Accounting for Partnership : Basic Concept
Nature of Partnership & Partnership Deed
Objective of this Lesson
After going through this lesson, you shall be able to understand the following concepts related to Partnership.
Nature of Partnership
Characteristics of Partnership
Partnership Deed and its Content
Importance of Partnership Deed
Provisions in Absence of Partnership Deed
Introduction to Partnership
The word ‘Partnership’ in the lay-man sense implies an agreement between two people to work together or jointly. In accountancy, the
meaning of partnership is the similar to that of in the general sense but with a greater depth. In our context, partnership implies the
agreement between two or more people who have decided to carry-out a business jointly. The main motive to form a partnership is to
earn profit arising out of the business activities.
Formal Definition of Partnership
According to the Section 4 of the Partnership Act, 1932, partnership is an agreement between two or more persons who have agreed
to share profits or losses of a business that will be carried by all or any one of them acting for all. The persons who joined their hands to
set up the partnership business individually are known as 'Partners' and all the partners in the partnership business collectively known as
'Firm'. The name under which the partners decided to carry out their business is known as 'Firm Name'. Partnership is a separate
business entity. It implies that a partnership firm is different from its partners. Any action taken by the partnership firm does not bind its
partners. Also any action taken by the partners does not bind the partnership firm. But from the legal point of view, partnership firm is
not treated as a separate business entity from its partners. It is same in the eyes of law.
Characteristics of Partnership
,The following are the important characteristics of a partnership.
1. Two or More Persons- Partnership is an agreement between two or more persons coming together
for a common goal. There should be at least two persons to form a partnership. Although as per the
Partnership Act of 1932, there is no maximum limit on the number of partners in a partnership firm,
but as per Rule (10) of Companies (Miscellaneous) Rules Act 2014, the maximum number of
partners permissible is 50.
Therefore, in case the number of partners exceeds the aforesaid limit, then the concerned partnership
is considered to be illegal. In this regards it must be noted that Section 464 of the Companies Act,
2013 provides that number of persons in any association/partnership shall not exceed one hundred
subject to the limit prescribed in rules.
In this regard, it must be noted that the maximum number of partners is not limited in case an
association or partnership is formed by professionals such as chartered accountants, lawyers, company
secretaries, etc. These professionals are governed by the special laws as formed by their respective
professional institutions.
Prior to the enforcement of Companies Act of 2013, the earlier act of 1956, imposed restrictions on the
maximum number of partners to 10 in case of banking business and 20 in case of any other kind of
business. However, with effect from April 01, 2014, Companies Act of 1956 has been replaced by
Companies Act of 2013.
2. Partnership Deed- An agreement between the partners of a partnership firm to carry out the
business activities under a common banner of a partnership firm is termed as Partnership Deed. To
form a partnership business, a partnership agreement is required. In other words, partnership is
created by a partnership agreement. The partnership agreement can either be written or oral. The
partnership deed in both the forms is equally valid in the eyes of law. However, it is always preferred
to have a written agreement to avoid the future conflicts and disputes among the partners. The
partnership agreement helps in governing the partners for carrying out the proposed business
activities. It also forms the basis for defining the relationship among the partners.
, 3. Business- A partnership is formed to carry out a legal business. Any partnership formed for carrying
out an illegal business is treated as an illegal partnership. For example, partnership for smuggling is
treated as illegal. In other words, the business activities should be lawful to form a partnership.
4. Sharing of Profits or Losses- The profits earned or losses incurred by a partnership firm must be
distributed among the partners as per the partnership deed. It is one of the important features of a
partnership. In short, the partners must share all the profits or losses of the business in the agreed
ratio.
However; it is not always necessary that all the partners in a partnership firm will bear the loss. It is
as per the terms and conditions of the partnership deed.
5. Liability- In a partnership business, the liability of the partners is unlimited. They are liable for all the
debts of the partnership firm. Each partner is liable jointly with all the other partners and also
individually to the third party for all the acts of the firm. If the assets of the firm are not sufficient to
meet its obligations, then the partners may be compelled to bring their personal assets to pay the
firm’s debt.
6. Mutual Agency- The partnership may be carried on by all the partners or by any one of them on
behalf of all. All the partners have equal right to participate in the activities of the business. There
exists a principal and agent relationship among the partners of a firm. As an agent, a partner may bind
the other partners by his/her acts and as a principal, a partner is himself/herself bound by the acts
done by the other partners. Thus, it can be concluded that mutual agency is very important feature of
partnership firm without which it cannot be considered as partnership.
