Fundamentals of Partnership notes: ISC Class 12 Accounts

1. Partnership and the Indian Partnership Act, 1932

Partnership (Section 4): the relation between persons who have agreed to share the profits of a business carried on by all of them or by any of them acting for all.

Features: two or more persons (at most 50, under the Companies Act, 2013 and its rules); an agreement, oral or written; a lawful business; sharing of profits; mutual agency; unlimited liability. Registration is optional, but an unregistered firm cannot sue outsiders to enforce a contract.

Provisions on accounts and rights (unless partners agree otherwise):

partners must be just and faithful to each other and render true accounts and full information (Section 9);
every partner may take part in the conduct of the business (Section 12);
ordinary matters are decided by majority; the nature of the business changes only with the consent of all (Section 12);
every partner may have access to, inspect and copy any of the books of the firm (Section 12).

Table of six features of partnership with an imagined bamboo-furniture firm in Kohima as the example: two or more persons, an agreement, a business, sharing of profits, mutual agency and unlimited liability
Feature	What it means	In an imagined bamboo-furniture firm in Kohima
Two or more persons	At least 2 and at most 50 partners	Neiphiu and Koushik run the workshop together
Agreement	Oral or written; the written form is the deed	They sign a deed before the first order
Business	A lawful business carried on for profit	Making and selling bamboo chairs and shelves
Sharing of profits	Profit and loss shared in an agreed ratio	They agree to share 3:2
Mutual agency	Run by all, or by any of them acting for all	Koushik's order for cane binds Neiphiu too
Unlimited liability	Partners' own property can meet the firm's debts	A supplier can claim from Neiphiu's savings

Table of provisions of the Indian Partnership Act on accounts and partners' rights: true accounts under section nine, the right to take part in the business, decisions by majority, the right to inspect and copy the books, and the money rules of section thirteen
Provision of the Act (unless partners agree otherwise)	What it means
Section 9: true accounts	Partners must be just and faithful and give true accounts and full information to each other
Section 12(a): conduct of business	Every partner may take part in running the business
Section 12(c): decisions	Ordinary matters by majority; the nature of the business changes only with every partner's consent
Section 12(d): books of account	Every partner may have access to, inspect and copy any of the firm's books
Section 13: money matters	Profit sharing, remuneration and interest (next slides)

Key terms

Firm: The partners collectively; the business is carried on under the firm name.
Mutual agency: Each partner is an agent of the others for the firm's business, and also a principal bound by their acts.
Unlimited liability: Partners' private property can be used to pay the firm's debts.
Sleeping partner: A partner who contributes capital and shares profit but takes no active part; he still has the right to inspect the books.

2. The partnership deed and the rules in its absence

Partnership deed: the written agreement among partners, signed and stamped. It usually covers names and business, duration, capitals (fixed or fluctuating), profit-sharing ratio, interest on capital, drawings, current balances and loans, salaries and commission, any guarantee of profit, accounting rules, and rules for admission, retirement, death, goodwill, disputes and dissolution.

When the deed is silent (Section 13):

profits and losses shared equally;
no salary or commission to any partner;
no interest on capital; where interest is agreed, it is payable only out of profits;
no interest on drawings;
interest on a partner's loan or advance at 6% per annum, a charge against profit, from the date of the advance.

Table of the rules of section thirteen of the Indian Partnership Act when the deed is silent: equal sharing, no remuneration, no interest on capital, no interest on drawings, and six per cent a year on a partner's loan, so one lakh twenty thousand rupees for nine months earns five thousand four hundred rupees
Matter	Rule when the deed is silent (Section 13)
Sharing of profits and losses	Equally
Salary or commission to a partner	Not allowed
Interest on capital	Not allowed; where agreed, payable only out of profits
Interest on drawings	Not charged
Interest on a partner's loan or advance	6% per annum, a charge (a loan of ₹1,20,000 for 9 months earns ₹5,400)

