Accounting for Partnership Firms: Fundamentals
What the domain tests
The Indian Partnership Act, 1932 defines partnership as a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The exam checks that you can run the machinery of a firm's books: capital accounts, interest on capital and drawings, partner salary and commission, and closing profit through the Profit and Loss Appropriation Account.
Rules when there is no deed
No interest on capital; no interest on drawings; no salary or commission; profits shared equally; interest on a partner's loan is 6% p.a.; an advance beyond capital is treated as a loan. A deed may vary every one of these, so read the given terms before writing a single entry.
Appropriation, not charge
Interest on capital and partner salary are appropriations out of profit. If the deed makes them a charge, they are debited to Profit and Loss instead. Interest on drawings is a gain to the firm and is credited in the Appropriation Account.
Two capital formats
Under the fluctuating method, interest, salary, drawings and share of profit all pass through the Capital Accounts. Under the fixed method, Capital Accounts stay static and a Current Account carries these items.
Worked example
Profit for the year ₹2,40,000. A: capital ₹5,00,000; B: capital ₹3,00,000; interest 10% p.a.; B is allowed a salary of ₹4,000 per month; profits shared equally. Interest on capital: A ₹50,000, B ₹30,000. Salary to B ₹48,000. Appropriations total ₹1,28,000, leaving ₹1,12,000 to divide equally: ₹56,000 each. B's Capital Account is credited with 30,000 + 48,000 + 56,000 = ₹1,34,000.
Traps that cost marks
Treating interest on drawings as an expense; charging interest on capital despite a loss when the deed is silent; missing the wording profit after charging commission, where commission = rate ÷ (100 + rate) × profit; and forgetting that drawings reduce capital rather than being an appropriation.