PARTNERSHIP ACCOUNTS CAIIB ABM

INTRODUCTIONTO PARTNERSHIP

Section 4 of the Indian Partnership Act, 1932 defines partnership as ‘The relation between persons who have agreed to share the profits of a business carried on by all or anyone of them acting for all.’

According to the above definition, the main features of partnership are as under:

(i)  It is the relationship between persons, which means that there should be at least two persons to form a partnership.

(ii)  A partnership is the result of an agreement, which may be written, or oral.

(iii)  The agreement is to share the profits of the business. This means that profits have to be shared by all though loss may be borne by only one partner, a few partners or all the partners.

(iv)  The business must be carried by one or more than one or all, on behalf of all. This means that one partner can act on behalf of the other partners. This is known as the principle of agency.

When all these four characteristics are fulfilled, the relationship between the persons is known as the ‘Partnership’. Persons who have entered into partnership with one another are individually called ‘partners’ and collectively ‘a firm’. The name under which the business is carried on is called the ‘firm name’ and it constitutes a separate entity for its activities/operations and subsequent accounting treatment thereof.

According to the Indian Partnership Act, there is no maximum limit of partners in the partnership, but according to the Companies Act 2013; the maximum number of partners is ten in case of banking business and hundred in case of other business operations. The Companies (Amendment) Bill 2003 permits the formation of partnership consisting of professionals up to fifty partners. An association of persons of more than the said limit is an illegal association.

The document, which contains the partnership agreement, is known as ‘Partnership Deed’. Legally, it is not compulsory for any partnership firm to have a written partnership deed but it is always advisable to have a written partnership deed to be referred to in future in the event of any disputes between partners. Sometimes, even if there is a partnership deed, it may be silent on certain points. In such cases, the relevant provisions of the Partnership Act will apply.

Some of the important clauses of a partnership deed (particularly those affecting accounts and consequent accounting treatment) are as follows:

1.  Name of the firm and the partnership business.

2.  Commencement and duration of business.

3.  Amount of capital to be contributed by each partner.

4.  Rate of interest to be allowed to each partner on his capital and on his loan to the firm

5.  Disposal of profits, particularly the ratio in which profits or losses is to be shared.

6.  Amount to be allowed to each partner as drawings and the timings of such drawings and interest chargeable, if any.

7.  Whether a partner will be allowed to draw a salary.

8.  Any variations in the mutual rights and duties of partners.

9.  Method by which the goodwill is to be calculated on the admission, retirement or death of a partner.

10.  Procedure by which a partner may retire and the method of payment of his dues.

11.  Basis of determination of the executors of a deceased partner and the method of payment.

12.  Treatment of losses arising out of the insolvency of a partner.

13.  Procedure to be followed for settlement of disputes among partners.

14.  Preparation of accounts and their audit.

In the absence of any partnership deed or where a deed is silent in respect of the above-mentioned points, the following rules of the Partnership Act will have to be observed:

1.  The partners are entitled to share profits or losses equally.

2.  The partners are not entitled to any interest on capital nor any interest is to be charged by the firm on drawings.

3.  The partners are entitled to interest at 6 per cent per annum on loans given by them to the firm.

4.  The partners are not entitled to any salary, remuneration or commission for any extra work done.

DISTINCTION BETWEEN PARTNERSHIP AND OTHER FORMS OF BUSINESS

The distinction between partnership accounts and other forms of business is depicted in the Table below:

Points of Distinction	Proprietary	Partnership	Company and other forms which are separate legal entitles (Artificial Judicial persons)
Legal Status	Individual, i.e. one single person.	Partners and partnership firm is one entity. All partners are jointly and severally liable for acts of the firm.	They are separate legal entities.
Ownership	Owned by a single person.	Owned jointly by all the partners.	Members of the Company, i.e. Shareholders are the owners.
Share of Profit	Entire profits belong to the proprietor.	All the partners share the profits in some agreed proportion.	Members, i.e. shareholders enjoy the profit in the form of dividends.
Management of Business	Business in most cases is run by single person.	Business may be run by one or some or all the partners acting for all.	Board of Directors who are professionals and may also be shareholders manages business.