Short Notes — Ch 16 Partnership Accounts
⚡ Ch 16 — Partnership Accounts ⭐⭐
PYQ: 5 questions — 2022·Q106, Q108 · 2024·Q44, Q45, Q58. Appeared in BOTH papers and grew 2 → 3. MCQ bank: 34 questions (Q198–226 · Q446–450). The second-biggest chapter after BRS, and the one with repeating numericals.
1️⃣ The core
Indian Partnership Act, 1932 — "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."
| Feature | Detail |
|---|---|
| Minimum partners | 2 |
| Maximum partners | 50 (prescribed by the Central Govt under Sec 464, Companies Act 2013 — the Act permits up to 100) |
| Agreement | oral or written — writing is not compulsory |
| Liability | ⭐ UNLIMITED, joint and several |
| ⭐ Mutual agency | each partner is both an owner AND an agent; his act binds all |
| Written agreement is called | Partnership Deed |
⭐ A minor CAN be admitted — but only to the benefits of the partnership (not liable for losses).
2️⃣ ⭐⭐ IF THE DEED IS SILENT — the highest-yield table
| Item | Rule when there is no deed |
|---|---|
| Profit-sharing ratio | ⭐ EQUAL — regardless of capital contributed |
| Interest on capital | ❌ NOT allowed |
| Interest on drawings | ❌ NOT charged |
| ⭐ Interest on partner's LOAN | ✅ 6% per annum |
| Salary / commission | ❌ NOT allowed |
Memory hook: Nothing is allowed except 6% on a loan, and profits are split equally. The Partnership Act applies only when there is no deed (or the deed is silent on that point).
3️⃣ Capital Accounts — Fixed vs Fluctuating
| FIXED capital | FLUCTUATING capital | |
|---|---|---|
| Accounts kept | TWO — Capital + Current | ONE — Capital only |
| Capital A/c shows | ⭐ only capital introduced/withdrawn | everything |
| Current A/c shows | interest on capital, drawings, interest on drawings, salary, share of profit | — |
| Balance | Capital A/c never changes | changes every year |
⭐ Under the fixed method, ONLY additional capital introduced appears in the Capital A/c — everything else goes to the Current A/c (2024-style question). A debit balance on a partner's Current A/c means his drawings exceeded his share of profits.
4️⃣ ⭐ Profit & Loss APPROPRIATION Account
Prepared after the P&L, to distribute profit among partners.
| Goes IN the Appropriation A/c | Does NOT (these are in the P&L) |
|---|---|
| ⭐ Partner's salary / commission | Office expenses |
| Interest on capital | Staff salaries |
| Interest on drawings (credit) | ⭐ Interest on partner's LOAN (a charge, not an appropriation) |
| Transfer to reserves | Rent, bank interest |
| Share of profit to partners |
⚠️ The trap: Interest on a partner's loan is a charge against profit (P&L), not an appropriation.
Interest on drawings entry: ⭐ Partner's Capital/Current A/c Dr · To Interest on Drawings A/c — it is a gain to the firm, so the partner is debited.
5️⃣ ⭐ Admission of a partner — the calculations
(a) New Profit-Sharing Ratio
New partner takes his share → the remaining share is split among the old partners in their old ratio.
Worked (2024·Q45): M and N share 3:2; P admitted for 1/5.
- P = 1/5; remaining = 4/5
- M = 4/5 × 3/5 = 12/25 · N = 4/5 × 2/5 = 8/25 · P = 1/5 = 5/25
- → 12 : 8 : 5 ✓
(b) Sacrificing Ratio
Sacrificing Ratio = Old Ratio − New Ratio (who gave up share) Goodwill brought by the new partner is credited to the SACRIFICING partners in that ratio.
(c) Goodwill
Worked (2024·Q58): Goodwill valued ₹30,000, appears in books at ₹12,000, Z admitted for 1/4.
