A 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 (Section 4 of the Indian Partnership Act, 1932). The written agreement is the partnership deed.
When there is no partnership deed
| Matter | Rule under the Act |
|---|---|
| Sharing of profit or loss | Equally |
| Interest on capital | Not allowed |
| Interest on drawings | Not charged |
| Salary or commission to a partner | Not allowed |
| Interest on a partner's loan to the firm | 6% per annum |
Profit and Loss Appropriation Account
It shows how the net profit is divided. Interest on capital, salary and commission to partners and transfers to reserve are debited; net profit and interest on drawings are credited; the balance is divisible profit, shared in the profit-sharing ratio.
Interest on capital is an appropriation, so it is allowed only out of profits. If the profit is less than the interest, the available profit is shared in the ratio of interest on capital.
Interest on drawings — average period
| Drawings made each month | Average period |
|---|---|
| At the beginning of the month | 6.5 months |
| In the middle of the month | 6 months |
| At the end of the month | 5.5 months |
For quarterly drawings the average periods are 7.5 months (beginning), 6 months (middle) and 4.5 months (end).
Fixed and fluctuating capitals
- Fixed capital method: two accounts per partner. The Capital Account changes only for fresh capital or withdrawal of capital; interest, salary, drawings and share of profit go to the Current Account.
- Fluctuating capital method: one Capital Account per partner that records everything.
Guarantee of minimum profit
When a partner is guaranteed a minimum share, any deficiency is borne by the guaranteeing partner(s) in the agreed ratio (or their profit-sharing ratio if nothing is agreed). Prepare the appropriation first, then show the deficiency being transferred.
Past adjustments
Errors in closed accounts (interest omitted, wrong ratio used) are corrected by one adjusting entry. See our step-by-step article on past adjustments.
Recorded lectures for this chapter
15 lectures (5 h 34 min) by Ronak Dugar in Class 12 Accountancy Book 1: Accounting for Partnership Firms. Enrolled students watch them in the student portal.
- Class 1 - Introduction to Class 12th21 min
- Class 2 - Basics of Partnership, P&L Appropriation23 min
- Class 3 - Partner's Capital, Comprehensive Questions32 min
- Class 4 - Journal Entries, Fixed & Fluctuating Capitals28 min
- Class 5 - Comprehensive Question, Treatment of Charge Against Profits25 min
- Class 6 - Interest on Drawings29 min
- Class 7 - Past Adjustments Basics20 min
- Class 8 - Past Adjustments Comprehensive Questions33 min
- Class 9 - Guarantee to a Partner20 min
- Class 10 - Comprehensive Question of Guarantee, Net Loss in Case of Guarantee24 min
- Class 11 - Questions of Charge Against Profits, Net loss in the firm14 min
- Class 12 - When Appropriation are more than Profits, Interest on Capital Cases15 min
- Class 13 - Additional Questions of Past Adjustments21 min
- Class 14 - Additional Questions of Guarantee to a Partner13 min
- Class 15 - Journal entries for Partner Loan cases11 min
Learn this chapter with Ronak Sir
Classroom batches in Sector 9, Faridabad and recorded lectures online. Book a free demo class or call +91 83685 45620.