Distribution of Profits Amongst Partners

The appropriation section(often described as profit and loss appropriation account) follows the profit and loss account and shows how net profit has been distributed amongst the partners. The net profit is transfered to the credit of profit has been distributed amongst the partners; and interest allowed on capital are debited and interest charged on drawings is credited. Thereafter, the balance is transfered to the capital accounts or current accounts(in case of fixed capital) of the partners in the profit sharing ratio as stated in the partnership deed, otherwise it is shared equally.
Profit and Loss Appropriation A/c is an extension of the Profit and Loss A/c. It is used to show how the Profit and Loss A/c balance-Net Profit-is shared by the partners.
Journal Entries relating to Profit and Loss Appropriation Account
1. For Interest on Capital
   (i) Interest on Capital A/c        ... Dr.
          To Partners' Capital(or current, if capital accounts are fixed) Accounts(individually)
   (ii) Profit and Loss Appropriation A/c    ...Dr.
           To interest on Capital A/c
        Alternatively, only one entry may be passed, as follows:
        Profit and Loss Appropriation A/c   ...Dr.
           To Partners' Capital Accounts(Individually)
2. For Interest on Drawings
   (i) Partners' Capital(or current, if Capital accounts are fixed) Accounts(individually)   ...Dr
          To Interest on Drawings A/c
   (ii) Interest on Drawings A/c    ...Dr.
           To Profit and Loss Appropriation A/c
3. For Partner's Salary/Commission
   (i) Partners, Salary/Commission A/c     ...Dr.
          To Partner's Capital(or current, if Capital accounts are fixed) A/c
   (ii) Profit and Loss Appropriation A/c   ...Dr
           To Partner's Salary/Commission
4. For Transfer to Reserve
        Profit and Loss Appropriation A/c  ...Dr.
           To Reserve A/c
5. For Transfer of Credit Balance(being Profit)
        Profit and Loss Appropriation A/c    ...Dr
           To Partners' Capital(or current, if Capital accounts are fixed) Accounts(Individually)

Provisions Affecting Accounting Treatment in the Absense of Partnership Deed

The partnership deed generally includes all the aspects concerning the business. It is possible that the partnership deed doesnot specify the financial terms, i.e, profit sharing ratio, salary to partners, interest on capital and drawings, etc. In such a situation, the provisions of Partnership Act,1932 apply. The provisions are:
1. Profit and losses are to be shared equally among the partners.
2. No partner is entitled to a salary.
3. Partners are not entitled to receive interest on their capital.
4. Interest is not to be charged on partners' drawings.
5. When a partner advances loan to the firm, he is entitled to receive interest at six percent per annum.
As discussed above, the partners may agree to terms that are different from the provisions of the Partnership Act. In such a case, they shall have to incorporate those terms in the partnership deed. It should be noted that the partners may change the partnership deed, if all the partners agree.
The provisions relating to accounting arising from the Partnership Act often vary with the agreement of all partners, by means of partnership deed.
A study of following illustrations will help you understand the treatment of items better, when there is no partnership deed.
Illustration 1. You and your friends Amit and Vinod are partners in a firm sharing profits and losses equally. The following differences have arisen among you. State giving reasons who is correct in each case:
(a) There is a joint life policy of Rs. 50,000 for which premium is paid by the firm. Vinod dies and his representatives want that the whole of the amount of the policy should be given to them whereas you and Amit want that amount of joint life policy should be dividend among all.
(b) Amit has provided a capital of Rs. 50,000 whereas Vinod has provided Rs. 10,000 only as capital . Vinod,however, has provided Rs. 20,000 as loan to the firm. There is no partnership agreement. Vinod claims interest of Rs. 1,200,whereas you and Amit do not want to give any interest.
(c) All the partners want to dissolve the firm. Vinod wants that his loan of Rs. 20,000 must be paid off before the payment of captials to the partners. But Amit wants that capitals must be paid before the payment of Vinod's loan.
(d) Amit wnats to retire from the firm. The Profit on revaluation of assets on  the date of retirement is Rs. 6,000. Amit wnats that it should be divided among all the partners in their profit sharing ratio whereas you and Vinod want that this profit should be divided between you and Vinod in your new profit sharing ratio.
Solution:
(a) You and Amit are right because the premium of Joint Life Policy is paid by the firm and the amount receivable from insurance company is the property of the firm. Hence, it should be shared among all the partners in profit sharing ratio.
(b) Vinod is right in claiming interest on his loan @6% per annum, which comes to Rs. 1,200 on Rs. 20,000. Since, there is no partnership deed, the provisions of Partnership Act 1932 will apply, which states that a partner will be entitled to interest @6% per annum on any loans and advances(over and above his share of capital) given by him to the firm.
(c) Vinod is right in claiming his loan before any re-payment of capital balances. As per Section 48 of Partnership Act 1932,the orderof payment is as follows:
          (i) To outsiders.
          (ii) To partners for their loans and advances.
          (iii) To partners for their capital balances.
          (iv) To partners, any balance, in their profit sharing ratio.
(d) Amit is right. Profit on revaluation of assets belongs to the firm, in which Amrit is still a partner and has a right to share the profit in profit sharing ratio. If there had been any loss on revaluation, then Amit also would have shared that in profit sharing ratio.

