FUNDAMENTALS OF PARTNERSHIP | 10 MARKS FIXED | EXAM GAP REVISION | CLASS 12 ACCOUNTS BOARD EXAM 2025

Key Concepts

• Partnership Definition: Relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all (Section 4, Partnership Act 1932).
• Partnership Deed: A written agreement outlining the terms and conditions of a partnership.
• Mutual Agency: Each partner acts as both a principal and an agent for the firm and other partners.
• Unlimited Liability: Partners are personally liable for the debts of the firm.
• Profit and Loss Appropriation Account: An extension of the profit and loss account showing the distribution of profits among partners.
• Interest on Drawings: Interest charged on the amount withdrawn by partners for personal use.
• Past Adjustments: Correcting errors or omissions in prior accounting periods.
• Guarantee of Profit: A minimum profit assured to a partner, with any deficiency borne by other partners.
• Fixed vs. Fluctuating Capital Accounts: Two methods of maintaining partner capital accounts, affecting how transactions are recorded.

Detailed Summary

1. Introduction

The video emphasizes the importance of starting preparation early, focusing on the "Fundamentals of Partnership" chapter. The goal is to thoroughly revise the chapter, covering theory, numerical problems, and previous year questions, to secure up to 10 marks in the board examination. The speaker aims to provide a comprehensive revision that benefits both board exams and the CUET.

2. Partnership Basics

• Definition: Partnership is defined under Section 4 of the Partnership Act 1932 as a relationship between people who agree to share profits from a business.
• Essential Conditions: A business must exist, with the motive of earning profit, and there must be mutual agency.
• Terminology: Partners are individually called partners, collectively called a firm, and the name under which the business is carried out is the firm name.
• Number of Partners: Minimum two, maximum 50 (Rule 10 of the Companies Act 2014). The government can increase this number to 100.
• Legal Entity: From a legal perspective, the firm and partners are not separate entities. Partners have unlimited liability, meaning they must use personal assets to pay off firm debts. However, from an accounting perspective, they are treated as separate.

3. Essential Features of Partnership

• Agreement: An agreement is compulsory, which can be oral or written. A written agreement is called a partnership deed, governed by the Stamp Act.
• Lawful Business: The business must be lawful.
• Profit Sharing: Partners must share profits and losses.
• Mutual Agency: Each partner acts as an agent and principal.
• No Separate Existence: Legally, the firm and partners are the same, but for accounting, they are separate.

4. Minor Partner

• Contractual Incapacity: A minor cannot enter into a contract.
• Benefit of Partnership: A minor can be admitted to the benefits of the firm with the consent of all partners, sharing only in profits, not losses.
• Attaining Majority: Upon turning 18, the minor has six months to decide whether to become a full partner or leave. If they remain, they become liable for all firm actions.

5. Rights of Partners

• Participation in Management: Every partner has the right to participate in the management of the business.
• Access to Books: Right to inspect books of accounts and have a copy of it.
• Profit Sharing: Right to share profits and losses.
• Interest on Loan: If a partner provides a loan to the firm, they are entitled to 6% interest per annum. This is a charge against profit.
• Right to Object: A partner can prevent the admission of a new partner.
• Right to Retire: A partner can retire after giving proper notice.

6. Partnership Deed

• Purpose: Contains all the terms and conditions to avoid future disputes.
• Mandatory? Not mandatory, but advisable.
• Contents: Includes names and addresses of partners and the firm, capital contributions, profit-sharing ratio, nature of business, accounting period, dispute resolution methods, interest on capital, salaries, commissions, rights, and duties.
• Absence of Deed: If a partnership deed is absent, the Partnership Act 1932 applies.

7. Rules in the Absence of a Partnership Deed

• Profit Sharing: Profits are shared equally, regardless of capital contribution.
• Interest on Capital: No interest is allowed on capital.
• Salary: No salary is paid to partners.
• Interest on Drawings: No interest is charged on drawings.
• Interest on Loan: Interest on a partner's loan to the firm is allowed at 6% per annum.

8. Limited Liability Partnership (LLP)

• Definition: A hybrid of partnership and company, where partners have limited liability.
• Liability: Partners' liability is limited to the extent of their agreed contribution.
• Designation: LLPs have "LLP" appended to their names.

9. Profit and Loss Appropriation Account

• Purpose: Shows how the net profit is distributed among partners.
• Format:
  • Credit side: Net profit (from P&L Account), Interest on Drawings.
  • Debit side: Interest on Capital, Salaries, Commission, Transfer to Reserve.
• Items Reducing Net Profit: Manager's commission, rent paid to a partner, and interest on a partner's loan are deducted from the net profit before appropriation.
• Divisible Profit/Loss: The balance is either divisible profit or loss, distributed among partners in their profit-sharing ratio.

