PARTNERSHIP:-
Partnership is the relation
between persons who have agreed to share the profits of a business carried on
by all on any one of them acting for all. (Section 4 of Indian Partnership Act,
1932)
CHARACTERISTICS/FEATURES
OF PARTNERSHIP:-
1. Association
of two or more persons
2. Agreement
either written or oral (Partnership Deed)
3. Carrying
on a business
4. Lawful
business
5. Profit
sharing (it is not necessary that all the partners must share the losses also)
6. Business
can be carried on by all or any of the partners acting for all.
RIGHTS OF PARTNERS
1. Right
to participate in management.
2. Right
to inspect the books of accounts and have a copy of the same.
3. Right
to share profits or losses in agreed ratio.
4. Right
to receive interest on loan, if loan is given to firm.
5. Right
NOT to allow the admission of a new partner.
6. After
giving proper notice, he has the right to retire from the firm.
7. Right
to get indemnified against payments made on behalf of the firm.
PARTNERSHIP DEED
The document containing the
agreement in writing among partners is called the Partnership Deed. The
partnership deed contains the following items/elements:-
1. Name
and address of the firm.
2. Name
and address of all the partners.
3. Date
of commencement of partnership.
4. Capital
contribution by each partner.
5. Whether
interest on capital is to be allowed.
6. Whether
any partner is to be allowed salary.
7. Profit
sharing ratio.
8. Duties
of partners.
9. Methods
of valuation of goodwill
10. Mode
of settlement of accounts etc.
DISTINGUISH BETWEEN
P&L A/C AND P&L APPROPRIATION A/C
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PROFIT AND LOSS A/C
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PROFIT & LOSS
APPROPRIATION A/C
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1.
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Prepared after trading a/c,
hence starts with the gross profit
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Prepared after P&L a/c,
hence starts with the net profit.
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2.
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Prepared to ascertain net
profit/net loss.
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Prepared to distribute net
profit among the partners.
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3.
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This account has neither
opening balance nor closing balance
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This account may have
opening as well as closing balance.
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4.
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Items debited to this a/c
are charge against profits.
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Items debited to this a/c
are appropriation of profits.
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5.
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This account is not prepared
on the basis partnership agreement, except for interest on loan.
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This account is prepared on
the basis of partnership agreement.
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6.
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Matching principle is
followed.
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Matching principle is not
followed.
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DISTINGUISH BETWEEN
FIXED CAPITAL ACCOUNTS AND FLUCTUATING CAPITAL ACCOUNTS:-
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BASIS OF DISTINCTION
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FIXED CAPITAL ACCOUNTS
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FLUCTAUTING CAPITAL
ACCOUNT
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No. of accounts
maintained
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Two accounts maintained:-
Fixed capital a/c &
Current a/c
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Only one a/c is maintained
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Frequency of change
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Balance in fixed capital
account does not change except under specific circumstances.
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The balances changes
frequently from period to period.
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Adjustment for Drawings
etc.
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All adjustments for
drawings, interest on drawings, interest on capital, salary, share of
profit/loss are made in current a/c.
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All adjustments for
drawings, interest on drawings, interest on capital, salary, share of
profit/loss are made in capital a/c.
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Balance
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It always shows credit
balance in capital account.
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Fluctuating capital a/c may
sometimes show a debit balance.
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RULES APPLICABLE IN THE
ABSENCE OF PARTNERSHIP DEED:-
·
No interest on capital
·
No interest on drawing
·
Interest on Loan @ 6% p.a.
·
Equal profit sharing ratio
·
No salary, commission or remuneration etc.
·
A new partner is admitted with the consent of
all the existing partners.
DISTINGUISH BETWEEN
CHARGE AGAINST PROFITS & APPROPRIATION OUT OF PROFITS:-
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BASIS OF DISTINCTION
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CHARGE AGAINST PROFITS
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APPROPRIATION OUT OF
PROFITS
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NATURE
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Indicates expenses to be
deducted from profits while calculating net profit or loss.
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Indicates distribution of
net profit to the various heads.
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RECORDING
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It is debited to profit and
loss account.
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It is debited to profit and
loss appropriation account.
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NECESSARY OR NOT
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It is necessary to make
charges against profits even if there is loss
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Appropriations are made only
when there is profit.
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EXAMPLE
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Interest on partner’s loan
and rent paid to a partner
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Interest on capital,
partner’s salary etc.
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RECONSTITUTION OF
PARTNERSHIP FIRM:-
Reconstitution of firm may
happen in following circumstances:-
·
Change in the profit sharing ratio among the
existing partners.
·
Admission of a new partner.
·
Retirement of an existing partner.
·
Death of a partner.
·
Amalgamation of two partnership firms.
ADJUSTMENTS REQUIRED AT
THE TIME OF RECONSTITUTION OF PARTNERSHIP FIRM:-
·
Determination of sacrificing and gaining ratio.
·
Accounting for goodwill.
·
Accounting treatment of reserves and accumulated
profits.
·
Accounting for revaluation of assets and
liabilities.
·
Adjustments of capitals.
DIFFERENCE BETWEEN
SACRIFICING RATIO AND GAINING RATIO:-
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BASIS
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SACRIFICING RATIO
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GAINING RATIO
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Meaning
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It is the ratio in which the
old partners surrender a part of their share in favour of new partner.
