Monday, October 07, 2013

AHSEC/CBSE: Accounting For Partnership Firms

Partnership: Introduction 2004, 2010, 2011,
In India, Partnership firm is governed by the Indian Partnership Act 1932. Section 4 of this act defines partnership as:
"The relationship between persons, who have agreed to share the profits of a business carried on by all or any one of them acting for all."
According to Prof. Haney, partnership is "the relation between persons competent to make contract who agree to carry on a lawful business in common with a view to private gain."
Partnership in this way is an agreement, between two or more persons to carry on legal business with profit motive, which is carried on by all or any one of them acting for all.
Essential (Characteristics) of Partnership: 2008, 2009
a)      Contract: Partnership is the result of contract between the partners and their relation of partnership arises from contract and not from status.
b)      Number of Persons: In a partnership firm there must be at least two people to form the business. Partnership Act 1932, does not specifies the maximum numbers of persons, but the Indian Company Act 1956, restricts the number of Partners to 10 for a partnership carrying on banking business and 20 in case of other kinds of business.
c)       Profit-Sharing: The agreement between/among partners must be to share profit or losses.
d)       Business: Business must be carried on by all the partners or any one of them acting as agent of other partners. Each partner carrying on the business is the principle as well as the agent for all the other partners.
e)      Motive: For a partnership firm there must be motive to earn profit. A partnership firm cannot be formed with service motive.

Partnership deed: Meaning 1999, 2003, 2007, 2009
A partnership is formed by an agreement. This agreement may be oral or in writing. Though the law does not expressly require that the partnership agreement should be in writing, it is desirable to have it in writing. A document, which contains the terms of partnership, as agreed to by the partners is called ‘Partnership Deed.’
Contents (Clauses) of the Deed:
a)      Name of the firm and its permanent address.
b)      Names and addresses of the partners.
c)       Nature of Business.
d)      Methods of evaluating of assets and liabilities.
e)      Date of commencement of partnership.
f)       Amount of capital to be contributed by each partner.
g)      Interest of Capital, if provided the rate of interest must be specified.
h)      Drawings by the partners.
i)        Interest on Drawings, if charged, the rate of interest should also be specified.
j)        Others

Duties and Rights of a Partner:
Duties (Obligations) of a Partner:
Ø  It is the duty of each partner to devote his full attention and time to the firm.
Ø  To carry on the business with the greatest common advantage and diligently. No partner is allowed any salary unless the deed provides.
Ø  To act within the authority and to be just and faithful to other partners.
Ø  Not to engage in competition against the firm.
Ø  To hold and use of property of the firm only for the firm.
Ø  To make good the loss that may have been caused by his willful neglect or breach of trust.

Rights of a Partner:
Ø  Every partner has a right to part in the conduct and management of the business.
Ø  Every partner has a right to be consulted in the matters of the partnership.
Ø  Every partner has a right to share profits (or losses) with others in the agreed ratio.
Ø  Partners have a right of free access to all records, books of accounts and also to examine and copy them.
Ø  A partner who has advances loan to the firm is entitled to receive interest. In case the rate of interest is not agreed, he will be given interest @ 6% p.a.

Fixed capital and fluctuating capital of partners: 2007,
Fixed Capital Accounts: A partnership firm can maintain the capital accounts of partners as fixed capital accounts or Fluctuating capital Accounts. In case capital accounts are fixed, the opening and closing balances of capital accounts normally remain unchanged. However in case some additional capital is introduced during the accounting year then closing capital will differ from opening capital.
But for this purposes a separate current account is opened in the name of each partner.
Current Accounts: When the fixed capital account is operated in the firm, all the transactions between firm and partner such as; salary, fees, bonus, commission, interest on capital, share in profits, reserves, goodwill etc, payable to partners, and Drawings, interest on drawings, share in losses, all these are recorded in Current Accounts. So current account is opened for each partner separately when the capital account is fixed.
Fluctuating Capital Accounts: A partnership firm may keep fluctuating capital accounts of partners, if it is provided in the partnership deed. Fluctuating capital accounts of partners means where in all the transactions relating to partners e.g. salary, fees ,commission, interest on capital, share in profits, goodwill, reserves, drawings etc., are recorded along with the opening balance of capital and additional capital introduced in the firm. In case of fluctuating capital accounts, current accounts of partners are not opened.

