Fundamentals of Partnership and Goodwill Test - 2

A person who joins a partnership business, individually called a partner. The group of partners is called Firm and the name under which all business activities going on is known as firm’s name.

1.Profit and loss appropriation account is prepared only in case of partnership business. The main purpose of preparing this account to distribute the profits amongst the partners in the form of appropriations and profits.

2.Other firms i.e. companies and sole proprietorship firms are not required to prepare profit and loss appropriation account. These firms are required to prepare only profit and loss account.

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

When partnership deed provides for the interest on drawings but dates of withdrawal of drawings are not given, in such a case average time period should be taken as six months. Interest on Drawings = Total Drawings × Rate/100 × 6/12

The business of partnership can be carried on by all the partners or any one of them acting for all. Thus, every partner is principal as well as agent of other partners and of the firm. Thus,

(i) Each partner is liable for acts performed by other partners,
(ii) Each partner can bind other partners and the firm by his acts done in the ordinary course of business.

When interest on capital is treated as charge, amount of interest will be paid in full irrespective or profits/losses. In a normal situation, interest on capital is an appropriation; it means it will be paid out of profits and up to the profits only. But in some cases it is paid as a charge, it means whether there is profit or loss, it will be paid. Only in such cases interest on capital is treated as a charge.

There are two main views. One is from the accounting point of view, according to that, status of partnership is different i.e.. it has a separate business entity. From the point of view of law, it has no separate business entity. Partners and firm are one.

Mostly, the liability of the partners of a firm is unlimited. Their personal properties can be disposed off to pay the debts of the firm if required. The creditors can claim their dues from any one of the partner or from all of them, meaning partners are liable:

• Individually

• Collectively

Insurance Premium paid for business is a charge against the profit. It means this transaction will reduce the profit of the firm. All charge items are shown in profit and loss account only. That’s why Insurance Premium paid for business is shown in profit and loss account and not in profit and loss appropriation account.

Anything which will reduce the net profit of the firm is called charge. Normally interest on capital is an appropriation; it means it will be paid out of profits and up to the profits only. But in some cases it is paid as a charge, it means whether there is profit or loss, it will be paid. Only in such cases interest on capital is treated as a charge.