Key MCQs on Partnership Accounting & Law
Test your understanding of the Indian Partnership Act, 1932, and fundamental partnership accounting principles with these essential multiple-choice questions and detailed explanations.
Q1. Separate Legal Entity
Which of the following is NOT a characteristic of a partnership firm under the Indian Partnership Act, 1932?
- (a) Minimum two persons required
- (b) Separate legal entity from its partners
- (c) Mutual agency
- (d) Unlimited liability of partners
Answer: (b)
Explanation: A partnership firm does not have a separate legal entity distinct from its partners. This is a key difference from a company. (Note: A Limited Liability Partnership (LLP) is a separate legal entity).
Q2. Profit Sharing in Absence of Deed
In the absence of a partnership deed, profits are shared among partners:
- (a) In the ratio of their capital contributions
- (b) Equally
- (c) In the ratio of time devoted to the business
- (d) As decided by the majority of partners
Answer: (b)
Explanation: As per Section 13(b) of the Indian Partnership Act, 1932, in the absence of any agreement, profits and losses are shared equally among partners.
Q3. Purpose of Interest on Drawings
Interest on drawings is charged to:
- (a) Reduce the capital of the partner
- (b) Increase the profit of the firm
- (c) Compensate the firm for use of its funds
- (d) Both (a) and (c)
Answer: (d)
Explanation: Interest on drawings is debited to the partner’s capital/current account (reducing his equity) and credited to the Profit & Loss Appropriation Account as income for the firm, compensating it for the early withdrawal of funds.
Q4. Interest on Partner’s Loan
A partner is entitled to receive interest on his loan to the firm at:
- (a) 6% per annum unless otherwise agreed
- (b) The rate agreed in the partnership deed
- (c) No interest unless the deed provides
- (d) The prevailing bank rate
Answer: (b)
Explanation: Interest on a partner’s loan is payable strictly as per the terms of the partnership deed. There is no automatic statutory rate.
Q5. Goodwill on Admission of Partner
Goodwill arising on admission of a new partner is credited to:
- (a) Capital accounts of old partners in their sacrificing ratio
- (b) Capital accounts of old partners in their old profit sharing ratio
- (c) Capital account of the new partner
- (d) Profit and Loss Appropriation Account
Answer: (a)
Explanation: Goodwill brought in by the new partner compensates the existing partners for their sacrifice of future profits. Thus, it is credited to their capital accounts in their sacrificing ratio.
Q6. Payment to Retiring Partner
On retirement of a partner, the amount due to him is paid:
- (a) Immediately in cash
- (b) In installments with interest as per agreement
- (c) Only after the firm is dissolved
- (d) After revaluation of assets and liabilities
Answer: (b)
Explanation: The settlement can be a lump sum or in installments as per the agreement. If payment is deferred, interest is typically paid as agreed upon.
Q7. Purpose of Realization Account
When a firm is dissolved, the realization account is prepared to:
- (a) Ascertain profit or loss on dissolution
- (b) Transfer assets to partners’ capital accounts
- (c) Record revaluation of assets and liabilities
- (d) Calculate interest on capital
Answer: (a)
Explanation: The Realization Account records the sale of assets and settlement of liabilities. Its balance reveals the overall profit or loss from the dissolution process.
Q8. Accounting for Partner’s Salary
A partner’s salary is debited to:
- (a) Profit and Loss Account
- (b) Profit and Loss Appropriation Account
- (c) Partner’s Capital Account
- (d) Drawings Account
Answer: (b)
Explanation: A partner’s salary is an appropriation of profit, not a business expense. It is therefore debited to the Profit and Loss Appropriation Account.
Q9. Condition for Interest on Capital
Interest on capital is allowed only if:
- (a) The partnership deed provides for it
- (b) The firm has made profits
- (c) The partner’s capital exceeds a certain limit
- (d) All partners unanimously agree each year
Answer: (a)
Explanation: Interest on capital is not an automatic right. It is permitted only if expressly provided for in the partnership deed.
Q10. Calculating Sacrificing Ratio
The sacrificing ratio is calculated as:
- (a) Old ratio – New ratio
- (b) New ratio – Old ratio
- (c) Old ratio + New ratio
- (d) New ratio / Old ratio
Answer: (a)
Explanation: Sacrificing Ratio = Old Profit Sharing Ratio – New Profit Sharing Ratio. It represents the proportion in which existing partners give up their share for a new partner.
Q11. Purpose of Revaluation on Admission
On admission of a partner, revaluation of assets and liabilities is done to:
- (a) Increase the firm’s goodwill
- (b) Adjust the capital accounts of old partners for any gain or loss
- (c) Reduce the new partner’s capital contribution
- (d) Avoid payment of stamp duty
Answer: (b)
Explanation: Revaluation ensures that any change in the value of assets/liabilities is adjusted in the capital accounts of the old partners (in their old ratio) before the new partner enters.
