Fundamentals of Partnership and Goodwill Test - 3

The beginning of partnership is always because of an agreement. There should be an agreement among the partners to start a partnership business. Agreement can be written or oral that does not matter.

In case of drawings, when a fixed amount is withdrawn at the end of the last day of every month, interest on drawings will be calculated as follows:

Step 1. Average Time Period = 11 + 0 = 11/2 = 5.5

Step 2. Total Drawings × Rate/100 × 5.5/12

When there is no Partnership deed or Partnership deed is prepared but it is silent on profit sharing ratio, in such a case rules of Partnership Act, 1932 will be applicable. According to which, profits or losses will be shared by the partners equally irrespective of their capitals.

Interest paid on debentures is a charge against the profit. Partnership Deed is mainly concerned with the appropriations and some charge. Main contents of partnership deed are interest on capital, interest on drawings, name of the firm, partners, their names and address etc.

The word per annum is the key element in the calculation of interest on drawings. When per annum word is given, it means interest on drawings is to be calculated on the time basis or for a particular time period. When word per annum is not given with the rate of interest on drawings, it means interest on drawings is to be calculated for the full year irrespective of time period.

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.

Members of the firm are called partners. Proprietor word is mainly used in case of sole proprietorship. But in case of partnership persons join hands together to run a business are called partners. They contribute capitals individually and responsible for all profits or losses.

Fixed capitals of the partners will remain fixed but there are two situations when fixed capitals of the partners may change:

1. When additional capital is introduced by the partners

2. When capital is withdrawn permanently under an agreement.

When rate of interest on capital is not mentioned in partnership deed, partners cannot claim for interest on capital. Interest on capital will be allowed to the partners only if rate of interest is mentioned in the partnership deed.

Rent paid to a partner is a charge against the profit. It means it will reduce the profit. That’s why it is shown in Profit and Loss Account instead of Profit and Loss Appropriation Account.