Table of the usual clauses of a partnership deed and why each matters to the accountant: names and business, capitals, profit-sharing ratio, interest rates, salary, commission and guarantees, and rules for later changes
Clause in the deed	Why the accountant needs it
Names of the firm and partners; nature and duration of business	Who the partners are and what the firm does
Capital of each partner; fixed or fluctuating capitals	Basis for interest on capital and the type of accounts
Profit-sharing ratio	Division of the divisible profit or loss
Interest on capital, drawings, current balances and loans	Rates to apply and whether interest is a charge
Salary, commission, guarantee of profit	Rewards and promises to particular partners
Admission, retirement, death, goodwill, disputes, dissolution	Rules for later changes

Table of worked example one: claims for interest on capital and a salary are refused; Gargi's loan earns six per cent for nine months, five thousand four hundred rupees; the remaining profit of two lakh forty thousand rupees is shared equally, eighty thousand rupees each
Claim	Ruling under the Act	Effect (₹)
Darshan: interest on capital at 10%	Not allowed: no agreement	nil
Himmat: salary of ₹8,000 a month	Not allowed: no agreement	nil
Gargi: interest on her loan at 10%	6% a year from 1 July 2025, a charge	1,20,000 × 6% × 9/12 = 5,400
Darshan: profit in the capital ratio 5:3:2	Equal sharing	(2,45,400 − 5,400) ÷ 3 = 80,000 each

Key terms

Partnership deed: The written agreement setting out the terms of the partnership.
Advance by a partner: Money lent by a partner beyond capital; it earns 6% a year if nothing is agreed.

3. Capital and current accounts

Fixed capital method: two accounts per partner.

Capital account: opening capital, additional capital (credit), capital permanently withdrawn (debit). Always a credit balance.
Current account: interest on capital, salary, commission, share of profit, interest on a credit current balance (credit); drawings, interest on drawings, share of loss, interest on a debit current balance (debit). May have a debit balance.

Fluctuating capital method: one capital account per partner records every item; its balance changes every year. Use it when a question names no method.

Interest on current balances (only if the deed provides): allowed on a credit balance like interest on capital; charged on a debit balance like interest on drawings; both through the appropriation account.

Opening capital from closing capital: closing capital + drawings + interest on drawings + share of loss − share of profit − interest on capital − salary − commission − additional capital = opening capital.

Table comparing the fixed capital method, with separate capital and current accounts, and the fluctuating capital method, with one capital account recording every adjustment
Basis	Fixed capital method	Fluctuating capital method
Accounts per partner	Two: capital and current	One: capital
Capital balance	Changes only when capital is added or permanently withdrawn	Changes every year
Interest, salary, commission, profit, drawings	Current account	Capital account
Debit balance	Possible in the current account	Possible, though rare, in the capital account

Table showing where each item goes: capital brought in or withdrawn goes to the capital account under both methods; earnings are credited and drawings, interest on drawings and losses are debited to the current account under fixed capitals or to the capital account under fluctuating capitals
Item	Side	Fixed capitals	Fluctuating capitals
Opening and additional capital	Credit	Capital account	Capital account
Capital permanently withdrawn	Debit	Capital account	Capital account
Interest on capital and on a credit current balance, salary, commission, share of profit	Credit	Current account	Capital account
Drawings, interest on drawings and on a debit current balance, share of loss	Debit	Current account	Capital account

Table of interest on current account balances: on a credit balance the firm allows interest like interest on capital; on a debit balance it charges interest like interest on drawings, in each case only if the deed provides
Opening current balance	Meaning	Interest (only if the deed provides)
Credit	The firm owes the partner	Allowed: debit P&L Appropriation A/c, credit partner's current account (like interest on capital)
Debit	The partner owes the firm	Charged: debit partner's current account, credit P&L Appropriation A/c (like interest on drawings)

