Class 12 Book Keeping and Accountancy Chapter 1: Introduction to Partnership and Partnership Final Accounts

Key concepts: Introduction to Partnership and Partnership Final Accounts

Partnership

A relation between persons who agree to share the profits of a lawful business carried on by all or any of them acting for all. Partners are individually 'partners' and together a 'firm'.

Partnership Deed

The written agreement signed by all partners, setting out capital, profit ratio, interest, salary, admission and retirement and how disputes are settled. It avoids future disputes.

Defaults under the Act (Sections 12 and 17)

If the deed is silent: profits shared equally, no interest on capital, no salary or commission, 6% p.a. on partner's loan, and drawings interest for an average of 6 months.

Fixed capital method

Capital stays the same each year. A separate Current Account records drawings, interest on capital and drawings, salary, commission and profit share. Current Account can show a debit or credit balance.

Fluctuating capital method

No Current Account is kept. All adjustments (drawings, interest, salary, commission, profit share, extra capital) pass through the Capital Account, so its balance changes every year.

Trading Account and Profit and Loss Account

Trading Account (direct expenses and incomes) shows Gross Profit or Loss. Profit and Loss Account (indirect expenses and incomes) shows Net Profit or Loss, shared among partners.

Balance Sheet

A statement, not an account, showing the firm's liabilities on the left and assets on the right on a given date. It shows the financial position.

Adjustments

Items such as closing stock, outstanding and prepaid expenses, bad debts, depreciation and goods lost. Each has two effects in the final accounts, in the accounts and in the Balance Sheet.

Quick revision: important points

• Partners: minimum 2 and maximum 50 (Companies Act 2013); Indian Partnership Act is of 1932.
• Deed silent: equal profit ratio, no interest on capital, no salary, 6% on loan, 6 months on drawings.
• Interest on drawings with no date = Drawings x Rate/100 x 6/12.
• Commission after charging itself = Rate x Net Profit / (100 + Rate).
• Closing stock is valued at cost or market price, whichever is less.
• Every adjustment has two effects; every Trial Balance item is shown only once.

Practice MCQs with answers

1. What are the minimum and maximum numbers of partners in a partnership firm (as per the Companies Act 2013)?

   1. 2 and 20
   2. 2 and 50
   3. 3 and 50
   4. 2 and 10
   Show answer

   Answer: B. 2 and 50
   A partnership needs at least two partners and can have at most fifty.

2. A written partnership agreement signed by all the partners is called a:

   1. Memorandum of association
   2. Prospectus
   3. Partnership Deed
   4. Trial Balance
   Show answer

   Answer: C. Partnership Deed
   The written agreement containing the terms and conditions of the partnership is called the Partnership Deed.

3. If the partnership deed is silent about the profit sharing ratio, how are profits and losses shared?

   1. Equally among all partners
   2. In the ratio of their capitals
   3. In the ratio of their drawings
   4. In the ratio of their ages
   Show answer

   Answer: A. Equally among all partners
   As per the Indian Partnership Act, when the deed is silent, profits and losses are shared equally.

4. A partner lends money to the firm and there is no agreement on the rate. Interest on the loan is allowed at:

   1. 5% p.a.
   2. 6% p.a.
   3. 9% p.a.
   4. 12% p.a.
   Show answer

   Answer: B. 6% p.a.
   The Indian Partnership Act provides 6% p.a. interest on a partner's loan when no rate is agreed.

5. If the deed is silent about remuneration, which statement about a partner's salary or commission is correct?

   1. Every partner gets a fixed monthly salary
   2. Partners get commission on sales
   3. Partners get 6% of profit as remuneration
   4. No salary or commission is payable for extra work
   Show answer

   Answer: D. No salary or commission is payable for extra work
   Under the Act, no salary, commission or other remuneration is given to a partner unless the deed provides for it.

All Class 12 Book Keeping and Accountancy chapters

• Chapter 1: Introduction to Partnership and Partnership Final Accounts
• Chapter 2: Accounts of Not for Profit Concerns
• Chapter 3: Reconstitution of Partnership (Admission of Partner)
• Chapter 4: Reconstitution of Partnership (Retirement of Partner)
• Chapter 5: Reconstitution of Partnership (Death of Partner)
• Chapter 6: Dissolution of Partnership Firm
• Chapter 7: Bills of Exchange
• Chapter 8: Company Accounts - Issue of Shares
• Chapter 9: Analysis of Financial Statements
• Chapter 10: Computer in Accounting

Class 12 Book Keeping and Accountancy notes: all chapters