Chapter – 1 Introduction to partnership Chapter outcomes: Meaning and nature of partnership; Partnership Deed; Accounting methods for partnership; Admission of a partner; Revaluation of assets and liabilities Pro forma journal entries and ledger accounts Practical exercises; Dr.BALAMURUGAN MUTHURAMAN Summer Semester

Meaning and nature of partnership Partnership is defined as the “relationship between two or more persons who have agreed to share the profits and losses of a business carried on by all or any of them acting for all” Essential elements: There must be two or more persons; There must an agreement entered into by all persons concerned; There must a business; There must be sharing of profits or losses of the business; There must be mutual agency, i.e., the business must be either carried on by all or any of them acting for Dr.BALAMURUGAN MUTHURAMAN

Dr.BALAMURUGAN MUTHURAMAN Partnership deed A partnership is formed by an agreement. This agreement may be oral or in writing. Though the law does not expressly require that the partnership agreement be in writing, it is desirable to have it in writing so that in case of a dispute among the partners, it may be readily referred to. A document which contains the terms of partnership as agreed among the partners is called ‘partnership deed’. A partnership deed usually includes the following particulars: Name of the firm; Names and addresses of all partners; Nature and places of business; Date of commencement of partners; Amount of capital contributed or to be contributed by each partner; Dr.BALAMURUGAN MUTHURAMAN

Partnership deed- continued 6. Ratio in which profits and losses are to be shared; 7. Interest on partners’ capitals and drawings; 8. Interest on loan given by a partner to the firm; 9. salary, commission, etc., if any, payable to a partner; 10. Method of computation and treatment of goodwill on the constitution of a firm; 11. Mode of settlement of accounts in case of retirement/death of a partner; 12. Mode of settlement of accounts in case of dissolution of a firm. Dr.BALAMURUGAN MUTHURAMAN

Methods of maintaining capital accounts of partners The partners’ capital account may be maintained under fixed capital method or fluctuating capital method. Under fluctuating capital method, only one account for each partner is maintained and all the transactions relating to a partner are recorded in the same account. As a result, the balance of the capital account keeps on fluctuating. Under fixed capital method, two accounts for each partner are maintained, namely, capital account and current account. The transactions relating to introduction or withdrawal of capital are recorded in capital account and other transactions like interest on capital, drawings, salary, commission, share of profit or loss are recorded in current account. Dr.BALAMURUGAN MUTHURAMAN

Dr.BALAMURUGAN MUTHURAMAN Admission of a partner Admission of a partner into the firm is one of the modes of reconstituting the firm under which old partnership comes to an end and new one between all partners comes into existence. When a new partner is admitted into the firm, the following adjustment is to be made: Revaluation of assets and liabilities of the firm; Transfer of undistributed profits or loss; and reserves; Treatment of goodwill; Adjustment of capital Dr.BALAMURUGAN MUTHURAMAN

1. Revaluation of assets and liabilities At the time of admission of a partner, the assets and liabilities are re-valued so that the profits or losses arising on account of such revaluation may be adjusted in the old partners capital account in their old profit sharing ratio and the incoming partner may not be affected by the profits or loss of revaluation of assets and liabilities. For the purpose of revaluation of assets and liabilities, a revaluation account is opened to record the revaluation of assets and liabilities and the balance shown by the revaluation account will be transferred to partners’ capital Dr.BALAMURUGAN MUTHURAMAN

Pro forma entries on revaluation of assets and liabilities For the increase in the value of assets: Assets account Dr. XXXXX Revaluation account Cr. XXXXX (Being the increase in the value of assets) For the decrease in the value of an asset: Revaluation account Dr. XXXXX Assets Account Cr. XXXXX (Being the decrease in the value of assets) For the increase in the value of liabilities: Revaluation account Dr. XXXXX Liabilities account Cr. XXXXX (Being the increase in the liabilities) Dr.BALAMURUGAN MUTHURAMAN

Pro forma entries on revaluation of assets and liabilities 4. For the decrease in the value of the liabilities: Liabilities account Dr. XXXXX Revaluation account Cr. XXXX (Being the decrease in the value of liabilities) 5. For unrecorded assets: Assets account Dr. XXXXX Revaluation account Cr. XXXXX (Being unrecorded assets brought into account) 6. For unrecorded liabilities: Revaluation account Dr. XXXXX Liabilities account Cr. XXXXX (Being the unrecorded liabilities brought into account) 7. Profit or loss on revaluation If profit: Revaluation account Dr. XXXXX Partners capital account Cr. XXXXX (Being the profit on revaluation transferred to old partners account) If loss: The above entry will be reversed. Dr.BALAMURUGAN MUTHURAMAN

Dr.BALAMURUGAN MUTHURAMAN 3. Treatment of goodwill When a new partner is admitted, sometimes, the new partner may be required to bring in cash for good. The amount brought in by the new partner will be shared by the old partners: When new partner brings in cash for goodwill: Bank account Dr. XXXXX New partner’s capital account Cr. XXXXX (Being the goodwill brought in by new partner) 2. When the amount is shared by the old partners: New partners capital account Dr. XXXXX Old partners capital account Cr. XXXXX (Being the goodwill brought in by the old partner shared by old partner shared by the old partners) Dr.BALAMURUGAN MUTHURAMAN

Dr.BALAMURUGAN MUTHURAMAN 3. Adjustment of capital Whenever a new partner is admitted, the capital of all the old partners will be rearranged according to the ratio of new partner. When there is excess capital, it will be paid and when there is deficiency the partners are required to bring in the deficit amount. The following entries are passed: When the excess capital of old partners are paid: Old partners capital account Dr. XXXXX Bank account Cr. XXXXX (Being the excess amount paid to old partners) 2. When the deficit amount is brought in by older partners: Bank account Dr. XXXXX Old partners capital account Cr. XXXXX (Being the capital brought in by old partners) Dr.BALAMURUGAN MUTHURAMAN