Accounting for Partnership : Basic Concepts
Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all. Features of partnership are: association of two or more persons, oral or written agreement, lawful business, etc. Rights of partners are to take part in the management of the business, to inspect books of account and have a copy of the same, to retire after serving proper notice, etc. Partnership Deed is a written agreement/contract between the partners. In absence of deed provisions of Partnership Act 1932 will apply.
Profit and Loss Appropriation A/c shows distribution of profits among the partners. Capital accounts transactions relating to the partners are recorded in their respective capital accounts. Capital account can be fixed in which the capital accounts of the partners remain fixed or fluctuating where the capital of the partners keeps on changing. Interest on drawings is calculated in following cases: when fixed amount is withdrawn at the end of the month, quarter or during six months; when varying amounts are withdrawn at different intervals; when the date of withdrawal is not given and when the rate of interest is given without the words per annum. Interest on capital is credited to a partner on the basis of agreed rate and with reference to the time period for which the capital remained in the business. It compensates those partners who contribute capital in excess of what is required as per profit sharing ratio. In the case there is error of omission of the salary, distribution of the profits in the wrong ratio, omission of interest on the capital or drawings, old accounts cannot be altered, so an adjustment entry is passed to rectify the error of the past. Guarantee of minimum profits: Sometimes, a partner or partners can enjoy the right to have minimum amount of profit in a year as per the terms of partnership agreement. Manager’s commission is charge against profits and not an appropriation of profits. It is shown in Profit & Loss account where as Partner’s commission allowed when partnership deed provides for the same, is an appropriation of profits.