ACCOUNTING FOR PARTNERSHIP FIRMS – FUNDAMENTALS

INTRODUCTION:- There are certain limitations of a sole trader, In a sole trading concern only one man invests capital, undertakes the risk involved in the business and controls the whole affairs of the business. But one man’s capital, skill, controlling and risk taking capacity are generally limited. Therefore, some persons may combine and enter into an agreement to form a partnership.

Partnership is a relation of mutual trust and faith. In order to maintain this trust, it is necessary that the partnership accounts be maintained in an honest, accurate and equitable manner.  Partnership accounts should present a true and fair picture of the partnership business. For this purpose it is necessary to study the definition of partnership as given in the Partnership Act and the relevant provisions of the Partnership Act which affect the partnership accounts.

NATURE OF PARTNERSHIP FIRM

As per accounting viewpoint, partnership firm is treated as a separate business entity distinct from its partners. However, as per legal viewpoint, a partnership firm is not a separate legal entity. In other words, it has no existence separate from its partners. It means that in case of bankruptcy of the partnership firm, private estates of the partners would be liable to meet the firm’s debts.

DEFINITION OF PARTNERSHIP:- Section 4 of the Indian Partnership Act, 1932, defines partnership as follows:

“Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.”

 

MAIN FEATURES OR ESSENTIAL ELEMENTS OR CHARACTERISTICS OF PARTNERSHIP

 

  1. Two or more persons:- There must be atleast two persons to form a partnership. Partnership Act does not specify the maximum number of persons to 50.
  2. Agreement: – Partnership is the result of an agreement. It must come into existence by an agreement and not by the operation of law. On the contrary, a Hindu undivided family comes into existence by the operation of law and not by an agreement, Such an agreement can be either oral or in writing. The agreement forms the basis of mutual rights and duties of partners.
  3. Existence of Business and Profit Motive:- Partnership can be formed for the purpose of carrying on some business with the intention of earning profits and such business must be legal. A joint ownership of some property by itself cannot be called a partnership.
  4. Sharing of Profits:- The agreement between the partner must be aimed at sharing the profits of the business. If some persons join hands to run some charitable activity, it will not be called partnership. Future, if a partner is deprived of his right to share the profits of the business, he cannot be called a partner. But it is not necessary that all partners should share the losses also. It may be agreed between the partners that one or more of them shall not be liable for losses.
  5. Relationship of Principal and Agent :- Each partner is an agent as well as a partner of the firm. An agent, because he can bind the other partners by his acts and a principle, because he himself can be bound by the acts of the other partners.
  6. Business carried on by all or any of them acting for all :- It means that each partner can participate in the conduct of business and each partner’s bound by the acts of other partners in respect to the business of the firm.

Partnership cannot come into existence in the absence of any one of the above mentioned essential features.

 

Right of a Partner:-

  1. Every partner has the right to share profits or losses with other partners in the agreed ratio.
  2. Every partner has the right to take part in the conduct of the business.
  3. Every partner has the right to be consulted in the matters related to partnership business.
  4. Every partner has the right to inspect the have a copy of the books of accounts.
  5. Every partner has a right to disallow the admission of a new partner.
  6. Every partner has a right to disallow the admission of a new partner.
  7. If a partner has given loan to the firm, he has a right to receive interest at agreed rate. If the rate of interest is not agree, it is paid @ 6% p.a.
  8. If a partner incurs expenses or makes payment on behalf of the firm, he has a right to be indemnified by the firm.
  9. Every partner has a right to retire from the firm after giving a proper notice.

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