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AHSEC HS 2ND YEAR ACCOUNTANCY
Unit – 1: Accounting for Partnership – Basic Concept
Q. Define the term “Partnership”, Partners, Firm and Firm name. What are characteristics of partnership? [AHSEC 2004, 2010, 2011,2020]
ANS:- A partnership is a form of business where two or more individuals share ownership, responsibilities, profits, and liabilities.
Definition: Section 4 of the Indian Partnership Act, 1932 defines partnership as "The relationship between persons who have agreed to share profits of a business carried on by all or any one of them acting for all."
Following are the characteristics of a partnership of a firm are: [AHSEC 2020,2023]
1.Mutual Agency: Each partner can act on behalf of the business and make decisions.
2. Shared Profits and Losses: Partners share both profits and losses according to their agreed-upon ratio.
3. Unlimited Liability: Partners are personally liable for the debts and obligations of the business.
4. Limited Life: The partnership dissolves if a partner leaves, dies, or if outlined in the partnership agreement.
5. Shared Management: Partners often participate in the management and decision-making processes of the business.
6. Ease of Formation: Partnerships are relatively easy to establish compared to other business structures.
7. Flexible Structure: Partnerships allow for flexibility in terms of management, profit sharing, and business operations.
8. Joint Ownership: All partners collectively own the business assets and liabilities.
9.Taxation: Partnerships are not taxed directly; instead, profits are taxed as personal income for each partner.
10.Confidentiality: Partnerships offer privacy as they are not typically required to disclose financial information publicly.
11.Limited Capital: Raising significant capital can be challenging as it relies on the contributions of the partners.
12.Risk of Conflict: Disagreements among partners can potentially lead to conflicts affecting the business.
Q. What are the merits/advantages/benefits and demerits/dis-advantages/problems/ limitations of partnership? [AHSEC-2022]
ANS.
Advantages:
1. Shared Responsibility: Partners share the workload and decision-making.
2. Diverse Skills: Each partner can bring different skills and expertise to the business.
3. Financial Strength: Partners contribute capital, increasing financial resources.
4. Ease of Formation: Partnerships are relatively easy and inexpensive to establish.
5. Tax Benefits: Profits are taxed at individual rates, potentially offering tax advantages.
6. Flexibility: Partnerships often have more flexibility in management and operations.
7. Synergy: Collaboration can lead to creative ideas and better problem-solving.
8. Personal Connection: Partnerships often foster strong personal relationships among partners.
Disadvantages:
1. Unlimited Liability: Partners are personally liable for the debts and obligations of the business.
2. Conflict: Disagreements among partners can lead to disputes and disruptions.
3. Shared Profits: Profits must be divided among partners as per the agreed terms.
4. Dependency: Actions of one partner can affect the entire business and other partners.
5. Lack of Continuity: The death or departure of a partner may dissolve the partnership.
6. Limited Capital: Raising substantial capital might be challenging compared to corporations.
7. Difficulty in Decision-making: Unanimous decisions can be hard to achieve among partners.
8. Potential for Mismanagement: Differences in managing styles can lead to inefficiencies or conflicts.
Q. What is Partnership Deed? What are its contents/Clauses? AHSEC 1999, 2003, 2007, 2009, 2014, 2018, 2019
ANS. A Partnership Deed is a legal document that outlines the terms and conditions of a partnership between two or more individuals or entities engaged in a business venture.It must be drafted, dated and signed by all partners. It should also be stamped.
Partnership deed is a very important document because it is the written agreement which contains all the terms and conditions of the partnership business. So it forms the basis of mutual relationship among partners as well as of form. So by having partnership deed partners' dispute may be settled in future.
The principal Clauses of a Partnership Deed are:
a) Name and address of the firm with their capitals: The names and address of the firm must be mentioned.
b) Nature and address of the partners with their capitals: The names address of the partners and their individuals' capitals must be mentioned.
c) Nature and place of business: Nature of the business and the place where it is to be carried on must be mentioned.
d) Tenure of business: The tenure of business should be specified.
e) Interest on capital and on drawings: It should mention whether any interest on capital, drawings and loans to be allowed.
f) Salary to a partner: It should be mention whether any salary would be allowed to a partner. If allowed, the amount of salary should be mentioned.
Q.What are the rules to be followed in the absence of Partnership agreement between partners? AHSEC 2000, 2002, 2009, 2011, 2014
ANS: According to Indian Partnership Act 1932 (sec. 4), the following provision are applicable in the absence of partnership deed:
a) Profit Sharing Ratio: In the absence of partnership deed all partners will share Profit or losses in equal ratio.
b) Interest on Capital: No interest will be given to any
partner on his capital in the absence of partnership deed. 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.
c) Interest on Drawings: No interest will be charged on drawing in the absence of partnership deed.
d) Partner’s Salary/Commission: No salary or commission will be given to any partner in the absence of partnership deed.
e) 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.
