1.Define Partnership Deed.

ANSWER:
Partnership Deed is a written agreement among the partners of a partnership firm. It
includes agreement on profit sharing ratio, salaries, commission of partners, interest
provided on partner's capital and drawings and interest on loan given or taken by the
partners, etc. Generally following details are included in a partnership deed.

1. Objective of business of the firm

2. Name and address of the firm

3. Name and address of all partners

4. Profit and loss sharing ratio

5. Contribution to capital by each partner

6. Rights, types of roles and duties of partners

7. Duration of partnership

8. Rate of interest on capital, drawings and loans

9. Salaries, commission, if payable to partners.

10. Rules regarding admission, retirement, death and dissolution of the firm, etc.

2.Why it is considered desirable to make the partnership agreement in writing.

ANSWER:

Partnership agreement may be oral or written. It is not compulsory to form partnership

agreement in writing under the Partnership Act, 1932. However, written partnership deed is
desirable than oral agreement as it helps in avoiding disputes and misunderstandings
among the partners. Also, it helps in settling disputes (as the case may be) among the
partners, as written partnership deed can be referred to anytime. If written partnership deed
is duly signed and registered under Partnership Act, then it can be used as 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:

(i)When Capitals are fixed

The following items are credited in the Partner's Capital Account when capital accounts are
fixed.

(a) Opening balance of capital

(b) Additional capital introduced during an accounting year

The following items are debited in the Partner's Capital Account when capital accounts are
fixed.

(a) Part of capital withdrawn

(b) Closing balance of capital

(ii) When Capitals are fluctuating

The following items are credited in the Partner's Capital Account when capital accounts are
fluctuating.

(a) Opening balance of capital.

(b) Additional capital introduced during an accounting year

(c) Salaries to the partners

(d) Interest on capital

(e) Share of profit

(f) Commission and bonus to the partners

The following items are debited in the Partner's Capital Account when capital accounts are
fluctuating.
(a) Drawings made during the accounting period

(b) Interest on drawings.

(c) Share of loss.

(d) Closing balance of capital.

4.Why is Profit and Loss Adjustment Account prepared? Explain.

ANSWER:

The Profit and Loss Adjustment Account is prepared because of the following two reasons.

1. To record omitted items and rectify errors if any- After the preparation of Profit and
Loss Account and Balance Sheet, if any error or omission is noticed, then these errors or
omissions are adjusted by opening Profit and Loss Adjustment Account in the subsequent
accounting period without altering old Profit and Loss Account.

2. To distribute profit or loss between the partners- Sometimes, besides adjusting the
items and rectifying errors, this account is also used for distribution of profit (or loss) among
the partners. In this situation, this account acts as a substitute for Profit and Loss
Appropriation Account. The main rationale to prepare the Profit and Loss Adjustment
Account is to ascertain true profit or loss.

5.Give two circumstances under which the fixed capitals of partners may change.
ANSWER:

The following are the two circumstances under which the fixed capitals of partner may
change.

(i) If any additional capital is introduced by the partner during the year.

(ii) If any part of capital is permanently withdrawn by the partner from the firm

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:
If a fixed amount is withdrawn on the first day of every quarter, then the interest is

calculated on the amount withdrawn for a period of seven and half ( ) months.

Example:

If a partner withdraws Rs 5,000 in the beginning of each quarter and the interest is charged
@ 10% on the drawings, then interest on drawings is calculated as:

Total drawings made by the partner during the whole year are Rs 20,000, i.e. Rs 5000× 4.

Interest on drawings

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:

(i) Sharing of profits and losses: If the partnership deed is silent on sharing of profit or
losses among the partners of a firm, then according to the Partnership Act of 1932, profits
and losses are to be shared equally by all the partners of the firm.

(ii) Interest on partner’s capital: If the partnership deed is silent on interest on partner’s
capital, then according to the Partnership Act of 1932, no interest on capital should be given
to the partners of the firm.