Partnership Deed

We know that partnership is established by an agreement which may be oral or in writing. It is always better to have the agreement in writing to avoid any dispute. The document, containing the agreement in writing amongst partners is called Partnership Deed. The Partnership Deed is stamped according to the provisions of the Stamp Act and contains the following particulars:
1. Description of the Partners.
Names, description and addresses of the partners.
2. Description of the Firm.
Name and address of the firm.
3. Principal Place of Business.
Address of the principal place of business.
4.Nature of business.
Nature of business, the firm proposes to carry on.
5. Commencement of Partnership.
Date of commencement of partnership.
6. Capital COntribution.
The amount of capital to be contributed by each partner. Also, whether the capital accounts shall be fixed or fluctuating.
7. Interest on Capital.
If interest on capital is to be allowed on capital, then at what rate?
8. Interest on Drawings.
If interest is to be charged on drawings, then at what rate?
9. Profit-sharing Ratio.
Ratio in which profits or losses are to be shared by the partners.
10. Interest on Loan.
What shall be the rate of interest on loan by a partner to the firm?
11. Salary.
If the partner is to be paid salary,commission, etc., then how much?
12. Goodwill.
The manner in which goodwill of the firm eill be valued in the case of its reconstitution.
13. Valuation of Assets.
The manner in which assets of the firm shall be valued in the case of its reconstitution.
14. Settlement of Account
The manner in which account of partner(s) shall be settled in case of his retirement or death.
15. Settlement of Accounts in case ofDissolution of Firm.
The manner in which accounts shall be settled when the firm is dissolved.
16. Accounting Period.
The date on which accounts shall be closed every year.
17. Rights and Duties of Partners.
What shall be the duty of each partner?
18. Duration of Partership.
The period for which partnership is established. If it is at will, the notice that will be required if any partner wishes to retire.
19. Bank Operation.
How shall the bank be operated? Whether it shall be operated by any of the partners or jointly?
20. Settlement of Disputes.
If any dispute arises among the partners, how it shall be settled. If an arbitrator(s) is to be appointed, how will the arbitrator(s) be appointed?

Duties(Obligations) of Partners

Alongwith the above rights, a partner also has some duties towards partnership. These are:
1. To devote time and attention to the business of the partnership.
2. To carry on the business diligently and with the greatest common advantage.
3. Not to engage in competition against the firm. If he does so, he must account for the profits made in the competing business.
4. To hold and use the property of the firm only for the firm.
5. To act within the authority.
6. To make good the loss that may have been caused by his willful neglect or breach of trust.

Rights of Partners

1. Every partner has a right to take part in the management of the business.
2. Every partner has a right to be consulted about the affairs of the partnership business.
3. Every partner has a right to inspect the books of account and have a copy of the same.
4. Every partner has a right to share the profits(or losses) with others in the agreed ratio.
5. If a partner has contributed a sum in excess of the agreed capital, he has a right to receive interest on such an excess at an agreed rate of interst. In case the rate of interest is not agreed, he may be paid interest @6%per annum.
6. In case of an emergency, a partner has the right to act according to his best judgement and be indemnified for the expenses incurred by him.
7. A partner has the right not to allow the admission of a new partner.
8. On giving a proper notice, a partner has the right to retire from the firm.
9. If a partner incurs expense on the business or he pays some money on behalf of the firm, that partner may get indemnified of these payments from the firm.