1. Basic Concepts

Partnership – A relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all (Section 4, Indian Partnership Act, 1932).

Partnership Deed – A written agreement containing key terms:

• Name of firm & partners
• Nature & place of business
• Capital contribution of each partner
• Profit‑sharing ratio (PSR)
• Interest on capital & drawings
• Salary/commission/bonus to partners
• Procedures for admission, retirement, death & dissolution
• Method of valuation of goodwill & assets

Key Accounting Principle – Partners’ capital accounts may be Fixed or Fluctuating.

2. Profit‑Sharing Ratio (PSR) & Adjustments

2.1 Calculation of New PSR on Admission / Retirement / Death

1. Old Ratio – Given in the deed.
2. Sacrificing Ratio (on admission) = Old Ratio – New Ratio of existing partners.
3. Gaining Ratio (on retirement/death) = New Ratio – Old Ratio of continuing partners.

Mnemonic: SACRIFICE = OLD – NEW (for existing partners)
GAIN = NEW – OLD (for continuing partners)

2.2 Adjustment of Goodwill

Quick Rule: Credit the sacrificing/gaining partner, Debit the gaining/sacrificing partner (depending on whether goodwill is being given or received).

2.3 Interest on Capital & Drawings

• Interest on Capital = Capital × Rate × Time (usually for the whole year unless otherwise specified).
• Interest on Drawings = (Sum of Drawings × Rate) / 12 × Months outstanding (or use product method).
• Accounting Entry:
  • Interest on Capital: Dr. Interest on Capital A/c → Cr. Partner’s Capital/Current A/c
  • Interest on Drawings: Dr. Partner’s Capital/Current A/c → Cr. Interest on Drawings A/c

Mnemonic: “CAPITAL earns, DRAWINGS cost” – Capital → Credit (income); Drawings → Debit (expense).

3. Partners’ Remuneration (Salary, Commission, Bonus)

Journal Example (Salary):
Dr. Profit & Loss Appropriation A/c
Cr. Partner’s Capital/Current A/c (Salary)

4. Preparation of Profit & Loss Appropriation Account

Profit & Loss Appropriation A/c
Dr.                                            Cr.
To Interest on Capital      xxx                By Net Profit b/d      xxx
To Partner’s Salary         xxx                By Interest on Drawings xxx
To Partner’s Commission     xxx                …
To Transfer to Reserve      xxx
To Balance c/d (Profit share) xxx

• Balance c/d is split among partners in their profit‑sharing ratio and transferred to each partner’s Capital/Current A/c.
• If a guarantee of profit exists, any shortfall is borne by the guaranteeing partner(s) in the agreed ratio.

5. Guarantee of Profit

• Guarantee to a Partner: The firm promises a minimum profit share to a partner; any deficiency is made good by other partner(s).
• Steps:
  1. Calculate each partner’s actual share (based on PSR).
  2. Compare with guaranteed amount.
  3. If actual < guaranteed → Deficit = Guaranteed – Actual.
  4. Deficit is debited to the guaranteeing partner(s)’ Capital/Current A/c in their agreed ratio and credited to the guaranteed partner’s A/c.

Mnemonic: “GIVE” – Guarantee → Identify Deficit → Transfer from Guarantor(s) to Guaranteed.

6. Admission of a Partner

Adjustments Required:

1. Revaluation of Assets & Liabilities (if any).
2. Treatment of Goodwill (as per 2.2).
3. Adjustment of Capitals (to make them proportionate to new PSR, if agreed).
4. Distribution of Reserves & Accumulated Profits/Losses (credited to old partners in old PSR).

Journal Entries (Summary):

7. Retirement / Death of a Partner

Adjustments Required: Similar to admission but in reverse.

1. Revaluation of Assets & Liabilities (if agreed).
2. Treatment of Goodwill (credited to retiring/deceased partner, debited to continuing partners in gaining ratio).
3. Payment to retiring/deceased partner – may be lump sum, installments, or transfer to loan account.
4. Adjustment of Capitals (to make them proportionate to new PSR, if desired).
5. Transfer of Reserves & Accumulated Profits/Losses (to continuing partners in old PSR).

Journal Entries (Summary):

Special Note on Death:

• Executor’s Loan A/c is opened for the amount due to the deceased partner’s estate.
• Interest on Executor’s Loan is allowed as per agreement (usually 6% p.a.).

Mnemonic: “RETIRE” – Revaluate, Earn Goodwill, Transfer Income, Repay, Adjust Capital, Settle Estate.

8. Dissolution of Partnership

Modes:

• By Agreement (all partners consent).
• By Notice (any partner may give notice).
• By Contingency (expiry of term, completion of venture, death/insolvency of a partner).
• By Court (unsound mind, permanent incapacity, misconduct, persistent loss, etc.).

Steps in Dissolution Accounting:

1. Realisation Account – Records sale of assets and payment of liabilities.
2. Partners’ Loan Accounts – Settled before capital accounts.
3. Partners’ Capital Accounts – Final balances after realization & loan settlement.
4. Cash/Bank Account – Balances off to zero.

Journal Entries (Key):

Transaction	Dr.	Cr.
Transfer of Assets to Realisation A/c	Realisation A/c	To Individual Asset A/c (at book value)
Transfer of Liabilities to Realisation A/c	Individual Liability A/c	To Realisation A/c
Sale of Asset	Bank/Cash A/c	To Realisation A/c (sale price)
Payment of Liability	Realisation A/c	To Bank/Cash A/c
Realisation Profit Editorial Team Founder & Content Creator at EduFrugal Email View Articles Leave a Comment Cancel reply Comment Name Email Website Save my name, email, and website in this browser for the next time I comment. Δ