Note: In case of any question regarding the permissible limit on the maximum number of partners in a
partnership firm, the students shall take the limit as 50.
Liabilities Of A Partner
When a partnership is formed certain terms governing his relationship with the firm are also decided a
priori that makes him liable in the following cases:
1) Competitive Business by a Partner: In case a partner carries a business that is quite similar to that
of the firm and earns profits from it, then he shall be liable to pay such profits to the firm. The reason being
, that his business being a competition for the firm violates the very basic nature of trust bestowed on him
by the firm.
2) Profit for self from a firm's transaction: If a partner earns any profit for self through the use of
business's property or connection or through any business transaction then the profit so earned shall be
handed over to the firm as it is. The reason being that a partner must not take undue advantage of the firm
for his own personal gains. For example, rent from a business property belonging to the firm must not be
taken by the partner, etc.
Some other important Provisions of the Indian Partnership Act, 1932
1) Sec. 30: A minor may be admitted for the benefit of partnership if agreed upon by all the partners.
2) Sec. 31: If all partners agree or the express agreement among the partners permit, a person can be
admitted as a partner to the firm.
3) Sec. 32: If all partners agree or the express agreement among the partners permit, a person may retire
from the firm.
4) Sec. 69: It is optional to register the firm
5) Sec. 35: A firm is dissolved on the death of the firm unless otherwise agreed by the partners in the
Partnership Deed.
Note: The above provisions will apply when Partnership Deed does not exist or where it exists it does not
have a clause to this effect.
PARTNERSHIP DEED
Partnership requires mutual trust, confidence and understanding among all the partners. An agreement that contains every aspects and
terms that the partners agreed upon before commencing the partnership firm is termed as partnership deed. A partnership deed can
either be oral or written. Both the forms of the partnership deed are equally valid in the eyes of law. However, it is always advisable and
preferable to have a written agreement in order to avoid any future conflicts and disputes among the partners. The partnership
agreement in the written form is termed as Partnership Deed.
Thus, a partnership deed can be defined as a document containing the details about the partners and agreement among all the partners of
Nature of Partnership & Partnership Deed
Objective of this Lesson
After going through this lesson, you shall be able to understand the following concepts related to Partnership.
Nature of Partnership
Characteristics of Partnership
Partnership Deed and its Content
Importance of Partnership Deed
Provisions in Absence of Partnership Deed
Introduction to Partnership
The word ‘Partnership’ in the lay-man sense implies an agreement between two people to work together or jointly. In accountancy, the
meaning of partnership is the similar to that of in the general sense but with a greater depth. In our context, partnership implies the
agreement between two or more people who have decided to carry-out a business jointly. The main motive to form a partnership is to
earn profit arising out of the business activities.
Formal Definition of Partnership
According to the Section 4 of the Partnership Act, 1932, partnership is an agreement between two or more persons who have agreed
to share profits or losses of a business that will be carried by all or any one of them acting for all. The persons who joined their hands to
set up the partnership business individually are known as 'Partners' and all the partners in the partnership business collectively known as
'Firm'. The name under which the partners decided to carry out their business is known as 'Firm Name'. Partnership is a separate
business entity. It implies that a partnership firm is different from its partners. Any action taken by the partnership firm does not bind its
partners. Also any action taken by the partners does not bind the partnership firm. But from the legal point of view, partnership firm is
not treated as a separate business entity from its partners. It is same in the eyes of law.
Characteristics of Partnership
,The following are the important characteristics of a partnership.
1. Two or More Persons- Partnership is an agreement between two or more persons coming together
for a common goal. There should be at least two persons to form a partnership. Although as per the
Partnership Act of 1932, there is no maximum limit on the number of partners in a partnership firm,
but as per Rule (10) of Companies (Miscellaneous) Rules Act 2014, the maximum number of
partners permissible is 50.
Therefore, in case the number of partners exceeds the aforesaid limit, then the concerned partnership
is considered to be illegal. In this regards it must be noted that Section 464 of the Companies Act,
2013 provides that number of persons in any association/partnership shall not exceed one hundred
subject to the limit prescribed in rules.
In this regard, it must be noted that the maximum number of partners is not limited in case an
association or partnership is formed by professionals such as chartered accountants, lawyers, company
secretaries, etc. These professionals are governed by the special laws as formed by their respective
professional institutions.