- Z brings his share of the VALUED goodwill = 30,000 × 1/4 = ₹7,500 ✓
- (The ₹12,000 already in the books is written off among old partners separately — it is a distractor.)
Goodwill valuation methods: Average Profit · Super Profit · Capitalisation.
(d) Revaluation
Profit/loss on revaluation of assets & liabilities → to the OLD partners in their old ratio.
(e) Asset brought in by a partner
⭐ Recorded at CURRENT MARKET VALUE (not cost, not book value) — 2022·Q108.
6️⃣ Types of partnership & dissolution
| Type | Meaning |
|---|---|
| Partnership at will | no fixed duration |
| ⭐ Limited Partnership | at least one partner has UNLIMITED liability, others limited |
| Particular partnership | for one specific venture |
Dissolution: the main account is the ⭐ REALISATION Account (not Revaluation — Revaluation is for reconstitution). ⭐ Garner v. Murray: when a partner is insolvent, his deficiency is borne by the solvent partners in their CAPITAL RATIO (not the profit-sharing ratio).
7️⃣ 🎯 PYQs from this chapter
2024 · Q45 — M and N share 3:2; P admitted for 1/5th. New ratio?
a) 12:4:7 b) 12:8:5 c) 12:5:8 d) 8:5:12 → Ans: B (worked above)
2024 · Q58 — Goodwill valued ₹30,000, in books at ₹12,000. Z admitted for 1/4. Amount Z brings?
a) 3,000 b) 4,500 c) 7,500 d) 10,500 → Ans: C (30,000 × ¼)
2024 · Q44 — What happens when interest on drawings is charged to a partner?
a) Credited to current a/c b) Not shown c) Debited to partner's capital a/c d) None → Ans: C
2022 · Q106 — "Liability of at least one partner is unlimited whereas others are limited"
a) Partnership at will b) Limited Partnership c) General Partnership d) Particular Partnership → Ans: B
2022 · Q108 — Jack contributes land: cost ₹50,000, book value ₹25,000, market value ₹30,000. His account increases by?
a) 50,000 b) 30,000 c) 25,000 d) 1,05,000 → Ans: B (current market value)
8️⃣ High-frequency MCQ traps
| MCQ | Point |
|---|---|
| Q198 / Q200 | Min 2 partners · liability unlimited |
| Q202 / Q219 / Q220 | No deed → equal profits, no salary/commission/interest on capital |
| Q212 | ⭐ A minor CAN be admitted (to benefits only) |
| Q213 | Partner is both owner and agent |
| Q214 / Q216 | No deed → no interest on capital; loan interest 6% |
| Q203 / Q207 | Interest on drawings → debit the partner |
| Q205 | Debit balance on Current A/c → drawings exceeded profits |
| Q206 | Current accounts opened when capitals are FIXED |
| Q208 | Dissolution → Realisation A/c |
| Q209 | Garner v. Murray → insolvent partner's deficiency, capital ratio |
| Q204 / Q222 / Q446 | ⭐ Interest on loan is NOT in the Appropriation A/c |
| Q447 | Fixed method → only additional capital in the Capital A/c |
| Q449 | Revaluation profit → old partners |
| Q450 | Goodwill → sacrificing partners |
9️⃣ If you remember nothing else
Act 1932 · min 2, max 50 · liability UNLIMITED · mutual agency · No deed → equal profits, no interest on capital, no salary, but 6% on a partner's LOAN · Fixed capital → Capital A/c holds only capital, rest goes to Current A/c · Interest on drawings DEBITS the partner · Goodwill → sacrificing partners · new partner brings his share of VALUED goodwill · asset brought in at MARKET value · dissolution → Realisation A/c · Garner v. Murray → capital ratio
🔗 Related
- Full notes: L-16-PARTNERSHIP ACCOUNTS · MCQs Q198–226, Q446–450 in MCQs
- Prev: SN-15-Bank-Reconciliation-Statement · Next: SN-17-Single-Entry-System
