Accounting for Partnership Firms - Fundamentals
Partnership fundamentals is where the exam tests whether you can read a deed and apply its clauses instead of the default rules. Almost every later chapter - admission, retirement, dissolution - reuses these rules, so precision here pays twice.
When the deed is silent
Under the Indian Partnership Act, 1932, absent an agreement: profits and losses are shared equally; no partner gets salary or commission; no interest is allowed on capital; no interest is charged on drawings; and interest on a partner's loan is allowed at 6% p.a. even when the deed is silent, because a loan is a debt, not capital. Interest on capital and on drawings is an appropriation, not a charge - it is allowed only out of profits, so in a year of insufficient profit interest on capital is restricted to the available profit.
Capital accounts
Under the fixed capital method there are two accounts - Capital (permanent additions and withdrawals only) and Current (interest, salary, drawings, share of profit). Under the fluctuating method everything goes into one Capital Account. Interest on drawings, where provided, is usually computed by the product method; average period is 6 months if drawn evenly through the year, 6.5 if at the beginning of each month, 5.5 if at the end.
Worked example
A and B share 3:2 with capitals of ₹1,00,000 and ₹60,000. The deed allows 10% interest on capital; interest on drawings is A ₹1,200 and B ₹800. Profit before appropriation is ₹50,000. Interest on capital is ₹16,000; less interest on drawings ₹2,000 gives a net charge of ₹14,000. Divisible profit = ₹36,000, so A gets ₹21,600 and B ₹14,400.
Traps
Charging interest on capital in a loss year; crediting interest on drawings to the Profit and Loss Account instead of the Profit and Loss Appropriation Account; giving salary when the deed is silent; treating a partner's loan as capital and denying the 6%.