Prior to the enforcement of Companies Act of 2013, the earlier act of 1956, imposed restrictions on the
maximum number of partners to 10 in case of banking business and 20 in case of any other kind of
business. However, with effect from April 01, 2014, Companies Act of 1956 has been replaced by
Companies Act of 2013.
2. Partnership Deed- An agreement between the partners of a partnership firm to carry out the
business activities under a common banner of a partnership firm is termed as Partnership Deed. To
form a partnership business, a partnership agreement is required. In other words, partnership is
created by a partnership agreement. The partnership agreement can either be written or oral. The
partnership deed in both the forms is equally valid in the eyes of law. However, it is always preferred
to have a written agreement to avoid the future conflicts and disputes among the partners. The
partnership agreement helps in governing the partners for carrying out the proposed business
activities. It also forms the basis for defining the relationship among the partners.
, 3. Business- A partnership is formed to carry out a legal business. Any partnership formed for carrying
out an illegal business is treated as an illegal partnership. For example, partnership for smuggling is
treated as illegal. In other words, the business activities should be lawful to form a partnership.
4. Sharing of Profits or Losses- The profits earned or losses incurred by a partnership firm must be
distributed among the partners as per the partnership deed. It is one of the important features of a
partnership. In short, the partners must share all the profits or losses of the business in the agreed
ratio.
However; it is not always necessary that all the partners in a partnership firm will bear the loss. It is
as per the terms and conditions of the partnership deed.
5. Liability- In a partnership business, the liability of the partners is unlimited. They are liable for all the
debts of the partnership firm. Each partner is liable jointly with all the other partners and also
individually to the third party for all the acts of the firm. If the assets of the firm are not sufficient to
meet its obligations, then the partners may be compelled to bring their personal assets to pay the
firm’s debt.
6. Mutual Agency- The partnership may be carried on by all the partners or by any one of them on
behalf of all. All the partners have equal right to participate in the activities of the business. There
exists a principal and agent relationship among the partners of a firm. As an agent, a partner may bind
the other partners by his/her acts and as a principal, a partner is himself/herself bound by the acts
done by the other partners. Thus, it can be concluded that mutual agency is very important feature of
partnership firm without which it cannot be considered as partnership.
Note: In case of any question regarding the permissible limit on the maximum number of partners in a
partnership firm, the students shall take the limit as 50.
Liabilities Of A Partner
When a partnership is formed certain terms governing his relationship with the firm are also decided a
priori that makes him liable in the following cases:
1) Competitive Business by a Partner: In case a partner carries a business that is quite similar to that
of the firm and earns profits from it, then he shall be liable to pay such profits to the firm. The reason being
, that his business being a competition for the firm violates the very basic nature of trust bestowed on him
by the firm.
2) Profit for self from a firm's transaction: If a partner earns any profit for self through the use of
business's property or connection or through any business transaction then the profit so earned shall be
handed over to the firm as it is. The reason being that a partner must not take undue advantage of the firm
for his own personal gains. For example, rent from a business property belonging to the firm must not be
taken by the partner, etc.
Some other important Provisions of the Indian Partnership Act, 1932
1) Sec. 30: A minor may be admitted for the benefit of partnership if agreed upon by all the partners.
2) Sec. 31: If all partners agree or the express agreement among the partners permit, a person can be
admitted as a partner to the firm.
3) Sec. 32: If all partners agree or the express agreement among the partners permit, a person may retire
from the firm.
4) Sec. 69: It is optional to register the firm
5) Sec. 35: A firm is dissolved on the death of the firm unless otherwise agreed by the partners in the
Partnership Deed.
Note: The above provisions will apply when Partnership Deed does not exist or where it exists it does not
have a clause to this effect.
PARTNERSHIP DEED
Partnership requires mutual trust, confidence and understanding among all the partners. An agreement that contains every aspects and
terms that the partners agreed upon before commencing the partnership firm is termed as partnership deed. A partnership deed can
either be oral or written. Both the forms of the partnership deed are equally valid in the eyes of law. However, it is always advisable and
preferable to have a written agreement in order to avoid any future conflicts and disputes among the partners. The partnership
agreement in the written form is termed as Partnership Deed.
Thus, a partnership deed can be defined as a document containing the details about the partners and agreement among all the partners of
