Partnership

PARTNERSHIP

According to Section 4 of the 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 of all.”

Main Features:

·        According to Indian Companies Act, 1956 in partnership, there should be

Minimum Numbers = 2 and

Maximum Numbers= 10 (in banking business)

Maximum Numbers= 20 (in ordinary business)

·        There must be an agreement between the partners. Such agreement can be either oral or in writing.

·        The main motive to form a partnership should be to carry some business (must be legal) with the intention of earning Profits.

·        The partners should share their profits according to their agreement.

·        Each partner is an agent as well as a partner of the firm. He can bind the other partners by his acts as an Agent. Moreover, he himself can be bound by the acts of the other partners as a Principal.

·        Each partner can participate in the business and is bound by the acts of the other partners in respect of the business of the firm.

 

PARTNERSHIP DEED

 

A written document which contains the term of agreement between partners is called Partnership Deed. It is essential that there must be some terms & conditions agreed upon by all the partners of the firm. According to law, it is not compulsory to have a written agreement. But to avoid all misunderstandings and disputes, it is the best course to have a written document duly signed and registered under the Act. It is also called ‘Articles of Partnership’.

Why it is necessary to have a Partnership deed for every firm?

Though according to law it is not mandatory for every firm but due to some reasons it is desirable to have it. The reasons are:-

·        It regulates the rights, duties and liabilities of each partner.

·        Any dispute between the partners can be settled easily with the reference of the partnership deed.

·        It helps to avoid the misunderstanding amongst the partners because all the partners know the terms and conditions of the Partnership Deed.

When there is no any partnership Deed between the partners, then the following rules will be applicable according to the Indian Partnership Act, 1932;

·        Profits and Losses are to be shared equally by all the Partners of the Firm (irrespective of their Capital contribution).

·        No interest on Capitals shall be allowed to the partners.

·        No interest is to be charged on Drawings (money withdrawn).

·        No partner is entitled to any salary or commission.

·        Interest @ 6% p.a. is to be allowed on a loan given by partner to the firm. Even in losses also, this interest will be paid.

·        Each partner can participate in the business of the firm.

·        No new partner can be admitted to the firm without the consent of all existing partners.

·        Each partner can inspect the books of the firm.

Accounting Equation

ACCOUNTING EQUATION

An accounting equation is a formula of accounting which shows that the assets of a business are always equal to the total of Capital and Liabilities. A business transaction will result in the change in either of the assets, liabilities or capital of the firm. After the change, assets will be again equal to the total of capital and liabilities. Therefore,

ASSETS = LIABILITIES + CAPITAL

OR

LIABILITIES = ASSETS - CAPITAL

OR

CAPITAL = ASSETS - LIABILITIES

We can understand it by an example.

Example: Show the Accounting Equation on the basis of the following transactions and prepare a Balance Sheet on the basis of last new equation:-

                                                                                                                             ₹          

1. A started business with cash                                         90,000
2.  Purchased goods for cash                                              30,000
3.  Purchased goods on credit                                            20,000
4.  Purchased furniture for cash                                           6,000
5.  Paid rent                                                                              5,000
6. Received commission                                                        1,000
7.  Withdrew cash for private use                                         3,000
8. Sold goods on credit (cost price ₹20,000)                    30,000
9. Paid to creditors                                                                10,000

 Solution:

 

S. No.	Transaction	Assets                                              = Liabilities + Capital  Cash+Stock+Furniture+Debtors=Creditors+Capital
1.	A started busi-ness with cash ₹90,000	90,000 + 0 + 0 + 0                               = 0 + 90,000
2.	Equation Purchased goods for cash ₹30,000	90,000 + 0 + 0 + 0                               = 0 + 90,000   (-)30,000 + 30,000 + 0 + 0                 = 0 + 0
3.	Equation Purchased goods on credit ₹20,000	60,000 + 30,000 + 0 + 0                     = 0 + 90,000    0 + 20,000 +0 +0                                 = 20,000 + 90,000
4.	Equation Purchased furni-ture for cash ₹6,000	60,000 + 50,000 + 0 + 0                     = 20,000 + 90,000     (-)6,000 + 0 + 6,000 + 0                      = 0 + 0
5.	Equation Paid rent ₹5,000	54,000 + 50,000 + 6,000 + 0             = 20,000 + 90,000   (-)5,000 + 0 + 0 + 0                             = 0+ (-)5,000
6.	Equation Received commi-ssion ₹1,000	49,000 + 50,000 + 6,000 + 0             = 20,000 + 85,000   1,000 + 0 + 0 + 0                                 = 0 + 1,000
7.	Equation Withdrew cash for private use ₹3,000	50,000 + 50,000 +6,000 + 0              = 20,000 + 86,000     (-)3,000 + 0 + 0 + 0                             = 0 + (-)3,000
8.	Equation Sold goods on credit ₹30,000  (cost price ₹20,000)	47,000 + 50,000 + 6,000 + 0             = 20,000 + 83,000     0 – 20,000 + 0 + 30,000                     = 0 + 10,000
9.	Equation Paid to creditors ₹10,000	47,000 + 30,000 + 6,000 + 30,000   = 20,000 + 93,000   (-)10,000 + 0 + 0 + 0                           = (-)10,000 + 0
	Final Equation	37,000 + 30,000 + 6,000 + 30,000   = 10,000 + 93,000

 

EXPLANATION

Serial No.	Transactions	Accounts Affected
		Assets	Liabilities & Capital
1	Capital brought in	Cash increases	Capital increases
2	Purchased goods for cash	Stock increases Cash decreases
3	Purchased goods on credit	Stock increases	Creditors increase
4	Purchased furniture for cash	Cash decreases Furniture increases
5	Paid rent	Cash decreases	Rent = Expenses Capital decreases
6	Received Commission	Cash increases	Commission = Income Capital increases
7	Withdrew cash for private use	Cash decreases	Capital decreases
8	Sold goods on credit for ₹30,000(cost price ₹20,000)	Debtors increase by ₹30,000. Stock decreases by ₹20,000	Capital increases by ₹10,000
9	Paid to creditors	Cash decreases	Creditors decrease

 Balance Sheet of A

As at ---------------

Liabilities + Capital	₹	Assets	₹
Creditors Capital	10,000 93,000	Cash Stock Furniture Debtors	37,000 30,000 6,000 30,000
	1,03,000		1,03,000

 

At any point of time, the total of the both sides of the Balance Sheet is always equal because the assets of a business are purchased either from the Funds (capital) supplied by the proprietor or from the funds provided by the external parties. From the study of above example, it may be concluded that every transaction has a double effect and in each case Assets = Liabilities + Capital. In other words, we can say that ‘Accounting Equation is true in all cases’.