Divisible profit ₹1,08,050 shared 3:2.
Dr: Particulars	₹	Cr: Particulars	₹
To Interest on Capital: Eshwar	32,000	By Profit and Loss A/c (net profit)	1,95,000
To Interest on Capital: Jasleen	20,000	By Interest on Drawings: Eshwar	1,350
To Interest on Current A/c: Eshwar	1,800	By Interest on Drawings: Jasleen	900
To Salary: Jasleen	36,000	By Interest on Current A/c: Jasleen	600
To Eshwar's Current A/c (share of profit)	64,830
To Jasleen's Current A/c (share of profit)	43,220
	1,97,850		1,97,850

Capitals stay at ₹4,00,000 and ₹2,50,000.
Dr: Particulars	Eshwar (₹)	Jasleen (₹)	Cr: Particulars	Eshwar (₹)	Jasleen (₹)
To Balance b/d	—	10,000	By Balance b/d	30,000	—
To Drawings A/c	45,000	30,000	By Interest on Capital A/c	32,000	20,000
To Interest on Drawings A/c	1,350	900	By Interest on Current A/c	1,800	—
To Interest on Current A/c	—	600	By Salary A/c	—	36,000
To Balance c/d	82,280	57,720	By P&L Appropriation A/c	64,830	43,220
	1,28,630	99,220		1,28,630	99,220

Key terms

Current account: The account that records a partner's routine credits and debits when capitals are fixed.
Fluctuating capital: A capital account that records every adjustment, so its balance changes each year.
Interest on current balance: Interest allowed on a credit current balance or charged on a debit one, under the deed.

4. The Profit and Loss Appropriation Account

Format: credit net profit (after all charges), interest on drawings and interest on debit current balances; debit interest on capital and on credit current balances, partners' salary and commission, transfer to reserve; the balance (divisible profit) is credited to partners in the profit-sharing ratio.

Interest on capital: on opening capital for the year; on additions from their date; reduced for withdrawals from their date.

deed silent: none;
appropriation, enough profit: full interest;
appropriation, profit short: the whole profit shared in the ratio of interest due;
appropriation, loss: none (Section 13: payable only out of profits);
charge: full interest debited to the Profit and Loss Account, even if it causes a loss.

Commission:

a manager's commission is a charge (Profit and Loss or Profit and Loss Adjustment Account);
a partner's commission is an appropriation;
on profit before charging it: profit × rate ÷ 100; after charging it: profit × rate ÷ (100 + rate).

Divisible profit = net profit + interest on drawings − interest on capital − salary − commission − reserve
Dr: Particulars	Cr: Particulars
To Interest on Capital (each partner)	By Profit and Loss A/c (net profit, after charges)
To Interest on credit current balances	By Interest on Drawings (each partner)
To Salary and Commission (partners)	By Interest on debit current balances
To General Reserve
To Partners' Capital or Current A/cs (divisible profit in the ratio)

Table of the treatment of interest on capital: none if the deed is silent; full interest out of enough profit; the profit shared in the interest ratio when it is short; none in a loss year; full interest as a charge when the deed says so
Situation	Treatment of interest on capital
Deed silent	No interest
Deed allows interest; profit is enough	Full interest, as an appropriation
Same, but profit is less than the interest due	Whole profit shared in the ratio of interest due
Same, but the firm made a loss	No interest (Section 13: only out of profits)
Deed treats interest as a charge	Full interest debited to the Profit and Loss Account, even if this causes a loss

Table of worked example three: interest due is thirty three thousand for Ketaki and twenty three thousand for Bhupen; as an appropriation the profit of forty four thousand eight hundred is shared twenty six thousand four hundred and eighteen thousand four hundred; in a loss year nothing is allowed; as a charge full interest is credited and a loss of eleven thousand two hundred rupees is shared three to two
Particulars	Ketaki (₹)	Bhupen (₹)	Total (₹)
Interest due at 10%	30,000 + 3,000 = 33,000	24,000 − 1,000 = 23,000	56,000
(a) Appropriation: profit shared 33:23	26,400	18,400	44,800
(b) Loss year, interest an appropriation	nil	nil	nil
(c) Charge: full interest, loss of 11,200 shared 3:2	33,000 − 6,720	23,000 − 4,480	56,000 − 11,200

After charging: profit × rate ÷ (100 + rate). Before charging: profit × rate ÷ 100.

