Short/Long type answer questions

Topic:  Partnership

Q.1.  Define partnership?

Ans.  When two or more persons enter into an agreement to carry on business and share its profit and losses, it is a case of partnership. The Indian partnership Act, 1932, defines partnership as follows:

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

Q.2. What do you understand by ‘partner’, ‘firm’ and firms’ name?

Ans.The persons who have entered in to a partnership with one another are individually called ‘partners’ and collectively ‘a firm’ and the name under which the business is carried is called firm’s name’.

Q.3. Write any four main features of partnership.

Ans. Essential elements or main features of partnership:

(i)  Two or more persons: partnership is an association of two or more persons.

(ii)  Agreement: The partnership is established by an agreement either oral or in writing.

(iii)  Lawful business: A partnership formed for the purpose of carrying a business, it must be legal business.

(iv) Profit sharing: Profit of the firm is share by the partners in an agreed ratio, if the ratio is not agreed then equally. Profit also includes loss.

Q.4. What is the minimum and maximum number of partners in all partnership?

Ans.  There should be at least two persons to form a partnership. The maximum number of partners in firm carrying a banking business should not exceed ten and in any other business should not exceed twenty.

Q.5. What is the status of partnership from accounting viewpoint?

Ans. From an accounting viewpoint, partnership is a separate business entity. From legal viewpoints, however, a partnership, like a sole proprietorship, is not separate from the owners.

Q.6. What is meant by partnership deed?

Ans.  Partnership deed is a written agreement containing the terms and conditions agreed by the partners.

Q.7. State any four contents of a partnership deed.

Ans.

(i)   The date of formation and the duration of the partnership

(ii)  Name and address of the partners

(iii) Name of the firm.

(iv) Interest on Partners capital and drawings

(v)  Ratio in which profit or losses shall be shared.

Q.8.  What are the provision that are applicable in the absence of partnership deed?

Ans.  In the absence of partnership deed, the provision of the Indian partnership Act. 1932 decide the rights and duties of the partners. Some of the important provisions given under section 13 of the Act, which affect the accounting process of the firm are as follows:

1. Interest on capital: No interest on capital will be allowed to the partners. If there is a provision for the interest on capital in the partnership deed. It will be allowed only when there is a sufficient profit. [Sec.13(C)]

2. Interest on drawings: No interest is to be charged on drawings.[Sec.13]

3.Profit sharing ratio: Profits and losses will be shared equal ratio irrespective of their capital contribution [Sec.13(B)]

4. Salary to a partner: No partner is entitled to any salary or commission for taking active part in business activities.[13(A)]

5. Interest on partners’ loan: Interest at the rate of 6% per year will be allowed on a partner’s loan to the firm. Such interest shall be paid even if there are losses to the firm.[Sec13(D)]

Some other important provisions of the partnership Act, 1932

(i)   With the consent of all the partners for the time being, a minor may be admitted in the firm for the benefit of partnership.[Sec.30]

(ii)  A person may be admitted as new partner, if all the existing partners agreed on his admission.[Sec.31]

(iii)  A partner may retire from the firm either with the consent of all the existing partners or in accordance with an express agreement among the partners.[Sec.32]

(iv) Unless otherwise agreed by the partners, a firm is dissolved on the death of a partner.[Sec.35]

It should be noted that above provisions are applicable in the absence of written agreement. Partners may change any of the above provisions by making an agreement.

Q.8.  In the absence of Partnership deed, how are mutual relations of partners governed?

Ans.  In the absence of partnership deed, mutual relations are governed by the partnership Act, 1932.

Q.9.  Give any two reason in favors of having a partnership deed.

Ans.

(i)  In case of any dispute or doubt, partnership deed is the guiding document.

(ii)  It can specify the duties and powers of each partner.

Q.10. State the provision of ‘Indian partnership Act, 1932’ relating to sharing of profits in absence of any provision in the partnership deed.

Ans. In the absence of any provision in the partnership deed, profit or losses are share by the partners equally.

Q.11. Why is it important to have a partnership deed in writing?

Ans. Partnership deed is important since it is a document defining relationship of among partners thus is assistance in settlement of disputes, if any and also avoids possible disputes: it is good evidence in the court.

Q.12. What is profit and loss appropriation account?

Ans. "Profit and loss appropriation account" is an extension of profit and loss account and it is prepared to show how nent profit earned by a firm has been distributed among partners. It is a nominal type of account.

Example : Ram and Shyaam Started a partnership business on 1st January, 2014, their contribution were Rs. 200000 and Rs. 150000 respectively. The partnership deed provided:

(I) Interest on capital at 10% p.a.

(II) Ram to get salary of Rs. 2000 p.m. and Shyam Rs. 3000 p.m.

(III) Profits are to be shared in the ratio of 3:2.

The profits for the year 31st December,2014 before making above appropriations were Rs. 216000. Interest on drawing amounted to Rs. 2200 for Ram and Rs. 2500 for Shyam. Prepare Profit and Loss Appropriation Account.

Note: Some Important points that you should remember while preparing Profit and Loss Appropriation account.

Sometimes, some adjustments are giben with the appropriation of net profit. Such as: manager commission, provision for bad-debts, provision for depreciation, interest on partners' loan, Rent paid to a partner etc. These must be taken into account before final division of profit.

All of these are called charge against profit not appropriations of profit. Hence if any of these adjustments are given with appropriations then it will be shown on the debit side of profit and loss account bnot in the profit and loss appropriation account.

Example: A and B are partners sharing profits in the ratio of 3:2 with capitals of Rs. 50,000 and Rs. 30,000 respectively. Interest on capital is agreed @6% p.a. B is to be allowed an annual salary of Rs. 2500. During the year ended 31 March 2016 the profits of the year prior to the calculation of interest on capital but after charging B's salary amounted to Rs. 12,500. A provision of 5% of the profits is to be made in respect of manager commission. 

Prepare profit and loss Appropriation account.