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It is the ratio in which the
remaining partners acquire the outgoing partner’s share.
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When calculated
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Calculated at the time of
the admission of a new partner.
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Calculated at the time of
retirement or death of a partner.
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Formula
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Sacrificing ratio= Old
ratio-New ratio
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Gaining Ratio=New ratio-Old
ratio
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Purpose of calculation
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New partner’s share of
goodwill is divided between the old partners in sacrificing ratio.
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Goodwill paid to retiring
partner is paid by the remaining partners in their gaining ratio.
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GOODWILL:-
Goodwill is the value of the
reputation of a firm which enables it to earn higher profits in comparison to
the normal profits earned by other firms in the same business.
CHARACTERISTICS/FEATURES
OF GOODWILL:-
·
Intangible asset.
·
Valuable asset.
·
Helpful in earning extra profits.
·
Its value is liable to constant fluctuations.
·
It is valuable only when entire business is sold
i.e. it cannot be sold in parts.
·
It is difficult to place an exact value on
goodwill.
CLASSIFICATION OF
GOODWILL:-
·
PURCHASED GOODWILL: - it is the goodwill
which is acquired by making a payment. When
a business is purchased, the excess of purchase consideration over its net
assets is referred to as purchased goodwill.
·
SELF GENERATED GOODWILL/INHERENT GOODWILL:
- It is internally generated goodwill which arises from number of
characteristics or attributes which an ongoing business possesses.
FACTORS AFFECTING THE
VALUE OF GODDWILL
·
Location of the business.
·
Efficiency of management
·
Nature of goods
·
Longevity of the business
·
Risk involved
·
Future competition etc.
METHODS OF VALUATION OF
GOODWILL:-
·
Average profit method
·
Super profit method
·
Capitalisation method
Ø Capitalisation
of average profits method
Ø Capitalisation
of super profits method
REVALUATION ACCOUNT:-
Whenever a new partner is
admitted, it becomes necessary to revalue the assets and liabilities of the
firm to their true and fair values. Such revaluation is done with the help of a
new account called “Revaluation Account”. This account is also called as
“Profit & Loss Adjustment A/c. This account is nominal in nature.
Revaluation account is prepared because of following reasons:-
·
To record the effect of revaluation of assets
and liabilities.
·
To find out the profit or loss on revaluation.
MODE OF DISSOLUTION OF
PARTERSHIP FIRM
·
When all the partners agree to dissolve the
firm.
·
When all or all but one partner of the firm
becomes insolvent.
·
When business becomes unlawful.
·
On the expiry of the period for which the firm
was formed.
·
By order of court.
DIFFERENCE BETWEEN DISSOLUTION OF
PARTNERSHIP & DISSOLUTION OF FIRM:-
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BASIS
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DISSOLUTION OF
PARTNERSHIP
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DISSOLUTION OF FIRM
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Meaning
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It refers to a change in the
existing agreement between the partners.
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It refers to the dissolution
of partnership between all the partners of the firm.
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Continuation of business
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The firm continues its
business.
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The firm does not continue
its business.
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Books of account
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Books of accounts may not be
closed.
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Books of accounts have to be
closed.
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Effect
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Dissolution of partnership
does not mean dissolution of firm.
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Dissolution of firm means
the dissolution of partnership also.
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Nature
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It is voluntary.
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It may be both voluntary and
compulsory.
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DIFFERENCE
BETWEEN REVALUATION A/C & REALISATION A/C
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BASIS
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REVALUATION
A/C
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REALISATION
A/C
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Situation
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Prepared
on the admission, retirement or death of a partner.
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Prepared
on the dissolution of partnership firm.
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Objective
|
It is
prepared to make necessary adjustments in the value of assets &
liabilities.
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It is
prepared to find out the profit or loss on the sale of assets & repayment
of liabilities.
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Result
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Even
after preparation of revaluation a/c, firm continues to function.
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The
firm comes to an end after preparation of this account.
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Value
of assets & liabilities recorded
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Difference
between book value and revised value is recorded.
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Book
value of assets & liabilities, the realised value of assets & the
actual payment of liabilities is recorded.
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When
prepared
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Prepared
many times during the life time of a firm.
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Prepared
only once during the life time of a firm.
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DISTINCTION
BETWEEN DRAWINGS AGAINST PROFITS AND DRAWINGS AGAINST CAPITAL
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DRAWINGS
AGAINST PROFITS
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DRAWINGS
AGAINST CAPITAL
|
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It
means drawings made out of profits earned by a firm during the year
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It
means drawings made in excess of profits.
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Such
drawings do not reduce the capital of the firm.
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Such
drawings reduce the capital of the firm.
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It is
not considered while calculating interest on capital.
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It is
deducted from capital while calculating interest on capital.
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ADJUSTMENTS
IN THE CLOSED ACCOUNTS
Sometimes after the accounts have been closed,
some errors and omissions are discovered. In such cases, instead of altering
old accounts, an adjustment entry is made for such errors or omissions at the
beginning of the next year. Usually the following types of adjustments are
made:-
·
Omission of interest on capital or drawings
·
Omission of salary or commission.
·
Profits or losses distributed in a wrong
proportion.
·
Profit sharing ratio has been changed with
effect from some past date.
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