Partnership Accounts -Fundamental, Meaning and features

Fundamental of Partnership Accounts

Partnership Act 1932

1) This Act may be called the Indian Partnership Act, 1932.

(2) It extends to the whole of India except the State of Jammu and Kashmir. ( The Jammu and Kashmir State Partnership Act, 1996)

(3) It shall come into force on the 1st day of October, 1932, except section 69 which shall come into force on the 1st day of October, 1933.

(4) Total Sections 1 to 74

(5) It is an Act that governs the partnership firms.

(6 )In case, Partnership Deed is silent on an issue, provisions of the Indian Partnership Act, 1932 are applied  ( section 13 b)

Simple Meaning of partnership

Partnership is a voluantry association of two or more persons who agree to carry on a lawful business jointly and share its profit and losses according to the agreement amongst them. They combine their funds and skills to carry on business together.

According to the Indian Partnership Act 1932, section-4

“Partnership is relation between persons who have agreed to share profits of a business carried on by all or any one of them acting for all”.

The persons who enter into partnership with the one another are individually called ‘                                                 partners’ and collectively a ‘firm’.

The name under which they carry on business is called name of ‘firm’.

Partner : The persons who have agreed to carry on a business and share its profits and losses,  upon the terms and conditions of partnership.

Firm : Partners who carry on the business are collectively known as firm. The name under which the business is carried on is called firm name.

Key points of Definition

  • relation between persons ( Arises from contract)
  • (must be at least two persons  The maximum number of partners in a partnership firm can be 50
  • (according to Companies Act 2013.section 464) ( Rule 10 of the Companies  Rules 2014)
  • who have agreed
  • to share profits
  • of a business ( Lawful)
  • carried on by all or any one of them acting for all

Characteristics of partnership

  • Agreement : A partnership is formed by an agreement. The agreement may be either oral or in writing. It defines the relationship between the persons, who agree to carry on business. It may contain the terms of sharing profit and the capital to be invested by each partner, etc. The written agreement is known as partnership deed.
  • Number of persons : There must be at least two persons to form a partnership. The maximum number of partners in a partnership firm can be 50 according to Companies Act 2013.
  • Legal Business : The Partnership is formed to carry on business with a purpose of earning profits. The business should be lawful. Thus, if two or more persons agree to carry on unlawful activities, it will not be termed as partnership.
  • Sharing Profits : The partners agree to share profits in the agreed ratio. In case of loss, all the partners have to bear it in the same agreed profit sharing ratio.
  • Mutual Agency : Every partner is an agent of the other partners. Every partner can bind the firm and all other partners by his/her acts. Each partner will be responsible and liable for the acts of all other partners.
  • Unlimited liability : The liability of each partner, except that of a minor, is unlimited. Their liability extends to their personal assets also. If the assets of the firm are insufficient to pay off its debts, the partners’ personal property can be used to satisfy the claim of the creditors of the partnership firm.
  • Management : All the partners have a right to manage the business. However, they may authorize one or more partners to manage the affairs of the business on their behalf.
  • Transferability of Share : No partner can transfer his/her share to any one including his/her family member without the consent of all other partners.
  • Utmost good faith: The relation relations between partners are based upon mutual trust and confidence.

LEGAL STATUS OF A FIRM

    • A firm is not a separate legal entity. In other words firm is not a legal person, it is merely a collection of partners. Hence, firm does not acquires an identity different from its partners. In this connections followings points are worth mentioning :
    • A firm cannot hold property in its own name.
    • A firm cannot sue & be sued in its own name.
    • Assets of the firm are the joint property of the partners.
    • All partners are jointly & separately i.e., individually liable for the                                                business obligation of the firm.

Rights of Partner

  • Right of the partner to take part in the day-to-day management of the
  • Right to be consulted and heard while taking any decision regarding the business.
  • Right of access to books of accounts and call for the copy of the same.
  • Right to share te profits equally or as agreed upon by the partners.
  • Right to get interest on capital contributed by the partners to the firm.
  • Right to avail(advantage or benefit) interest on advances paid by the partners for business purpose.
  • Right to be indemnified(compensate) in respect of payment made or liabilities incurred or for protecting the firm from losses.
  • Right to the use of partnership property only for partnership business (not himself.)

Duties of a Partner

  • To carry on the business to the greatest common advantage:
  • every partner is bound to carry on the business of the firm to the greatest common advantage. In other words, the partner must use his knowledge and skill in the conduct of business to secure maximum benefits for the firm.
  • To be just and faithful to each other:
  • Every partner must be just and faithful to other partners of the firm. Every partner must observe utmost good faith and fairness towards other partners in business activity.
  • To render true accounts:
  • Every partner must render true and proper accounts I his co-partners. Each and every entry in the books must be supported by vouchers and di explanations if demanded by other partners.
  • To provide full information:
  • Every partner must provide full information of £ activities affecting the firm to the other co-partners. No information should be concealed, kept secret.
  • To attend diligently to his duties:
  • Every partner is bound to attend diligently to duties in the conduct of the business of the firm.
  • To work without remuneration:
  • A partner is not entitled to receive any kind remuneration for taking part in the conduct of the business. But in practice, the working partners are generally paid remuneration as per agreement, so also commission in some case.

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