Chapter 2 Accounting for Partnership Basic Concepts Solutions
Question - 1 : - Define Partnership Deed.
Answer - 1 : -
A partnership deed also referred to as a partnership agreement, is a document of importance that contains the details of all the rights and responsibilities of the concerned parties involved in a business. It helps in preventing any kind of disputes or disagreements that can arise between partners over their role on the business and the associated benefits from the partnership in the firm.
Question - 2 : - Why it is considered desirable to make the partnership agreement in writing.
Answer - 2 : -
According to the Partnership Act, 1932, having a Partnership deed in writing is not mandatory. However, it is a safe option to have it in writing as it helps avoid any kind of disputes that may arise between partners of a firm in future. It also helps resolution of any kind of disputes as a written partnership that is signed by all the partners is suitable for use as an evidence in the court of law.
Question - 3 : - List the items which may be debited or credited in the capital accounts of the partners when:
(i) Capitals are fixed
(ii) Capitals are fluctuating
Answer - 3 : -
(i) These items get credited:
1. Opening capital balance
2. Additional capital or Fresh capital that is added to the business.
These items get debited:
1. Part of capital that is withdrawn.
2. Closing capital balance
(ii)These items get debited
1. Opening capital balance
2. Fresh capital added in the accounting period
3. Salaries paid to partners
4. Profit share
5. Interest received on capital
These items get debited:
1. Withdrawals done during the accounting year.
2. Interest accumulated on withdrawals (drawing)
3. Closing capital balance
4. Loss on shares
Question - 4 : - Why is Profit and Loss Adjustment Account prepared? Explain.
Answer - 4 : -
It is prepared for the following reasons:
1. For recording transactions, errors or omissions which may be left while preparing the final accounts.
2. To act as a account for distributing profit and loss between partners
3. To accommodate for changes in partnership deed.
Question - 5 : - Give two circumstances under which the fixed capitals of partners may change.
Answer - 5 : -
Following circumstances lead to change in fixed capital of partners
1. Introducing fresh capital in the firm by a partner with consent from other partners.
2. When a portion of capital is withdrawn with consent of partners.
Question - 6 : - If a fixed amount is withdrawn on the first day of every quarter, for what period the interest on total amount withdrawn will be calculated?
Answer - 6 : -
When there is withdrawal of money on first day of each quarter. Then the corresponding interest is calculated for a period of seven and half months on the total amount that is withdrawn.
Question - 7 : - In the absence of partnership deed, specify the rules relating to the following:
(i) Sharing of profits and losses.
(ii) Interest on partner’s capital.
(iii) Interest on Partner’s drawings.
(iv) Interest on Partner’s loan
(v) Salary to a partner.
Answer - 7 : -
1. Sharing of profits and losses: If a partnership deed is absent, then the profit sharing ratio should be equal among all partners, as per Partnership Act, 1932.
2. Interest on Partner’s capital: If partnership deed is absent, then as per Partnership Act, 1932, the partners are not entitled to interest earned on capital.
3. Interest on Partner’s drawings: If partnership deed is absent, then as per Partnership Act, 1932, in event of drawing money it shall be charged to the partners
4. Interest on Partner’s loan: If partnership deed is absent then the partner is eligible for a 6% interest on loan to the firm
5. Salary to a partner: In case of absence of partnership deed, the partners are not eligible for any salary, any salary whatsoever if paid will be as appropriation of profit (in case there is profit)
Question - 8 : - What is partnership? What are its chief characteristics? Explain.
Answer - 8 : -
According to Section 4 of the Partnership Act, 1932 a partnership is defined as “an agreement between two or more persons who have mutually agreed to share profits or losses that will be carried by all or any one of them acting for all”. The individuals who setup the business jointly are called as partners and all the partners collectively are known as firm.
Following are the important characteristics of a partnership firm:
1. Number of partners: The minimum number of persons to form a partnership is 2 and the maximum is 50 as per Companies Rules Act, 2014. Any more than the specified limit makes partnership illegal.
2. Partnership Deed: A partnership deed is necessary document that contains all the terms of the partnership and the details about contribution of each partner towards the firm. It should be in written format as it helps in resolving disputes between partners and acts a evidence in d
3. Business: One of the important characteristics of business is that it is formed in order to do legal business. So any kind of business that is deemed illegal makes the partnership illegal
4. Profit/Loss Sharing: Partners are supposed to take profit and loss as per the ratio that was agreed at the time of partnership.
5. Liability: Firm has unlimited liability and the partners of the firm need to pay from the personal asset if the firm is unable to pay to any concerned third party
6. Mutual Agency: The firm is an agency and all the partners are its agents. Every partner is an agent and binds other partners by his/her act while at the same time is bound by other partners actions.
Question - 9 : - Discuss the main provisions of the Indian Partnership Act, 1932 that are relevant to partnership accounts if there is no partnership deed.
Answer - 9 : -
As per the Indian Partnership Act, 1932. Here are the following provisions that stays relevant when a partnership deed is not present:
1. Sharing of profits and losses: If a partnership deed is absent, then the profit sharing ratio should be equal among all partners, as per Partnership Act, 1932.
2. Interest on Partner’s capital: If partnership deed is absent, then as per Partnership Act, 1932, the partners are not entitled to interest earned on capital.
3. Interest on Partner’s drawings: If partnership deed is absent, then as per Partnership Act, 1932, no interest shall be charged to the partners in event of drawing money.
4. Interest on Partner’s loan: If partnership deed is absent then the partner is eligible for a 6% interest on loan to the firm.
5. Salary to a partner: In case of absence of partnership deed, the partners are not eligible for any salary, any salary whatsoever if paid will be as appropriation of profit (in case there is profit).
Question - 10 : - Explain why it is considered better to make a partnership agreement in writing.
Answer - 10 : -
According to the Partnership Act, 1932, it is not mandatory to have Partnership deed in writing. However, it is a safe option to have it in writing as there are chances that the partners may have conflicts in the future that gives rise to dispute among the partners regarding the operations of the firm. A partnership deed that is documented helps in proper functioning of the firm and assists in avoiding any kind of disputes that may arise between partners of a firm in future. It also helps resolution of any kind of disputes as, a written partnership that is signed by all the partners is suitable for use as an evidence in the court of law.