Accounting for Partnership: Basic Concepts

Lesson

Part 1 — what a partnership is, the deed and the Act, capital accounts, and the Profit and Loss Appropriation Account.

In this lesson you will

State the features of partnership, the contents of a deed and the rules of the Indian Partnership Act, 1932 when the deed is silent
Prepare partners' capital and current accounts under the fixed and fluctuating capital methods
Prepare the Profit and Loss Appropriation Account with interest on capital and drawings, salary, commission and reserve

Part 1 at a glance

Concept

What is a partnership?

The Indian Partnership Act, 1932 describes partnership as a relation between persons who agree to share the profits of a business run by all of them, or by any of them acting for all.
The persons are partners; together they form the firm; the business is run under the firm name.

Table of the six features of partnership with an imagined dairy as the example: two or more persons, an agreement, a business, sharing of profit, mutual agency and unlimited liability
Feature	What it means	Example (imagined dairy in Karnal)
Two or more persons	At least 2 and at most 50 partners	Amrit and Baljit run the dairy together
Agreement	Oral or written; the written form is the deed	They sign a deed on 1 April 2025
Business	A lawful business carried on for profit	Collecting, chilling and selling milk
Sharing of profit	Profit or loss shared in an agreed ratio	They agree to share 3:2
Mutual agency	Each partner is an agent and a principal	Baljit's order for milk cans binds Amrit too
Unlimited liability	Partners' private assets can pay the firm's debts	A creditor can claim from Amrit's own savings

Concept

The written agreement between partners is the partnership deed. It is signed by all partners and stamped as required by law.

Table of the main clauses of a partnership deed and why each matters: names and business, capitals, profit-sharing ratio, interest rates, salaries and commission, and rules for later changes
Clause in the deed	Why it matters
Names of firm and partners, nature and duration of business	Who the partners are and what the firm does
Capital contributed by each partner	Basis of interest on capital
Profit-sharing ratio	How profit or loss is divided
Interest on capital, on drawings and on partners' loans	Rates the accountant must apply
Salary or commission to partners	Reward for partners who work in the firm
Admission, retirement, death, goodwill, disputes, dissolution	Rules for later changes