Class – XII

ACCOUNTANCY
ACCOUNTING FOR PARTNERSHIP:
DISTRIBUTION OF PROFIT
Partnership
According to section 4 of the Indian partnership act, 1932:
“Partnership is the relations between persons who have agreed
to share profits of a business carried on by all or any of them
acting for all.”

Features of partnership
1. Two or more persons: A partnership is said to take place
when at least two or more individuals associate. The
partnership act does not specify the upper limit of number
of members, but the companies act, 1956 restricts the
number of persons to 10 in case of firms carrying on banking
business while 20 for all other kinds of business.
2. Agreement: There must be an agreement between two or
more persons, either written or oral for a partnership to
come into existence.
3. Existence of business: partnership is formed for carrying on
a business with the objective of earning profits.
4. Lawful business: The business for which a partnership is
formed must be legal.
5. Profit sharing: The agreement between the partners must
be for sharing of profits. However, it is not necessary that
the losses are also shared by all the members.

Partnership deed
Partnership deed is a document in writing containing the terms
and conditions of partnership, the rights, duties and obligations
of partners. The following contents are generally covered in the
partnership deed.

 Name and address of the firm

 Name and address of the partners
 Nature and type of business
 Capital contributed by each partner
 Interest on capital
 Profit sharing ratio
 Drawings
 Interest on drawings
 Salary
 Interest on loan
 Goodwill
 Date of commencement of business
 Duration of partnership
  Accounting period
 Method of recording of accounts
 Bank accounts
 Auditing of accounts
 Procedures followed in case of admission of a partner
 Procedure followed in case of retirement/death of a
partner
 Settlement of disputes.

Importance of partnership deed

 Basis for formation of partnership
 Regulates various aspects of partnership
 Provides guidance for management of firm’s affairs.
 Helps in avoiding confusions, misunderstandings and
conflicts between partners.
 Helps in settlement of disputes.
Profit and loss appropriation account
‘Profit and loss appropriation account’ is an extension of ‘profit
and loss account and is prepared to show the distribution of net
profit among the partners. This account is debited with interest
on capitals, partners’ salary and commission and division of
profits among the partners and credited with net profit before
appropriation and interest on partners’ drawings.
Fixed capital account
Under fixed capital accounts method, the original amount
brought in by the partners as capital remains constant or
unchanged unless additional capital is introduced.
Thus under this system, two accounts are maintained:
(i) Partners’ capital account
(ii) Partners’ current account

Fluctuating capital account

Under the fluctuating capital account system, the partners’
capitals are allowed to change or fluctuate from time to time.
The change in capital amount occurs because all of the
adjustments relating to the introduction or withdrawal of
capital along with the share of profits (losses), interest on
capitals, salary or commission, drawings, interest on drawings,
etc. are either credited or debited in the same account.

Methods of calculating interest on drawings

There are two methods for calculating interest on drawings:

Simple method: when partners withdrew unequal

amounts at unequal time intervals then, simple interest
method can be used for calculating interest on
drawings. Under this method, calculation of interest on
drawings is done for the period the amount has been
utilized.