1.2 Double Entry Book Keeping [Section A]—ISC XII
SUMMARY OF THE CHAPTER
Meaning of Partnership as per Section 4 of Indian Partnership Act, 1932
“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.”
Nature: A partnership firm has no separate legal entity apart from the partners constituting it.
Partners, Firm and Firm Name: The persons who have entered into partnership with one another are
individually called partners and collectively a firm. The name under which the business of the firm is
carried on is called the firm name.
Essential Elements, Main Features or Characteristics of Partnership
1. There must be two or more persons.
2. There must be an agreement.
3. There must be a lawful business.
4. There must be sharing of profits of business.
5. There must be a mutual agency, i.e., the business must be either carried on by all or any of them acting for all.
Partnership Deed: The document containing the terms and conditions of the agreement between/among
partners, is known as the Partnership Deed. The Partnership Deed usually includes the following:
[i] Name and address of the firm.
[ii] Names and addresses of all partners.
[iii] Date of commencement of partnership.
[iv] Capital to be contributed by each partner.
[v] Whether interest is to be allowed on capitals.
[vi] Whether any partner is to be allowed salary.
[vii] The profit-sharing ratio.
[viii] The duties of each partner.
[ix] Mode of settlement of accounts in case of retirement/death of a partner.
Benefits or Advantages of having a Partnership Deed
[i] It facilitates functioning of the business.
[ii] It is helpful in the settlement of all disputes arising among the partners.
[iii] It helps to avoid misunderstandings among the partners.
Provisions Applicable in the Absence of Partnership Agreement/Partnership Deed
1. Interest is not allowed on Partners’ Capitals or charged on Drawings.
2. Partner is not entitled to salary or remuneration for the work done for the firm.
3. Interest @ 6% p.a. is allowed on the loans advanced by any partner.
4. Profit or loss is distributed equally among the partners.
Profit and Loss Appropriation Account is an extension of the Profit and Loss Account. The purpose of this
account is to show how Net Profit is appropriated and distributed among the partners.
It is credited with Net Profit and interest on drawings.
It is debited with interest on capitals, salary or commission to partners as per the terms of Partnership Deed.
Its balance is transferred to the Partners’ Capital [or Current] Accounts in their agreed profit-sharing ratio
[or equally if there is no agreed profit-sharing ratio].
• Salary or Commission to a Partner: Salary or Commission to a partner is allowed if the Partnership
Deed provides for it.- Download India Code Logo
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Who is involved in a partnership?
A partnership is a form of business where two or more people share ownership, as well as the responsibility for managing the company and the income or losses the business generates.
What is the relation of one partner with another partner?
It provides that the relation of partners to one another is of the utmost good faith. It provides that every partner is an agent of each other, therefore, the contract entered by one of the partners will bind all the partners. Thus, the relation of partners to one another is based on mutual trust and confidence.
What is the agreement between partners called as?
The written agreement of partnership is called a partnership deed. It is a contract between two or more individuals who decide to manage and operate a business together for profit-making.
What are the two types of partnership?
Partnerships come in two varieties: general partnerships and limited partnerships. In a general partnership, the partners manage the company and assume responsibility for the partnership's debts and other obligations. A limited partnership has both general and limited partners.