Accounting for Partnership Firms – Basic Concepts
CBSE Class 12 Accountancy | 2026–27
1. Partnership: Meaning and Essential Features
Partnership arises when persons agree to carry on a business and share its profits, with the business carried on by all or any one acting for all. The principle of mutual agency is central: an act of a partner in the ordinary course can bind the firm.
2. Partnership Deed
The written agreement normally covers profit-sharing ratio, capital, drawings, interest on capital and drawings, partner remuneration, admission/retirement, goodwill and settlement. Students should always check the deed first before applying default provisions.
3. When the Deed Is Silent
For examination questions, apply the relevant provisions of the Partnership Act when the agreement does not specify a treatment. Do not assume interest, salary or commission merely because it is common in other firms.
4. Capital Accounts
| Fixed Capital | Fluctuating Capital |
|---|---|
| Capital account remains generally unchanged; a Current Account records routine adjustments. | All adjustments are made directly in the Capital Account. |
5. Profit and Loss Appropriation Account
After determining net profit, the appropriation account distributes it among partners. Interest on capital, partner salary and commission are dealt with according to the agreement.
Worked Example
A and B share 3:2. Profit before appropriation is ₹1,00,000. Interest on capital is A ₹10,000 and B ₹6,000; A receives salary ₹12,000. Balance = ₹72,000. A receives ₹43,200 and B ₹28,800 from the balance. Thus total appropriation credited is A ₹65,200 and B ₹34,800.
6. Interest on Drawings
Interest on drawings is calculated using the amount, rate and period. If equal amounts are withdrawn regularly, the average period depends on the timing of withdrawals. Always identify the withdrawal pattern before calculating.
7. Guarantee of Profit
First calculate the partner’s normal share. Compare it with the guaranteed amount. The shortfall is borne by the partner(s) specified in the agreement.
8. Past Adjustments
Prepare a small working statement showing what each partner should have received and what was actually recorded. The difference becomes the net adjustment entry.
9. Goodwill
Average Profit Method: Average Profit × Years’ Purchase.
Super Profit Method: Super Profit × Years’ Purchase, where Super Profit = Average Profit − Normal Profit.
Capitalisation Method: Capitalised Value = Average Profit × 100 ÷ Normal Rate; Goodwill = Capitalised Value − Actual Capital Employed.
🖼️ Concept Map
Exam-Focused Questions
- Prepare a Profit and Loss Appropriation Account with interest and salary.
- Calculate interest on drawings under different withdrawal dates.
- Calculate goodwill under average-profit, super-profit and capitalisation methods.
- Prepare a past-adjustment statement and journal entry.
- Explain fixed and fluctuating capital accounts with formats.
MCQs
- Which principle makes a partner’s ordinary business act capable of binding the firm? Mutual agency.
- Under fixed capital, routine adjustments are generally recorded in the Current Account.
- If average profit is ₹60,000 and years’ purchase is 3, goodwill is ₹1,80,000.
- Super profit equals average profit minus normal profit.
- Past adjustment compares the amount due with the amount actually recorded. Correct.