Divisible profit ₹2,54,400 shared 2:2:1.
Dr: Particulars	₹	Cr: Particulars	₹
To Interest on Capital: Rukmini	30,000	By Profit and Loss A/c (net profit)	4,20,000
To Interest on Capital: Sudhir	24,000	By Interest on Drawings: Rukmini	2,400
To Interest on Capital: Vinod	18,000	By Interest on Drawings: Sudhir	1,800
To Salary: Vinod	48,000	By Interest on Drawings: Vinod	1,200
To Commission: Sudhir	21,000
To General Reserve	30,000
To Rukmini's Capital A/c (share of profit)	1,01,760
To Sudhir's Capital A/c (share of profit)	1,01,760
To Vinod's Capital A/c (share of profit)	50,880
	4,25,400		4,25,400

Key terms

Divisible profit: Profit left for sharing in the profit-sharing ratio after all appropriations.
Appropriation of profit: A distribution of the net profit among partners or to reserve.
Commission after charging: Commission worked out on the profit that remains after deducting that commission.

5. Charges against profit and interest on drawings

Charges are met before net profit, even in a loss year: interest on a partner's loan (6% if no rate is agreed), rent paid to a partner, a manager's commission. When the profit is given before such items, prepare a Profit and Loss Adjustment Account: credit the profit, debit the charges, and transfer the net profit to the appropriation account.

Interest on drawings is charged only if the deed provides; it is debited to the partner and credited to the appropriation account.

Product method: multiply each drawing by the months left to the year end; interest = total of products × rate ÷ 100 × 1/12.
Average period for equal drawings at equal gaps = (months left after the first drawing + months left after the last) ÷ 2. Whole year: monthly 6½ / 6 / 5½ (beginning / middle / end); quarterly 7½ / 6 / 4½; half-yearly 9 / 6 / 3.
Dates not given: 6 months.

Two-column table: charges such as interest on a partner's loan, rent paid to a partner and a manager's commission go to the profit and loss account even in a loss year; appropriations such as interest on capital, partners' salary or commission and reserves come out of profit only
Charge against profit (Profit and Loss Account)	Appropriation of profit (Appropriation Account)
Interest on a partner's loan	Interest on capital (unless the deed calls it a charge)
Rent paid to a partner for the firm's premises	Salary or commission to a partner
Manager's commission and employees' salaries	Transfer to general reserve
Allowed even in a year of loss	Allowed only out of profit

Profit and loss adjustment account of Firozabad Glassworks: interest on Navneet's loan of six thousand rupees and rent to Mohini of sixty thousand rupees are debited, leaving a net profit of two lakh forty four thousand rupees
Dr: Particulars	₹	Cr: Particulars	₹
To Interest on Navneet's Loan (6% for 6 months)	6,000	By Profit and Loss A/c (profit before the charges below)	3,10,000
To Rent: Mohini (12 months)	60,000
To P&L Appropriation A/c (net profit transferred)	2,44,000
	3,10,000		3,10,000

Average period = (months left after the first drawing + months left after the last) ÷ 2. No dates given: 6 months.
Equal drawings made	At the beginning	In the middle	At the end
Every month (12 times)	6½ months	6 months	5½ months
Every quarter (4 times)	7½ months	6 months	4½ months
Every half-year (2 times)	9 months	6 months	3 months

First drawing 12 months, last 1 month: (12 + 1) ÷ 2 = 6½.