Q.Mention three Rights and Duties of Partners. [AHSEC-2014,2023]
ANS:
Duties (Obligations) of a Partner: It is the duty of Partners:
a) It is the duty of every partner to devote his full attention and time to the firm.
b) It is the duty of every partner to act honestly for the benefit of the firm.
c) It is the duty of every partner to not to carry similar business.
d) Every partner must share losses of the firm.
e) It is the duty of every partner to maintain secrecy and does not share business secrets with others.
Rights of a Partner: [AHSEC-2022]
a) Every partner has a right to take part in the conduct and management of the business.
b) Every partner has a right to be consulted in the matters of the partnership.
c) Every partner has a right to share profits with others in the agreed ratio.
d) Partners have a right of free access to all records, books of accounts and also to examine and copy them.
e) Every partner has the right not to allow the admission of a new partner.
f) Every partner has the right to retire from the firm after giving proper notice.
Q. What are various types of partners and partnership?
ANS: Types of Partners :
a)Active partner: An active partner is a partner who gives capital, participates in management, shares the profits and losses and has unlimited liability.
b)Sleeping partner or Dormant Partner: A Partner who do not take part in the business activities.
c)Nominal partner: A partner who allows his name to be used by the firm is called nominal partner.
d)Secret partner: A partner who has association with the firm but unknown to the public.
e)Partner by estoppel: A person who by behaviour sets an impression to others that he/she is a partner of the firm.
f)Partner by holding out: A person who is not a partner but allows himself to be represented as partner in a firm.
Kinds of Partnership:
Partnership firms are of two type’s viz., General Partnership and Limited Partnership.
1. General Partnership: In this case the liability of all the partners is unlimited. General Partnership can be further divided into two types i.e. (i) Partnership at Will, and (ii) Particular Partnership. These are explained as under:
(i) Partnership at will: When a partnership firm is constituted for unspecified period, it is known as Partnership at will. It can be dissolved by any partner by giving a notice indicating that he wants to withdraw his interest from the firm.
(ii) Particular partnership: As the very name suggests, this type of partnership is formed for conducting business of specific or temporary nature. The partnership comes to an end either on the accomplishment of the task for which the partnership was undertaken or on the expiry of the time period for which the firm was constituted.
Q. Explain the rules applicable in absence of partnership deed regarding the following: [AHSEC-2014]
- Interest on Capital & drawings
- Interest on partners loan
- Profit and Loss ratio
- Salaries to a partners
- Admission of a new partner
ANS. In the absence of a partnership deed, the partnership Act, 1932 applies. The provisions of the Act in this respect are stated below.
1. Interest on Capital & Drawings: Under section 13(c) of the Partnership Act, 1932 partners are not entitled to any interest on capital. They are not charged any interest on drawings also.
2. Interest on loans and advances from partners/loan in excess of capital: Under section 13(d), partners are entitled to interest on advances or loan given to the firm @ 6% p.a.
3. Profit and Loss ratio: Under section 13(b), partners are entitled to share profits and bear losses equally irrespective of their amount capitals.
4.Salaries to a Partners: under section 13(a), partners are not entitled to receive any remuneration, such as, salaries, commissions etc. for taking part in conduct of the business.
5.Admission of new partner: No new partner will be admitted unless all the existing partners agree.
Q. What are the points to be taken into account while calculating interest on drawing/ different situations of calculation of interest on drawing.
OR
Points to be taken into account while Calculating of interest on drawing 6-8 marks
ANS. Rules/methods/points of calculation of interest on drawings:
- When the dates of drawings are specified, interest on drawings is calculated from the date till the date of preparation of final accounts.
- When the dates of drawings are not specified, interest on total drawings is calculated for a period of six months.
- If an equal amount is drawn at the beginning of each month, interest is calculated on total drawings for a period of six and half months.
- If an equal amount is drawn at the middle month, interest is calculated on total. drawings for a period of six months.
- If an equal amount is drawn at the end of each month, interest is calculated on total drawings for a period of five and half months.
Q. What is Profit and Loss appropriation Account? Mention its purpose and features. Distinguish between profit and loss account and profit and loss appropriation account. 2020
Ans: Profit and Loss Appropriation Account' is merely an extension of the profit and loss account and is prepared to show how net profit is to be distributed among the partners. The account should begin with the profit or loss forwarded from the profit and loss account. Further this account is credited with net profit and interest on drawings, and debited with interest on capitals, salary or commission to partners. After these adjustments have been made, the Profit and Loss Appropriation Account will show the amount of profit or loss. After transferring a particular sum to the reserve fund, balance amount will be distributed among the partners in the agreed profit sharing ratio. And this amount is transferred to their capital or current accounts.
Features of Profit and loss Appropriation account:
a) It is an extension of the profit and loss account.
b) It is a nominal account.
c) It is prepared by partnership firms only.
d) It is prepared as per the contents of partnership deed.
e) It shows the appropriation of profit for the accounting period.
Difference between Profit and loss account and Profit and loss appropriation account: