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.
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.