Interest = 2,61,000 × 8/100 × 1/12 = ₹1,740
Date of drawing	Amount (₹)	Months to 31 March 2026	Product (₹)
1 May 2025	12,000	11	1,32,000
31 August 2025	9,000	7	63,000
1 December 2025	15,000	4	60,000
28 February 2026	6,000	1	6,000
Total	42,000		2,61,000

Product method: 84,000 × 10/100 × 1/12 = ₹700. Average period (6 + 1) ÷ 2 = 3½ months: 24,000 × 10/100 × 3.5/12 = ₹700.
Drawing of ₹4,000 on the first day of	Months to 31 March	Product (₹)
October	6	24,000
November	5	20,000
December	4	16,000
January	3	12,000
February	2	8,000
March	1	4,000
Total		84,000

Key terms

Charge against profit: An expense debited before net profit is found, payable whatever the result.
Product method: Interest on drawings from the sum of each amount multiplied by the months it was outstanding.
Average period: The average number of months for which equal drawings stay with the partner.

6. Guarantee of profits

A partner is promised a minimum share of profit. Divide the profit (after interest, salary and other appropriations, unless the guarantee says otherwise) in the normal ratio; if the share is below the minimum, the deficiency is borne by:

the firm: the other partners in their mutual profit-sharing ratio;
one partner: that partner alone;
two or more partners: in the ratio they agreed (their profit ratio if none is stated).

Show the guarantors' reduced shares and the guaranteed partner's minimum in the appropriation account, or pass an entry: guarantor's capital (or current) A/c Dr., to guaranteed partner's capital (or current) A/c.

In a loss year the guarantee still holds: deficiency = minimum + the guaranteed partner's share of loss. The firm's total profit or loss never changes.

Table of the guarantee at Makrana Marble Craft: normal shares one lakh eighty thousand, one lakh eight thousand, seventy two thousand; Chandni's deficiency of eighteen thousand is borne three to one by Akshara and Balwant, giving one lakh sixty six thousand five hundred, one lakh three thousand five hundred, ninety thousand rupees
Particulars	Akshara (₹)	Balwant (₹)	Chandni (₹)
Share of profit 5:3:2	1,80,000	1,08,000	72,000
Deficiency borne by Akshara and Balwant 3:1	− 13,500	− 4,500	18,000
Final share	1,66,500	1,03,500	90,000
If the firm had guaranteed (5:3)	1,68,750	1,01,250	90,000

The firm's total profit never changes.

Chandni reaches the minimum either way; the agreed ratio decides who pays.

Profit and loss appropriation account of Kalimpong Orchid Nursery: interest on capital of eighty thousand rupees debited first; of the divisible profit, Mrinal gets forty six thousand after bearing Joydeep's deficiency of twenty six thousand, Oindrila forty eight thousand and Joydeep his minimum of fifty thousand rupees
Dr: Particulars	₹	Cr: Particulars	₹
To Interest on Capital: Mrinal	40,000	By Profit and Loss A/c (net profit)	2,24,000
To Interest on Capital: Oindrila	30,000
To Interest on Capital: Joydeep	10,000
To Mrinal's Capital A/c (72,000 − 26,000)	46,000
To Oindrila's Capital A/c	48,000
To Joydeep's Capital A/c (24,000 + 26,000)	50,000
	2,24,000		2,24,000

Key terms

Guaranteed partner: A partner promised a minimum share of profit.
Deficiency: The amount by which a guaranteed partner's share falls short of the minimum.
Guarantor: The partner or partners who promise the minimum and bear the deficiency.

7. Past adjustments

Errors or omissions found after the accounts are closed (interest on capital or drawings omitted or at a wrong rate, salary or commission omitted, a wrong profit-sharing ratio) are corrected without reopening the accounts.

Method:

For each partner, list what should have been credited (+) or debited (−).
Deduct what was actually credited: when appropriations were omitted, take their total back in the profit-sharing ratio; for a wrong ratio, compare the right and wrong shares.
Find the net effect for each partner; the net effects total nil.
Pass one entry: debit the partners who lose, credit those who gain (current accounts if capitals are fixed, capital accounts if fluctuating), and post it to give the adjusted capitals.

When interest on capital is omitted and opening capitals are not given, work them back from the closing capitals first.

