Basic Concepts of Accounting for Partnership
Business can be organised into different forms like sole proprietorship, partnership firm or a company. Every form of business has its own share of limitations. As a business expands, there is a requirement of capital and more risk is involved.
Partnership is based on mutual agreement and in a partnership, they agree to share capital, profits and loss of the business. The individuals who have entered into the partnership are known as partners.
Partnership is defined as per the Indian Partnership Act, 1932 as “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”.
Features of a partnership
The following features of a partnership can be discussed:
- It is an association of two or more persons
- A partnership is established by an agreement
- Partners must share the profit and loss of the business
- Business must be conducted lawfully in order to make profit
- Partnership business must be carried by all or any one on behalf of all. Mutual and implied agency forms the basis of partnership
Generally, a partnership deed deals with all the matters related to the relationship between partners and how the profit and loss should be shared. In absence of a partnership deed the following Accounting rules are applicable as per Indian Partnership Act, 1932:
- The partners are not entitled to receive interest on capital.
- There will be no interest charged on drawings made by the partners
- The partners are not entitled to receive salary or commission, unless otherwise stated in partnership deed.
- The profit sharing ratio will be the same irrespective of their capital contribution in the partnership.
- A partner will be able to earn interest on any extra amount provided as loan to firm apart from the his share of capital.
Let us now understand each concept of Accounting for Partnership : Basic Concepts, in detail.