(iii) Interest on partner’s drawings: If the partnership deed is silent on interest on

partner’s drawings, then according to the Partnership Act of 1932, no interest on drawing
should be charged from the partners of the firm for the amount of capital withdrawn in form
of drawings.
(iv) Interest on partner’s loan: If the partnership deed is silent on interest on partner’s
loan, then according to the Partnership Act of 1932, the partners are entitled for 6% p.a.
interest on the loan forwarded by them to the firm.

(v) Salary to a partner: If the partnership deed is silent on salary to a partner, then
according to the Partnership Act of 1932, no salary should be given to any partner.

1.What is partnership? What are its chief characteristics? Explain.

ANSWER:

According to the Section 4 of the Partnership Act, 1932, partnership is an agreement

between two or more persons who have agreed to share profits or losses of a business that
will be carried by all or any one of them acting for all.

Person who joined their hands to set up the business are called ‘partners’ individually and
‘firm’ collectively and the name under which they carry out their business is termed as ‘firm
name’.

Important Characteristics of Partnership

The following are the important characteristics of partnership.

1.Two or more persons: Partnership is an agreement between two or more persons

coming together for a common goal. There should be at least two persons to form a
partnership. Although as per the Partnership Act of 1932, there is no maximum limit on the
number of partners in a partnership firm, but as per the Rule (10) of the Companies
(Miscellaneous) Rules Act 2014, the maximum number of partners permissible is 50.
Therefore, in case the number of partners exceeds the aforesaid limit, then the concerned
partnership is considered to be illegal. In this regards it must be noted that Section 464 of
Companies Act 2013, the maximum number of partners permissible is one humdred.
However, it must be noted that the maximum number of partners is not limited in case an
association or partnership is formed by professionals such as chartered accountants,
lawyers, company secretaries, etc. These professionals are governed by their the special
laws as formed by their respective professional institutions. Prior to the enforcement of
Companies Act of 2013, the earlier act of 1956, imposed restrictions on the maximum
number of partners to 10 in case of banking business and 20 in case of any other kind of
business. However, with effect from April 01, 2014, Companies Act of 1956 has been
replaced by Companies Act of 2013.

2.Partnership Deed: The partnership among the partners should be backed up by a

partnership deed. A partnership deed is an agreement among the partners governing them
in carrying out the proposed business. The deed may be oral or written.
3.Business: A partnership is formed to carry out a legal business. Partnerships in
smuggling, black marketing etc. are illegal business activities and hence, the partnership is
also illegal.

4. Sharing of profit: The profit or loss earned by a partnership firm must be distributed as
per the partnership deed or equally among the partners (in absence of partnership deed). It
is a very important feature of partnership. If a group is formed for charitable purpose, not to
earn profit then this group will not be regarded as a partnership.

5.Liability: Liability of a partnership firm is unlimited and each partner is liable for firm’s
liabilities whether individually and jointly with other partners to the third party. Moreover,
each partner along with his/her co-partners is responsible for all the acts of the partnership
firm.

6. Mutual agency: Partnership may be carried on by all or any one of them acting on behalf
of all. It means all the partners of a firm are equally entitled to participate in the activities of
the business or any one of them who is acting on behalf of all. Every partner acts as an
agent for others and binds others by his/her act and in turn is bound by others by their act.

2:Discuss the main provisions of the Indian Partnership Act, 1932 that are relevant to
partnership accounts if there is no partnership deed.
ANSWER:

The following are the main provisions of the Indian partnership Act, 1932 that are relevant to
the partnership accounts in absence of partnership deed.

1.Profit Sharing Ratio: If the partnership deed is silent on sharing of profit or losses among
the partners of a firm, then according to the Partnership Act of 1932, profits and losses are
to be shared equally by all the partners of the firm.

2.Interest on Capital: If the partnership deed is silent on interest on partner’s capital, then
according to the Partnership Act of 1932, no interest on capital should be given to the
partners of the firm. However, interest on capital is given only out of the profits, if mutually
agreed by all the partners.