10. Interest on Capital

• General Rule: Interest on capital is provided only if there are profits.
• Insufficient Profits: If profits are insufficient, the available profit is distributed in the ratio of interest on capital.
• Charge Against Profit: If the partnership deed states that interest on capital is a charge, it must be provided even if there is a loss.

11. Interest on Drawings: Different Cases

• Date of Withdrawal Given: Calculate interest from the date of withdrawal until the end of the accounting year.
• Date of Withdrawal Not Given: Calculate interest for six months on the total drawings.
• Equal Amounts Withdrawn Regularly:
  • Beginning of each month: Time factor 6.5/12
  • Middle of each month: Time factor 6/12
  • End of each month: Time factor 5.5/12
• Equal Amounts Withdrawn Quarterly:
  • Beginning of each quarter: Time factor 7.5/12
  • Middle of each quarter: Time factor 6/12
  • End of each quarter: Time factor 4.5/12
• Equal Amounts Withdrawn Half-Yearly:
  • Beginning of each half-year: Time factor 9/12
  • Middle of each half-year: Time factor 6/12
  • End of each half-year: Time factor 3/12
• Equal Amounts Withdrawn for Six Months:
  • Beginning of each month: Time factor 3.5/12
  • Middle of each month: Time factor 3/12
  • End of each month: Time factor 2.5/12
• Unequal Amounts Withdrawn: Use the product method.

12. Product Method for Interest on Drawings

• Formula: Total Product * (Rate / 100) * (1 / 12)
• Steps:
  1. List the dates and amounts of each withdrawal.
  2. Calculate the number of months from each withdrawal date to the end of the accounting year.
  3. Multiply the amount of each withdrawal by the number of months to get the product.
  4. Sum the products to get the total product.
  5. Apply the formula.

13. Calculating Monthly Drawings from Interest on Drawings

• Formula: Interest on Drawings = Total Drawings * (Rate / 100) * (Time Factor / 12)
• Process: If the interest on drawings is given, and you need to find the monthly drawings, rearrange the formula and solve for the unknown variable (monthly drawings).

14. Special Case: Interest on Drawings for a Specific Period

• Scenario: A partner withdraws a fixed amount at the beginning of every month for only six months.
• Calculation: Use the formula for interest on drawings, but adjust the time factor based on the specific period.

15. Salary and Commission to Partners

• Salary: Salary is given for the entire year. If given per month, multiply by 12.
• Commission:
  • Before charging such commission: Commission = Net Profit * (Rate / 100)
  • After charging such commission: Commission = Net Profit * (Rate / (100 + Rate))

16. Adjusting Capital for Interest Calculation

• Opening Capital: Interest on capital is always calculated on the opening capital.
• Closing Capital Given: If closing capital is given, calculate the opening capital using the formula: Opening Capital = Closing Capital + Drawings - Additional Capital + Share of Loss - Share of Profit.
• Adjustments During the Year: If capital is introduced or withdrawn during the year, calculate interest separately for each period.

17. Methods of Maintaining Capital Accounts

• Fixed Capital Method:
  • Two accounts are maintained: Capital Account and Current Account.
  • The Capital Account shows the initial capital and any additional capital introduced or withdrawn.
  • The Current Account records all other transactions, such as interest on capital, salary, drawings, etc.
• Fluctuating Capital Method:
  • Only one account is maintained: Capital Account.
  • All transactions are recorded in the Capital Account, causing the capital balance to fluctuate.

18. Past Adjustments

• Purpose: To correct errors or omissions in the accounts of prior periods.
• Process:
  1. Identify the errors or omissions.
  2. Prepare a statement showing adjustments.
  3. Pass an adjustment entry to rectify the errors.
• Types of Errors:
  • Interest on capital not provided.
  • Interest on drawings not charged.
  • Profit distributed in the wrong ratio.
• Adjustment Entry: The partner who has been under-credited is debited, and the partner who has been over-credited is credited.

19. Guarantee of Profit to a Partner

• Definition: A minimum profit is guaranteed to a partner.
• Deficiency: If the actual profit is less than the guaranteed profit, the deficiency is borne by the other partners in their profit-sharing ratio (unless otherwise agreed).
• Accounting Treatment:
  1. Calculate the profit as per the profit-sharing ratio.
  2. Determine the deficiency (if any).
  3. Allocate the deficiency to the other partners in their profit-sharing ratio.
  4. Adjust the capital accounts of the partners accordingly.
• Journal Entry: The partner(s) bearing the deficiency are debited, and the guaranteed partner is credited.

20. Conclusion

The video provides a comprehensive revision of the "Fundamentals of Partnership" chapter, covering all essential concepts, formulas, and accounting treatments. It emphasizes the importance of understanding the underlying principles and practicing various types of questions to secure good marks in the board examination. The speaker encourages students to focus on this chapter and assures them that following the guidance provided will help them succeed.