings
 Profit sharing ratio
 Salary
 Goodwill
 Accounting period of the firm
 Method of recording of firm’s accounts.
 Auditing
 Date of Commencement of partnership.
 Duration of Partnership.
 Use of the decision of Garner vs. Murray
 Bank Accounts
 Rules to be followed in case of admission of a partner.
 Rules to be followed while setting the Accounts on Retirement
 Settlement of Disputes

9. Rules Applicable in the Absence of Partnership Deed
In the absence of a Partnership Deed or Verbal agreement, or if the Partnership deed is
silent on a certain point, the following provisions of partnership Act, 1932 will be
applicable:-
 Profit Sharing Ratio- Profit and Losses are to be shared equally irrespective of
their capital contribution.
 Interest on Capital- No interest on Capitals shall be allowed to the partners. If there
is a provision for the interest on capitals in the partnership deed, it will be allowed
only when there is a profit.
 Interest on Drawings- No Interest is to be charged on drawings.
 Salary to a Partner No Partner is entitled to any salary or commission for taking
part in running the firm’s business.
 Interest on loan- Interest at the rate of 6% per annum is to be allowed on partner’s
loan to the firm. Such Interest shall be paid even if there are losses of the firm.
 Admission of a new partner-without the consent of all existing partners no new
partner can be admitted to the firm.
 Each partner can participate in the conduct of the business.
 Each partner can inspect the books of firm and can take a copy of the same