3.Interest on Drawings: If the partnership deed is silent on interest on partner’s drawings,

then according to the Partnership Act of 1932, no interest on drawing should be charged
from the partners of the firm for the amount of capital withdrawn in the form of drawings.

4.Interest on Partner’s Loan: If the partnership deed is silent on interest on partner’s loan,
then according to the Partnership Act of 1932, the partners are entitled for 6% p.a. interest
on the loan forwarded by them to the firm.
5.Salary to Partner: If the partnership deed is silent on salary to a partner, then according
to the Partnership Act of 1932, no salary should be given to any partner.

3.Explain why it is considered better to make a partnership agreement in writing.

ANSWER:

A partnership deed forms the basis of a partnership firm. A partnership deed consists of all
the pre-determined terms and conditions that are agreed to by all the partners while forming
the partnership. Generally the following details are included in a partnership deed.

1. Objective of business of the firm

2. Name and address of the firm

3. Name and address of all partners

4. Profit and loss sharing ratio

5. Contribution to capital by each partner

6. Rights, types of roles and duties of partners

7. Duration of partnership

8. Rate of interest on capital, drawings and loans

9. Salaries, commission, if payable to partners.

10. Rules regarding admission, retiring, death and dissolution of the firm, etc. It ensures the

A partnership deed can both be oral or written. Although, it is not compulsory to form
partnership agreement in writing under the Partnership Act of 1932, however, written
partnership deed is more desirable than the oral agreements. This is because it ensures the
smooth functioning of the business of the partnership firm. It helps in avoiding disputes and
misunderstandings among the partners. Also, it helps in settling t the disputes (as the case
may be) among the partners, as written partnership deed can be referred to anytime. If
written partnership deed is duly signed and registered under Partnership Act, then it can be
used as evidence in the court of law. Moreover, any changes (if needed) in the partnership
deed cannot be made without the consent of all the partners of the firm. Therefore, it is
desirable to form partnership deed in writing because of the merits associated with written
documents over its oral counterparts.
4.Illustrate how interest on drawings will be calculated under various situations.
ANSWER:

When a partner withdraws any amount, either in cash or in any other form, from the firm for
his/her personal use, then it is termed as drawings. The interest charged by the firm on the
amount of drawings is termed as interest on drawings. The method of calculating interest on
drawings depends on the information available for time and frequency of the drawings made
by the partner. The following different situations of drawings made illustrate the calculation
of interest charged on drawings.

Situation 1: When information regarding Amount, Date and Rate of Interest on

drawings are given.

If a partner withdrew Rs 10,000 on May 01 and interest on drawing is charged at 10% p.a.
and the firm closes its books on December 31 every year then interest of drawings amounts
to Rs 667.

Situation 2: When information regarding Amount, Rate of Interest on drawings is

given

Case I: If the Amount and Rate of Interest on drawings (per annumn) is given but date is
not mentioned

If the details regarding the amount of drawings and rate of interest of drawings (p.a.) is
given but the date of drawings is not mentioned then interest is charged on average basis
and the period of drawings is taken as 6 months.

Example- If a partner withdrew Rs 10,000 and rate of interest on drawings is 10% p.a. then
the interest of drawings amounts to Rs 500

Case II: If the Amount and Rate of Interest on drawings is given but the date and per
annumn rate of interest is not mentioned
If the date and the rate of interest are given but per annum is not specified, then annual
interest is charged.

Example- If a partner withdrew Rs 20,000 and interest rate is 10% , then the interest on
drawings amounts to Rs 2,000.

Situation 3: When a fixed amount is withdrawn at regular interval

Case I: If a fixed amount is withdrawn at the beginning of each month, then the interest is
calculated for 6.5 months.

Example- If a partner withdraws Rs 1,000 in the beginning of every month and the rate of
interest is 10% p.a., then the interest on drawings amount to Rs 650.

