CONCEPTS OF PARTNERSHIP IN ACCOUNTING:
PARTNERSHIP:
Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are individually called partners and collectively a firm
Accounting for partnership is like the accounting of sole proprietorship. It also has the same account of charts, journal, ledger and cash journals etc. The only difference in partnership accounting is in formation, distribution of income dissolution and presentation of capital in the balance sheet
FORMATION OF PARTNERSHIP:
At the time of formation, each partner made initial investment in the business. The assets brought into the partnership by a partner should be valued at an amount agreed to by all the partners. It is necessary to take the assets in the partnership books at the agreed price
WITHDRAWAL OF FUNDS:
If any amount of assets taken by any partner from the business for his personal use, it should be recorded in a separate account of each partner called drawing account. The drawing account in partnership is similar to the drawing account of a sole proprietorship. The drawing account is closed into the respective partner's capital account in the usual manner
DISTRIBUTION OF PROFIT OR LOSS:
In a partnership firm, generally capital account may be prepared under the following two methods:
1: Fluctuating Capital Method:
In this method, Capital account is prepared by taking the opening balance of capital plus all other necessary adjustments, such as drawing, interest on capital, interest on drawing, partner’s salaries and commission, share of profit etc
2: Fixed Capital Method:
In this method, the Capital account of the partners remain fixed, and no entry is required to be passed for sharing profits, drawing or any other adjustment, like drawing, interest on capital, interest in drawing, partner’s salaries and commission
In short, the Capital account of each partner remains unchanged except for additional capital to be introduced by the partners
ADMISSION OF PARTNER IN THE PARTNERSHIP:
A new partner can be admitted into partnership with the consent of all the existing partners. When a new partner is admin, some adjustments are required to be made in the books of accounts. The new partner will have the right in the profits and properties of the firm and will also be liable to its losses and liabilities
Due to admission of a partner, revaluation of assets is necessary. As a result, gain or lose on revaluation of assets is distributed among the old or existing partners according to the agreement
RETIREMENT OF THE PARTNER:
When any partner is retired from the partnership, the following adjustment must be made:
1:Sale of interest by the retiring partner to the existing partners directly. In this case, the existing partners make payment from the private sources to retiring partner, and nothing is paid from the firm funds
2: Transfer in interest by the retiring partner to his son, daughter, wife, sister, brother or any other nominated person with the consent of other partners
3: Withdrawal of interest by the retiring partner from the firm. In this case, payment is made from the firm’s funds to the retiring partner
When the partner retires, he also gets a share in the goodwill of the firm. In this case, goodwill is treated as an asset and shall be distributed between all partners in their profit sharing ratio
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