Q12. Guarantee of Minimum Profit
When a partner guarantees a minimum profit to another partner, any deficiency is borne by:
- (a) The guaranteeing partner alone
- (b) All partners in their profit sharing ratio
- (c) The guaranteed partner
- (d) The firm’s reserves
Answer: (a)
Explanation: The guaranteeing partner personally compensates the guaranteed partner for any shortfall from the agreed minimum profit, unless otherwise stated.
Q13. Maximum Partners in Banking
In the case of a partnership firm, the maximum number of partners allowed in a banking business is:
- (a) 10
- (b) 20
- (c) 50
- (d) No limit
Answer: (a)
Explanation: As per the Companies Act, 2013 (Section 464), a partnership engaged in banking business cannot have more than 10 partners.
Q14. Account Not Opened in Partnership Books
Which account is NOT opened in the books of a partnership firm?
- (a) Partner’s Capital Account
- (b) Partner’s Loan Account
- (c) Partner’s Salary Account
- (d) Partner’s Drawings Account
Answer: (c)
Explanation: There is no separate “Partner’s Salary Account.” Salary is an appropriation entry debited to the P&L Appropriation Account and credited to the partner’s Capital/Current Account.
Q15. Interest on Drawings: Monthly Withdrawals
If a partner withdraws a fixed amount at the beginning of each month, interest on drawings for a year is calculated for:
- (a) 6 months
- (b) 6.5 months
- (c) 12 months
- (d) 6 months on average
Answer: (b)
Explanation: For equal drawings at the beginning of each month, the average period is 6.5 months. Formula: (Total period in months + 1) / 2 = (12+1)/2 = 6.5 months.
Q16. Nature of Revaluation Account
The revaluation account is a:
- (a) Nominal account
- (b) Real account
- (c) Personal account
- (d) Valuation account
Answer: (a)
Explanation: The Revaluation Account is a nominal account. It records gains and losses from revaluation, and its final balance is transferred to the partners’ capital accounts.
Q17. Unrecorded Liabilities on Dissolution
On dissolution, unrecorded liabilities are:
- (a) Ignored
- (b) Credited to realization account
- (c) Debited to realization account
- (d) transferred to partners’ capital accounts
Answer: (c)
Explanation: Payment of an unrecorded liability is an expense of dissolution. It is debited to the Realization Account, increasing the dissolution loss.
Q18. Use of Gaining Ratio
The gaining ratio is used when:
- (a) A partner is admitted
- (b) A partner retires or dies
- (c) The firm changes its profit sharing ratio without any admission/retirement
- (d) The firm is dissolved
Answer: (b)
Explanation: The Gaining Ratio (New Ratio – Old Ratio for continuing partners) is used to allocate goodwill or adjustment entries on the retirement or death of a partner.
Q19. Treatment of Interest on Partner’s Loan
Interest on a partner’s loan to the firm is treated as:
- (a) An appropriation of profit
- (b) A charge against profit
- (c) Capital expenditure
- (d) Not allowed unless the deed provides
Answer: (b)
Explanation: Interest on a partner’s loan is a charge against the firm’s profit, similar to interest on any other loan. It is debited to the Profit and Loss Account.
Q20. Correct Statement about LLP
Which of the following statements about limited liability partnership (LLP) is correct?
- (a) Partners have unlimited liability
- (b) LLP is governed by the Indian Partnership Act, 1932
- (c) At least one partner must have unlimited liability
- (d) LLP is a separate legal entity and partners’ liability is limited to their agreed contribution
Answer: (d)
Explanation: An LLP is a body corporate (separate legal entity) governed by the LLP Act, 2008. The liability of partners is limited to their agreed contribution.
Q21. Fluctuating Capital Method
A partner’s capital account fluctuates when:
- (a) The partnership deed provides for a fixed capital method
- (b) The firm follows the fluctuating capital method
- (c) Interest on capital is not allowed
- (d) Drawings are not made
Answer: (b)
Explanation: Under the fluctuating capital method, all transactions (profit share, salary, interest, drawings) are recorded directly in the capital account, causing its balance to change frequently.
Q22. Goodwill Brought in Cash
On admission, if the new partner brings goodwill in cash, the amount is credited to:
- (a) Goodwill Account
- (b) Capital accounts of old partners in sacrificing ratio
- (c) Bank Account
- (d) Profit and Loss Appropriation Account
Answer: (b)
Explanation: Cash received for goodwill is debited to the Bank Account and credited directly to the old partners’ capital accounts in their sacrificing ratio.
Q23. Partner’s Loan on Dissolution
When a firm is dissolved, the partner’s loan account is:
- (a)