Interest on drawings

Case II: If a fixed amount is withdrawn at the end of each month, then the interest is
calculated for 5.5 months

Example- If a partner withdraws Rs 1,000 at the end of each month and rate of interest is
10% p.a., then the interest on drawings amount to Rs 550.

Case III: If a fixed amount is withdrawn in the middle of every month then assuming that the
drawings are made on15th of every month then interest on drawings is calculated for 6
months

Example- If a partner withdraws Rs 1,000 on 15 th of every month and the rate of interest is
10% p.a., then the interest on drawings amount to Rs 600.

Case IV: If a fixed amount is withdrawn in the beginning of every quarter then the interest is
calculated for 7.5 months
Example- If a partner withdraws Rs 3,000 in the beginning of every quarter and the rate of
interest is 10% p.a. then the interest on drawings amount to Rs 750

Case V: If a fixed amount is withdrawn at the end of every quarter, then the interest is
calculated for 4.5 months

Example- If a partner withdraws Rs 3,000 at the end of every quarter and the rate of
interest is 10% p.a., then the interest on drawings amounts to Rs 450.

Situation 4:

When different amount is at different intervals

If different amount is withdrawn by a partner at different points of time then the interest is
calculated by Product Method. The period of drawings is calculated from the date of
withdrawal to the last date of the accounting year.

Example- A partner withdraws Rs 5,000 on Feb 01, Rs 3000 on May 01, Rs 5,000 on Sep.
30 and Rs 1000 on Dec. 31 and the rate of interest on drawings is 10% p.a. The firm closes
its book on December 31.
Calculation of Interest on Drawings by Product Method

Interest on Drawings

Amount Outstanding
Date Product
Rs Period
Feb. 01 5,000 11 5,000  11 = 55,000
May. 01 3,000 8 3,000  8 = 24,000
Sep. 30 5,000 3 5,000  3 = 15,000
Dec. 31 1,000 0 1,000  0 = 0
94,000
5.How will you deal with a change in the profit sharing ratio among existing partners?

Take imaginary figures to illustrate your answer?

ANSWER:
Usually due to the admission, retirement or death of a partner or sometimes due to the general
agreement among the partners, they may decide to change the profit sharing ratio. Various
adjustments that should be considered during the change in the profit sharing ratio are , goodwill,
reserves and accumulated profits, profit or loss on the revaluation of assets and liabilities and
adjustment of capitals, etc. The general reserves and accumulated profits (if any) and profit (or
loss) on revaluation on assets and liabilities should be credited (debited) in the Partner's Capital
Account in their old profit sharing ratio.
But if the existing partners decide to change the profit sharing ratio then some partners gain
(gaining partners) at the cost of other partners (sacrificing partners). Thus, the former should
compensate the latter. Therefore, the gaining Partners’ Capital Account s are debited to the
extent of their gain and sacrificing Partners' Capital Accounts are credited to extent of their
sacrifice. The following Journal entry is passed.

Gaining Partner's Capital A/c Dr.

To Sacrificing Partner's Capital A/c
(Adjustment entry passed)

Example:
A, B, C are partners in a firm sharing profit and loss in 3:2:1 ratio. They decide to share profit
and loss equally in future. On that date, the books of the firm shows Rs 1,20,000 as general
reserve, profit due to revaluation of building Rs 30,000. The following adjustment entry is
passed through the capital accounts without affecting the books of accounts.

Particulars A B C
Share of profit as per 3:2:1 60,000 40,000 20,000
Profit on revaluation of building 15,000 10,000 5,000

75,000 50,000 25,000

Share of profit as per 1:1:1 50,000 50,000 5,000

Difference (Gain or Loss) 25,000 - 25,000

(Loss) (Gain)

Hence, in this example, C gains at the cost of A, so the partner A needs to be compensated by C
with the amount of Rs 25,000. The following adjustment entry is passed.
Adjustment entry:

C's Capital A/c Dr. 25,000

To A's Capital A/c 25,000
( Adjustment entry passed)