Accounting for Partnership Firms – Fundamentals: Class 12 Accountancy Notes (CBSE)
Meaning and features of partnership, rules in the absence of a partnership deed, Profit and Loss Appropriation Account, fixed and fluctuating capital, interest on capital and drawings, commission, guarantee of profit and past adjustments — with formats and examples.
In this chapter
1. Meaning and features of partnership
Definition (Section 4, Indian Partnership Act, 1932): “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.”
- Two or more persons: at least two; at most 50.
- Agreement: oral or written. A written agreement is called the partnership deed.
- Business: carried on with a profit motive.
- Sharing of profits: in the agreed ratio.
- Mutual agency: each partner is an agent of the firm and of the other partners.
- Unlimited liability: partners are liable jointly and severally.
Memory aid — T-A-B-S-M-U: Two persons, Agreement, Business, Sharing, Mutual agency, Unlimited liability.
2. Rules in the absence of a partnership deed (Section 13)
| Matter | Rule applied |
|---|---|
| Sharing of profits and losses | Equally |
| Interest on capital | Not allowed |
| Interest on drawings | Not charged |
| Salary or commission to a partner | Not allowed |
| Interest on a partner’s loan to the firm | 6% per annum, allowed even if there is a loss |
Memory aid — E-N-N-N-6: Equal profits · No interest on capital · No interest on drawings · No salary · 6% on loan.
3. Profit and Loss Appropriation Account
It is prepared after the Profit and Loss Account to show how the net profit is distributed among the partners.
Profit and Loss Appropriation Accountfor the year ended 31 March 20XX
Dr.Cr.
| Particulars | Amount (₹) | Particulars | Amount (₹) |
|---|---|---|---|
| To Interest on Capital | xxx | By Profit and Loss A/c (net profit) | xxx |
| To Partners’ Salary / Commission | xxx | By Interest on Drawings | xxx |
| To General Reserve | xxx | ||
| To Profit transferred to Capital A/cs | xxx | ||
| xxx | xxx |
Charge — debit the Profit and Loss Account
Interest on a partner’s loan, rent paid to a partner, manager’s commission. Allowed even in a loss.
Interest on a partner’s loan, rent paid to a partner, manager’s commission. Allowed even in a loss.
Appropriation — debit the Appropriation Account
Interest on capital, partners’ salary and commission, transfer to reserve. Allowed only out of profits.
Interest on capital, partners’ salary and commission, transfer to reserve. Allowed only out of profits.
4. Fixed and fluctuating capital
| Basis | Fixed capital | Fluctuating capital |
|---|---|---|
| Accounts maintained | Two: Capital A/c and Current A/c | One: Capital A/c only |
| Interest, salary, drawings and profit | Recorded in the Current A/c | Recorded in the Capital A/c |
| Nature of balance | Capital A/c is always credit; Current A/c may be debit | Usually credit; may become debit |
| Change in capital | Only when additional capital is introduced or capital is withdrawn permanently | Every year |
Exam tip: When the question does not say which method to use, take fluctuating capital.
5. Interest on capital
- Calculated on the opening capital for the whole year, and on additional capital from the date it is introduced.
- Allowed only out of profits. If the profit is less than the total interest, the profit is shared in the ratio of interest on capital.
- Not allowed when there is a loss, unless the deed treats it as a charge.
Opening capital = Closing capital + Drawings − Share of profit − Additional capital
Also deduct interest on capital and salary credited, and add back interest on drawings, if given.
Also deduct interest on capital and salary credited, and add back interest on drawings, if given.
6. Interest on drawings
Interest = Total drawings × Rate ÷ 100 × Average period ÷ 12
| Drawings made | Monthly | Quarterly | Half-yearly |
|---|---|---|---|
| At the beginning of each period | 6.5 months | 7.5 months | 9 months |
| In the middle of each period | 6 months | 6 months | 6 months |
| At the end of each period | 5.5 months | 4.5 months | 3 months |
Example. A partner withdrew ₹2,000 at the beginning of every month. Rate of interest 10% p.a.
Interest = ₹24,000 × 10/100 × 6.5/12 = ₹1,300
- Different amounts or dates: use the product method — multiply each amount by the months remaining in the year, then calculate interest on the total product for one month.
- Date of drawing not given: charge interest for 6 months. Rate not given: no interest is charged.
7. Commission, guarantee and past adjustments
Commission on net profit
| Commission | Formula |
|---|---|
| Before charging such commission | Net profit × Rate ÷ 100 |
| After charging such commission | Net profit × Rate ÷ (100 + Rate) |
Example. Net profit before commission ₹1,10,000. A partner gets 10% commission after charging such commission.
Commission = ₹1,10,000 × 10 ÷ 110 = ₹10,000
Guarantee of minimum profit
Deficiency = Guaranteed amount − Actual share. It is borne by the guaranteeing partner, or by the other partners in their profit-sharing ratio (or the agreed ratio).
Past adjustments
If an item (such as interest on capital or salary) was omitted after the accounts were closed, pass a single adjusting entry through the partners’ Capital or Current Accounts. The Profit and Loss Appropriation Account is not reopened.
8. Exam checklist and self-test
Do
✓ Read for the words “as per deed”, “charge” and “ignore”.
✓ Take fluctuating capital when the method is not given.
✓ Show the average period or product as a working note.
✓ Read for the words “as per deed”, “charge” and “ignore”.
✓ Take fluctuating capital when the method is not given.
✓ Show the average period or product as a working note.
Avoid
✗ Allowing interest on capital in a loss.
✗ Showing interest on a partner’s loan in the Appropriation Account.
✗ Taking 6 months for drawings made at the beginning of each month.
✗ Allowing interest on capital in a loss.
✗ Showing interest on a partner’s loan in the Appropriation Account.
✗ Taking 6 months for drawings made at the beginning of each month.
1. Without a deed, at what rate is interest allowed on a partner’s loan?
6% per annum.
2. The firm has a loss and the deed is silent. Is interest on capital allowed?
No. Interest on capital is allowed only out of profits.
3. What is the average period for equal drawings made at the end of every quarter?
4.5 months.
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- Written by Vijay Adarsh, teaching commerce since 2003.
- Checked against the 2026-27 CBSE syllabus.
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