SYBAF – Financial Accounting – Partnership A/c 01(Introduction)

WHY PARTNERSHIP?

A partnership is created by individual parties believing they can better achieve their goals by working together. It helps to Add resources (Capital) when Only one is not capable of arranging the entire sum, Also there are many other Patters such as, One partner Brings capital, whereas the other Runs the business.

The Indian Partnership Act defines partnership as “the relationship between persons who have agreed to share the profit of a business carried on by all or any of them acting for all.”

ESSENTIAL FEATURES ?

1. An association of two or more persons;

2. An agreement entered into by all persons concerned;

3. Existence of a business;

4. The carrying on of such business by all or any one of them acting for all; and

5. Sharing of profits of the business (including losses).

6. Unlimited liability of all partners.

The persons who enter into such an agreement are called partners and the business is called a firm.

and the agreement is known as PARTNERSHIP DEED.

(Unlimited liability means :-  If there is loss in the business, and each partner has to bear the loss, for Eg; Each partner has to bear Rs. 100,000 as loss, hence he would need to satisfy this amount by any means, by that it means, he may also need to sell his personal assets to satisfy the loss amount)

Hence I would prefer Partnership, but without the Feature of UNLIMITED LIABILITY.

To same can be found in a LIMITED LIABILITY PARTNERSHIP (LLP)

The Limited Liability Partnership (LLP) is viewed as an alternative corporate business proposal that provides the benefits of limited liability but allows its members, the flexibility of organizing their internal structure as a partnership, which is based on a mutually arrived agreement. 

What is Partnership deed, & what does it contain?

1. Name of the firm and the partners;

2. Commencement and duration of business;

3. Amount of capital to be contributed by each partner;

4. Amount to be allowed to each partner as drawings and the timings of such drawings;

5. Rate of interest to be allowed to each partner on his capital and on his loan to the firm, and to be charged on his drawings;

6. The ratio in which profits or losses are to be shared;

7. Whether a partner will be allowed to draw any salary;

8. Any variations in the mutual rights and duties of partners;

9. Method of valuing goodwill on the occassions of changes in the constitution of the firm ;

10. Procedure by which a partner may retire and the method of payment of his dues;

11. Basis of the determination of the executors of a deceased partner and the method of payment;

12. Treatment of losses arising out of the insolvency of a partner;

13. Procedure to be allowed for settlement of disputes among partners;

14. Preparation of accounts and their audit.

Well the surprising part is,

Registration of the firm is not compulsory, but non-registration restricts the partners or the firm from taking any legal action.

Often there is no written Partnership Deed or, if there is one, it may be silent on a particular point. In that case the relevant sections of the Partnership Act will apply.

If on any point the Partnership Deed contains a clause, it will hold good; otherwise the provisions of the Act relating to the questions will apply.

It means that, if the profit sharing Ratios are not given, Then they will be assumed as per provision of Partnership Act 1932. (The provision says, if the PSR is silent, then it will be equal between all partners)