PARTNERSHIP

A PARTNERSHIP FIRM IS AN ASSOCIATION OF TWO OR MORE PERSONS TO CARRY ON A LEGAL

BUSINESS AND SHARE ITS PROFITS OR LOSSES. THE PERSONS WHO JOIN HANDS TOGETHER TO DO

A BUSINESS ARE INDIVIDUALLY KNOWN AS PARTNERS AND COLLECTIVELY A FIRM.

ACCORDING TO SEC 4 OF THE INDIAN PARTNERSHIP ACT, 1932, "THE TERM PARTNERSHIP IS
THE RELATION BETWEEN TWO OR MORE PERSONS WHO HAVE AGREED TO SHARE THE PROFIT OF

THE BUSINESS CARRIED ON BY ALL OR ANY OF THEM ACTING FOR ALL”

ESSENTIAL ELEMENTS OF PARTNERSHIP

1. AT LEAST TWO PERSONS:

THERE MUST BE AT LEAST TWO PERSONS TO FORM A PARTNERSHIP

AND ALL SUCH PERSONS MUST BE COMPETENT TO CONTRACT.

2. AGREEMENT:

THERE MUST BE AN AGREEMENT TO FORM A PARTNERSHIP. THIS

AGREEMENT CAN BE ORAL OR WRITTEN.

3. LEGAL BUSINESS:

AN AGREEMENT SHOULD BE FOR THE PURPOSE OF CARRYING ON THE

BUSINESS OR PROFESSION. THE BUSINESS TO BE CARRIED ON BY THE PARTNERS SHOULD BE

LEGAL.
4. PROFIT SHARING:

THE AGREEMENT BETWEEN THE PARTNERS MUST BE TO SHARE THE

PROFITS OR LOSSES OF THE BUSINESS IN THE PARTICULAR RATIO.

5 MUTUAL AGENCY:

THERE SHOULD BE A MUTUAL AGENCY RELATIONSHIP AMONG THE

PARTNERS. 'MUTUAL AGENCY' RELATIONSHIP MEANS THAT EACH PARTNER IS BOTH AN AGENT
AND THE PRINCIPAL. EACH PARTNER IS AN IN THE SENSE THAT HE CAN BIND THE OTHER

PARTNERS BY HIS ACTS DONE.

6. NUMBER OF PARTNERS:

THE MINIMUM LIMIT OF THE PARTNERS IN A FIRM IS TWO AND

MAXIMUM NUMBER OF PARTNERS IN A BANKING FIRM SHOULD BE 10 AND IN THE OTHER FIRM
SHOULD BE 20.

MEANING OF PARTNERSHIP DEED

AS STATED ABOVE A PARTNERSHIP IS FORMED BY AN AGREEMENT. THIS

AGREEMENT CAN BE ORAL OR WRITTEN. THOUGH THE LAW DOES NOT EXPRESSLY

REQUIRE THAT THERE SHOULD BE AN AGREEMENT IN WRITING BUT THE ABSENCE

OF WRITTEN AGREEMENT MAY BE THE SOURCE OF PROBLEM IN MANAGING THE

AFFAIRS OF THE PARTNERSHIP FIRM.

 RULES IN THE ABSENCE OF THE PARTNERSHIP DEED

(I) THE PARTNERS WILL SHARE THE PROFITS AND LOSSES IN THE EQUAL RATIO.

(II) INTEREST ON LOAN WILL BE GIVEN @ 6% P.A. TO THE PARTNERS.

(III) NO INTEREST IS ALLOWED TO PARTNERS ON THE CAPITAL INVESTED BY

THEM.

(IV) NO PARTNER IS TO GET ANY REMUNERATION SUCH AS SALARY, COMMISSION

ETC FOR PARTICIPATING IN THE BUSINESS.

(V) NO INTEREST WILL BE CHARGED ON DRAWINGS MADE BY THE PARTNERS.

PROFIT AND LOSS APPROPRIATION ACCOUNT

PROFITS ARE AN IMPORTANT PART OF A BUSINESS SO AS ITS ALLOCATION. THAT
IS WHY PROFIT AND LOSS APPROPRIATION ACCOUNT IS AN IMPORTANT PART OF
AN ORGANIZATION. PROFIT AND LOSS APPROPRIATION ACCOUNT IS NECESSARY
FOR BUSINESSES, ESPECIALLY PARTNERSHIPS BECAUSE THEY HELP TO ALLOCATE
THE NET OF EXPENDITURES AND INCOMES AMONG THE VARIOUS PARTNERS. NOW
LET’S DISCUSS VARIOUS FACTS ABOUT THE PROFIT AND LOSS APPROPRIATION
A/C.

MEANING OF PROFIT AND LOSS APPROPRIATION ACCOUNT

IT IS A SPECIAL ACCOUNT WHICH A FIRM PREPARES TO SHOW THE DISTRIBUTION

OF PROFITS/LOSSES AMONG THE PARTNERS OR PARTNER’S CAPITAL.

THIS ACCOUNT SHOULD NOT BE CONFUSED WITH THE TYPICAL PROFIT AND LOSS
ACCOUNT BUT RATHER SEEN AS AN EXTENSION OF IT AS IT IS MADE AFTER
MAKING THE PROFIT AND LOSS ACCOUNT.
Particulars Amount Particulars Amount

To Interest On Capital A/c

By Profit And Loss A/c (Profit
transferred from P&L A/c)
A

To Partner’s Salary A/c By Interest on Drawings A/c

A A

B B

To Reserves A/c

To Partner’s Commission A/c

To Profit transferred to Partner’s

Capital/Current Account