T.S. Grewal’s Double Entry Book Keeping—Accounting for Partnership Firms
MEANING OF KEY TERMS USED IN THIS CHAPTER
1. Partnership Partnership is a relation between persons who have agreed to share the
profits of a business carried on by all or any of them acting for all.
2. Partners Partners are the persons who have agreed to carry on a partnership
business and share its profits and losses.
3. Firm Partners carrying on the business are collectively known as firm. The name
under which the business is carried on is called firm name.
4. The Partnership It is an Act that governs the partnership firms. In case, Partnership Deed is
Act, 1932 silent on an issue, provisions of the Indian Partnership Act, 1932 are applied.
5. Partnership Deed Partnership Deed is a written agreement among the partners detailing the
terms and conditions of the partnership.
6. Capital Capital is the amount contributed by the partners in the firm. Capital may
be fixed or fluctuating.
7. Fixed Capitals Fixed Capitals mean that capitals of the partners remain fixed and change
with the introduction or withdrawal of capital. When capitals are fixed
two accounts for each partner are maintained, i.e., Capital Account and
Current Account.
8. Fluctuating Capitals Fluctuating Capitals mean that capitals of the partners do not remain
fixed but change with each entry. When capitals are fluctuating, only one
account, i.e., Capital Account is maintained for each partner.
9. Drawings Drawings mean withdrawal by the partner from the firm in cash or kind for
his or her personal use.
10. Profit-sharing Ratio Profit-sharing Ratio is the ratio in which the partners have agreed to share
profits and losses of the firm.
11. Past Adjustments Past Adjustments refer to those adjustments which are related to
past period that occurred due to errors or omissions in the books of the
firm or giving effect to a new agreement with retrospective effect.
12. Guarantee of Profit Guarantee of Profit means minimum guaranteed profit given to a
partner or partners of the firm. It may be given by a partner or partners or by
the firm.
1
, T.S. Grewal’s Double Entry Book Keeping—Accounting for Partnership Firms
CHAPTER SUMMARY
Meaning of Partnership as per 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 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) of Partnership
1. There must be two or more persons.
2. There must be an agreement to carry business.
3. There must be 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
A written document detailing the terms and conditions of the agreement between/among partners is termed 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) Profit-sharing Ratio among partners.
(viii) The rights and duties of each partner.
(ix) Method of valuation of goodwill in case of admission or retirement or death of a partner.
(x) Mode of settlement of accounts in case of retirement/death of a partner or dissolution of the firm.
Benefits or Advantages of having a Partnership Deed
(i) It facilitates functioning of the business.
(ii) It is helpful in the settlement of disputes arising among partners.
(iii) It helps in avoiding misunderstandings among the partners.
Provisions Applicable in the Absence of Partnership Agreement/Partnership Deed
(i) Interest is not allowed on Partners’ Capitals or charged on drawings.
(ii) Partner is not entitled to salary or remuneration for the work done for the firm.
(iii) Interest @ 6% p.a. is allowed on the loans by any partner.
(iv) Profits or losses are divided equally among the partners.
• Interest on Partner’s Loan to the Firm: If a partner gives a loan to the firm, he is entitled to an interest on
such loan at an agreed rate of interest. If there is no agreement as to the rate of interest on loan, the partner
is entitled to interest on loan @ 6% p.a. Such interest is a charge against the profit. It should be debited to
Profit & Loss Account.
• Rent Paid to Partner: Rent paid to a partner is a charge against profit. It is debited to Profit & Loss Account and
credited to Rent Payable Account.
• Manager’s Commission and Partners’ Commission are calculated on corrected Net Profit of Profit & Loss
Account, if the question is silent. It should be kept in mind that manager’s commission is a charge against the
profit whereas, partners’ commission is an appropriation of profit.
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MEANING OF KEY TERMS USED IN THIS CHAPTER
1. Partnership Partnership is a relation between persons who have agreed to share the
profits of a business carried on by all or any of them acting for all.
2. Partners Partners are the persons who have agreed to carry on a partnership
business and share its profits and losses.
3. Firm Partners carrying on the business are collectively known as firm. The name
under which the business is carried on is called firm name.
4. The Partnership It is an Act that governs the partnership firms. In case, Partnership Deed is
Act, 1932 silent on an issue, provisions of the Indian Partnership Act, 1932 are applied.
5. Partnership Deed Partnership Deed is a written agreement among the partners detailing the
terms and conditions of the partnership.
6. Capital Capital is the amount contributed by the partners in the firm. Capital may
be fixed or fluctuating.
7. Fixed Capitals Fixed Capitals mean that capitals of the partners remain fixed and change
with the introduction or withdrawal of capital. When capitals are fixed
two accounts for each partner are maintained, i.e., Capital Account and
Current Account.
8. Fluctuating Capitals Fluctuating Capitals mean that capitals of the partners do not remain
fixed but change with each entry. When capitals are fluctuating, only one
account, i.e., Capital Account is maintained for each partner.
9. Drawings Drawings mean withdrawal by the partner from the firm in cash or kind for
his or her personal use.
10. Profit-sharing Ratio Profit-sharing Ratio is the ratio in which the partners have agreed to share
profits and losses of the firm.
11. Past Adjustments Past Adjustments refer to those adjustments which are related to
past period that occurred due to errors or omissions in the books of the
firm or giving effect to a new agreement with retrospective effect.
12. Guarantee of Profit Guarantee of Profit means minimum guaranteed profit given to a
partner or partners of the firm. It may be given by a partner or partners or by
the firm.
1
, T.S. Grewal’s Double Entry Book Keeping—Accounting for Partnership Firms
CHAPTER SUMMARY
Meaning of Partnership as per 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 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) of Partnership
1. There must be two or more persons.
2. There must be an agreement to carry business.
3. There must be 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
A written document detailing the terms and conditions of the agreement between/among partners is termed 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) Profit-sharing Ratio among partners.
(viii) The rights and duties of each partner.
(ix) Method of valuation of goodwill in case of admission or retirement or death of a partner.
(x) Mode of settlement of accounts in case of retirement/death of a partner or dissolution of the firm.
Benefits or Advantages of having a Partnership Deed
(i) It facilitates functioning of the business.
(ii) It is helpful in the settlement of disputes arising among partners.
(iii) It helps in avoiding misunderstandings among the partners.
Provisions Applicable in the Absence of Partnership Agreement/Partnership Deed
(i) Interest is not allowed on Partners’ Capitals or charged on drawings.
(ii) Partner is not entitled to salary or remuneration for the work done for the firm.
(iii) Interest @ 6% p.a. is allowed on the loans by any partner.
(iv) Profits or losses are divided equally among the partners.
• Interest on Partner’s Loan to the Firm: If a partner gives a loan to the firm, he is entitled to an interest on
such loan at an agreed rate of interest. If there is no agreement as to the rate of interest on loan, the partner
is entitled to interest on loan @ 6% p.a. Such interest is a charge against the profit. It should be debited to
Profit & Loss Account.
• Rent Paid to Partner: Rent paid to a partner is a charge against profit. It is debited to Profit & Loss Account and
credited to Rent Payable Account.
• Manager’s Commission and Partners’ Commission are calculated on corrected Net Profit of Profit & Loss
Account, if the question is silent. It should be kept in mind that manager’s commission is a charge against the
profit whereas, partners’ commission is an appropriation of profit.
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