Admission of a manager as a partner is not in the ISC 2027 syllabus for guarantee or past-adjustment problems.

Past adjustment table for Neelam, Mehul and Suhail: interest on capital and Suhail's salary credited, the total of seventy two thousand taken back two to one to one; net effect Neelam debit twelve thousand, Mehul debit two thousand, Suhail credit fourteen thousand rupees, totalling nil
Particulars	Neelam (₹)	Mehul (₹)	Suhail (₹)	Firm (₹)
Interest on capital at 8% (credit)	Cr 24,000	Cr 16,000	Cr 8,000	Cr 48,000
Salary to Suhail (credit)	—	—	Cr 24,000	Cr 24,000
72,000 taken back in 2:1:1 (debit)	Dr 36,000	Dr 18,000	Dr 18,000	Dr 72,000
Net effect	Dr 12,000	Dr 2,000	Cr 14,000	nil

Closed accounts are never reopened.

Capital accounts after the adjustment: Neelam's and Mehul's capitals are debited and Suhail's credited, giving adjusted capitals of three lakh twenty eight thousand, two lakh eight thousand, one lakh thirty nine thousand rupees
Dr: Particulars	Neelam (₹)	Mehul (₹)	Suhail (₹)	Cr: Particulars	Neelam (₹)	Mehul (₹)	Suhail (₹)
To Suhail's Capital A/c (adjustment)	12,000	2,000	—	By Balance b/d	3,40,000	2,10,000	1,25,000
To Balance c/d	3,28,000	2,08,000	1,39,000	By Neelam's and Mehul's Capital A/cs	—	—	14,000
	3,40,000	2,10,000	1,39,000		3,40,000	2,10,000	1,39,000

Table for a profit of one lakh eighty thousand rupees shared equally instead of three to two to one: Lalremruati should gain thirty thousand, Tejal is unaffected and Vedant should lose thirty thousand rupees
Particulars	Lalremruati (₹)	Tejal (₹)	Vedant (₹)	Firm (₹)
Profit that should have been credited (3:2:1)	Cr 90,000	Cr 60,000	Cr 30,000	Cr 1,80,000
Less: profit actually credited (equally)	Dr 60,000	Dr 60,000	Dr 60,000	Dr 1,80,000
Net effect	Cr 30,000	—	Dr 30,000	nil

Key terms

Adjustment entry: A single entry between partners' accounts that corrects the net effect of past errors.
Net effect: For each partner, what should have been credited less what was credited.

Exam tips

How marks are usually split (ISC Accounts, Section A)

1 mark: one correct option, a term or a short reason.
2 marks: one computation with its working, such as interest on drawings, a commission or a single adjustment entry.
3 marks: a short account or working table, such as a small appropriation account, a past-adjustment table with its entry or interest with additions and withdrawals.
5 marks: a full Profit and Loss Adjustment and Appropriation Account, current accounts, or a guarantee or past-adjustment problem with adjusted capitals.

Common mistakes

Putting interest on a partner's loan, rent to a partner or a manager's commission in the appropriation account (they are charges).
Charging the Act's 6% on a loan for the full year when it was given during the year.
Allowing interest on capital in a loss year when the deed does not call it a charge.
Charging interest on an addition to capital for the whole year, or ignoring a withdrawal.
Treating interest on a debit current balance as an expense of the firm.
Counting drawing months to the wrong date, or forgetting 6 months when dates are not given.
Letting the guaranteed partner bear part of his own deficiency, or using the profit ratio when the guarantors agreed another ratio.
A past-adjustment table whose net effects do not total nil.

All firms and figures in SOYL practice are imagined; the board paper will give its own.

1. Partnership and the Indian Partnership Act, 1932

Key terms

2. The partnership deed and the rules in its absence

Key terms

3. Capital and current accounts

Key terms

4. The Profit and Loss Appropriation Account

Key terms

5. Charges against profit and interest on drawings

Key terms

6. Guarantee of profits

Key terms

7. Past adjustments

Key terms

Exam tips

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