Partnership Firms Nature Accounting Help

Partnership Firms Nature

When two or more persons come together to establish legal business and share its profits and losses, they are said to be in partnership. The persons who have entered into partnership with one another are individually called partners and collectively called firm. The name in which the partnership business is carried on is called the firm’s name.

1. Definition of partnership

Section 4 of the Indian partnership act, 1932 defines partnership as “the relation between persons who agreed to share the profits of a business carried on by all or of them acting for all”. The term profits also include the negative profits which mean losses.

2. Essentials or features of partnership

(i) Two or more persons: there must be at least two persons and maximum persons should not exceed 10 if the firm is carrying on banking business and 20 if it is engaged in any other business.

(ii) Agreement between the partners: partnership is created by an agreement which forms the basis of mutual relationship amongst the partners. This agreement may be either oral or in writing.

(iii) Business: the partnership should be for carrying on some legal business. Mere co-ownership of a property does not amount to partnership.

(iv) Sharing of profits: profits earned should be divided amongst partners in the agreed profit sharing ratio. The term profits also include the negative profits which mean losses. Thus, sharing of loss is implied. If some persons join hands for the purpose of some charitable activity, it will be termed as partnership.

(v) Management: the management of partnership must be carried on by all the partners or by one or more than one behalf of all others. It means every partner is entitled to participate in the conduct of the affairs of its business and each partner carrying on the business is the principal as well as the agent for all the other partners.

3. Meaning of partnership deed

A partnership is formed by an agreement. This agreement may be written or oral. Though the laws does not expressly require that there should be an agreement in writing but the absence of a written agreement may be a source of problem/crisis in managing the affairs of the partnership firm. The agreement between the partners, when written, duly stamped and registered is known as partnership deed. It is also known as articles of partnership.

4. Contents of partnership deed

Partnership deed lays down the terms and conditions of partnership, the rights, duties and obligations of partners. The following principal contents are generally covered in the deed:

(i) Amount of capital contributed or to be contributed by each partner.

(ii) Ratio in which profits or losses are to be shared.

(iii) Rate of interest on partner’s capital and drawings.

(iv) Rate of interest on loan by a partner to the firms

(v) Remuneration of partners such as salary, commission etc.

(vi) Rules to be followed in case of admission, retirement and death of a partner.

(vii) Methods of settings dispute amongst partners.

5. In the absence of partnership deed

In the absence of partnership deed, the relevant provisions of the Indian Partnership Act, 1932 shall become applicable which are as follows:

(i) The partners shall share firm’s profit or losses equally.

(ii) If any partner has given some loan to the firm, he is entitled to take interest on such loan @ 6% p.a.

(iii) No interest is allowed to partners on the capital invested by them.

(iv) No interest will be charged on drawings made by the partners.

(v) No partner is entitled to get any renumeration such as salary, commission etc. for participating in the business of the firm.


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