CBSE Class 12 Accountancy – Chapter 1: Accounting for Partnership Firms: Basic Concepts
NCERT/CBSE-aligned study resource | Partnership Fundamentals
1. Meaning of Partnership
A partnership is an agreement between persons who agree to share the profits of a business carried on by all or any one of them acting for all. The relationship is based on mutual agency.
2. Partnership Deed
The partnership deed records agreed terms such as capital contribution, profit-sharing ratio, drawings, interest on capital, interest on drawings, partner salary or commission, admission and retirement provisions. A written deed reduces disputes.
3. Provisions in the Absence of Agreement
| Item | Default treatment |
|---|---|
| Profit/loss sharing | Equal |
| Interest on capital | Not allowed |
| Interest on drawings | Not charged |
| Partner’s salary/commission | Not allowed |
| Interest on partner’s loan | 6% p.a. |
4. Fixed and Fluctuating Capital
Under the fixed-capital method, the Capital Account normally remains unchanged except for permanent adjustments; a separate Current Account records drawings, interest, salary and share of profit. Under the fluctuating method, these items are recorded directly in the Capital Account.
5. Profit and Loss Appropriation Account
Profit is appropriated among partners after considering items such as interest on capital, partner salary/commission and interest on drawings according to the agreement.
6. Interest on Capital
Interest on capital is an appropriation of profit when authorised by the deed. Basic calculation: Interest = Capital × Rate × Time.
Illustration: A’s capital is ₹2,00,000 and the agreed rate is 6% p.a. for a full year. Interest on capital = ₹2,00,000 × 6% = ₹12,000.
7. Interest on Drawings
Interest on drawings compensates the firm for use of business funds by a partner. The amount depends on the timing and amount of drawings.
Illustration: If ₹60,000 is withdrawn at the beginning of the year at 10% p.a., interest for a full year is ₹6,000.
8. Guarantee of Profit
A partner may be guaranteed a minimum amount of profit by another partner or partners. Any shortfall is borne according to the guarantee arrangement.
Exam Focus
- Memorise the default provisions carefully.
- Distinguish appropriation from charge against profit.
- Practise capital/current account treatment.
Chapter-Specific MCQs
- In the absence of agreement, partners share profits: (A) equally (B) according to capital (C) according to age (D) according to drawings. Answer: A.
- Interest on partner’s loan in the absence of agreement is: (A) 4% (B) 6% (C) 8% (D) 10%. Answer: B.
- Interest on capital is normally: (A) appropriation of profit (B) operating expense (C) asset (D) liability to outsider. Answer: A.
Competency Questions
- Prepare the appropriation treatment when profit, interest on capital and partner salary are given.
- Explain why the partnership deed is important even when partners trust one another.
- Calculate interest on drawings when withdrawals occur at different dates.