Difference between fixed capital accounts and fluctuating capital Accounts:
Basic of difference
Fixed Capital Account
Fluctuating Capital Accounts
1. Opening and Closing balance
Opening and Closing balances normally remains same
Opening & Closing bal. change due to adjustment in capital account.
2. Current account
Current accounts of partners are opened in this case.
Current accounts of partners are not opened in this case.
3. Adjustment relating to capital
All adjustment relating to partners capital accounts are made in current account.
All such adjustments are made in capital account itself.
4. Closing capital
The closing balance is always a credit balance.
The closing balances of partner’s capital account may be debit or credit.

Profit or loss appropriation account:
In case of partnership, profit earned by the firm is distributed among partner in their profit sharing ratio. If ratio is not specified, partners are assumed to be equal. Divisible profit is subject to certain adjustments such as interest on capital, drawings, interest on loan, salaries and commission to partners. These transactions are not charges against profit, so they are not mixed up with general trading transactions.
 Accordingly an additional account known as profit and loss appropriation accounts is prepared. It is on extension of profit and loss accounts. The net profit disclosed by profit and loss accounts is transferred to these accounts.

Guarantee in partnership
Sometimes on the admission of a new person into a partnership the old partner may agree that the new partner would be entitled to receive a minimum amount of profits, irrespective of the actual profit earned by the business. The old partners thus offer a guarantee of the minimum amount of profits to new partner in case his actual share of profit is less than the stipulated amount. The old partners may bear this loss from their own share of the profit in proportion to their sharing ratio or the loss may be borne by only of the old partners.

Provisions of the Partnership Act relating to partnership accounts if there is no partnership agreement 2000, 2002, 2009, 2011,
According to Indian Partnership Act 1932 (sec. 4), the following provision are applicable in the absence of partnership deed:
Ø  Profit Sharing Ratio: In the absence of partnership deed all partners will share Profit or losses in equal ratio.
Ø  Interest on Capital: No interest will be given to any partner on his capital. In case, there is a partnership deed, which allows interest on capital, it will be allowed in case of profit but not in case of loss in the business.
Ø  Interest on Drawings: No interest will be charged on drawing in the absence of partnership deed.
Ø  Partner’s Salary/Commission: No salary or commission will be given to any partner in the absence of partnership deed.
Ø  Interest on Partner’s Loan: Interest on partner’s loan will be given @ 6% p.a. Such interest is payable even if there are losses.

Meaning of Joint Venture 1999, 2000, 2003, 2011
A joint venture is the combination of two or more persons into a single activity. It is a form of partnership which is limited to a specific venture. It is exactly the same as partnership, with the exception that it is one of a business that is to be terminated.
Since the business is to be terminated after completion of the venture, a firm name is not generally used. Thus the joint venture is like a temporary partnership without a firm name. It can also be said a particular partnership or partnership for a particular object.
Similarities between Partnership and Joint Venture:
Joint Venture
It is association of two or more partners.
A joint venture is the combination of two or more persons into a single activity.
Distribution of Profits
Primary aim of partners is to distribute profit between them.
The profits are ascertained for each venture separately and distributed between covertures.

Difference between Partnership and Joint Venture:
Basis of Difference
Joint Venture
Going Concern
It is a going concern.
It is a terminable venture.
It always has a name.
It may not bear a name.
Persons carrying on business are called partners.
Persons carrying on business are called co-ventures.
Ascertainment of profit
Profits are ascertained at regular intervals, i.e., annually.
The profits are ascertained for each venture separately.