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INTRODUCTION:
A partnership has a different organisation that a sole proprietorship or a company. So accounting for a
partnership firm has some of its own peculiarities, like the Capital Account or the Profit and Loss
Appropriation Account. Let us learn some basic concepts of partnership accounts.

According to Section -4 of the Indian Partnership Act, 1932:

FEATURES OF PARTNERSHIP
1. Two or more persons: 
There must be at least two persons to form a valid partnership. The maximum number of
partners cannot exceed the number of partners prescribed by Companies Act, 2013 which is 50
in any business whether banking or non- banking.
2. Agreement: 
Partnership comes into existence by an agreement (either written or oral among the partners. The
written agreement among the partners is called Partnership Deed.
3. Existence of business and profit motive: 
A partnership can be formed for the purpose of carrying on legal business with the intention of
earning profits. A joint ownership of some property by itself cannot be called a partnership.
4. Sharing of Profits: 
An agreement between the partners must be aimed at sharing the profits. If some persons join
hands to run some charitable activity, it will not be called partnership. Futher, if a partner is
deprived of his right to share the profits of the business, he cannot be called as partner.
5. Buiness carried on by all or any of them acting for all: 
It means that each partner can participate in the conduct of business and each partner is bound by
the acts of other partners in respect to the business of the firm.
6. Relationship of Principal and Agent: 
Each partner is an agent ad well as a partner of the firm. An agent, because he can bind the other
partners by his acts and principal, because he himself can be bound by the acts of the other
partners.

PARTNERSHIP DEED
Since partnership is the outcome of an agreement, it is essential that there must be some terms and
conditions agreed upon by all the partners. Such terms and conditions mat be either written or oral. The
law does not make it compulsory to have a written agreement. However, in order to avoid all
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misunderstandings and disputes, it is always the best course to have a written agreement duly signed and
registered under the Act.

The partnership deed is a written agreement among the partners which contains the terms of
agreement. It is also called ‘Articles of Partnership’. A partnership deed should contain the
following points:

1. Name and address of the firm as well as partners.

2. Name and addresses of the partners.

3. Nature and place of the business.

4. Duration, if any of partnership.

5. Capital contribution by each partner.

6. Interest on capital.

7. Drawings and interest on drawings.

8. Profit sharing ratio.

9. Interest on loan.

10. Partner’s Salary/commission etc.

11. Method for valuation of goodwill and assets.

12. Accounting period of the firm and duration of partnership

13. Rights and duties of partners how disputes will be settled.

14. Decisions taken if some partner becomes insolvent.

15. Opening of Bank Account – whereas it will be in the name of firm or partners.

16. Rules to be followed in case of admission & Settlement of accounts or retirement or death of
partner.

17. Revaluation of assets & liabilities, if any to be done.

18. Method of recording of firm’s accounts

19. Auditing

20. Date of commencement of partnership

Benefits of Partnership Deed

(2) It helps to avoid any misunderstanding amongst the partners because all the terms and conditions of
partnership have been laid down beforehand in the deed.

(3) Any dispute amongst the partners may be settled easily as the partnership deed may be readily
referred to.

Hence, it is always best course to have a written partnership deed duly signed by all the partners and

Closing Stock: As the worth of closing inventories is determined at the end of the accounting year, it
seems like an adjustment. It ought to be attributable to trading a/c and shown within the asset side of the
B/S.
The entry is:
Closing Stock a/c Dr.
To trading a/c
Trading Account and balance sheet

Outstanding Expenses: These are the expenses incurred among the accounting year; however, the
payment has not been created. Outstanding or unpaid expenses ought to be else to the involved expenses
a/c in P&L a/c and can be shown as a current liability within the B/S.
For example, the Rent of the month of October 2010 Rs. One thousand remain unpaid. The year is that
the accounting year.

Adjusting Entry:
Rent account Dr. Rs.1000
To Outstanding Rent a/c Rs. 1,000
Profit and Loss Account
Balance Sheet
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Prepaid Expenses: These are the expenses that are paid; however, a part of the quantity paid extends to
the consequent year. It’s additionally known as ‘Un-expired expenses.’ The advance quantity paid ought
to be subtracted from the involved expenses and be shown as a Current plus within the B/S.
For example, the premium of Rs.2, 400 a year was paid on first July 2002. The yr is that the accounting
year. Since one year’s premium has been paid on first July, the premium for six months, i.e., 0.5, the
amount relates to the present year, and therefore the other half relates to consequent year.

Hence, Rs. One thousand two hundred should be treated as post-paid and subtracted from the premium
paid and be shown as a plus within the B/S.

Adjusting Entry:
Prepaid Insurance a/c Dr. Rs. 1, 200
To premium a/c Rs. 1, 200
Prepaid Expenses

Accrued Financial Gain: It is the financial gain that has already been earned [i.e., the service has
already been rendered]; however, the money has not been received. For instance, Interest on investments
increased Rs. 1,200.
The interest for the present year is due at the shut of the year. The quantity could also be truly received
within the next year. Nowadays, it represents a financial gain that has become due or increased. Thus
it’s attributable to P&L a/c and being assets, shown as a plus within the B/S.

Adjusting Entry:
Accrued Interest a/c Dr. Rs. 1,200
To Interest a/c Rs. 1,200
Accrued Income
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Incomes Received in Advance: These are incomes received throughout the present year. However, a
part of the amount received relates to the consequent year. Such quantity should be subtracted from the
entire amount received in P&L a/c and shown on the liabilities side of the B/S because it represents an
amount that the business is obligated to come back. For example, concern has received apprentice
premium for three years amounting to Rs.6, 000. During this quantity Rs.2, 000, i.e., 1/3 of Rs.6, 000 is
for the current year and may be attributable to P&L a/c as financial gain. And therefore, the balance
Rs.4, 000 represents a liability because the business is obligated to come back.
Adjusting Entry:
Apprentice Premium a/c Dr. Rs. 4000
To Apprentice, Premium received before Rs. 4000
Income received before

Depreciation on Assets: Depreciation suggests that diminution or fall in the worth of a plus thanks to
its constant use. It’s going to additionally arise on account of damage and tear, the lapse of your time,
and degeneration. It’s a loss to the business.
It is sometimes calculated at an explicit share on {the worth|the worth} of plus, and therefore, the
quantity therefore obtained, is initially shown on the accounting system of the P&L a/c and so
subtracted from the initial value of plus within the B/S. For Example, a business has furnishings of the
worth of Rs.50, 000 at the tip of the year it’s depreciated at five-hitter.

Adjusting Entry:
Depreciation a/c Dr. Rs. 2,500
To furnishings a/c Rs. 2,500
[5% on Rs.50, 000 = 2,500]
Depreciation on Assets
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Bad Debts: Debts represent cash due from debtors [i.e., uncollected portion of credit sales]. Once debts
become lost, it becomes dangerous debts and is treated as a loss. The quantity of dangerous debts is
debited to P&L a/c and is subtracted from Sundry Debtors within the B/S. For example, the ledger
balance in respect of sundry debtors of a merchant shows Rs.20, 000 and of this Rs. 1,000 is calculable
to be lost.
Adjusting Entry:
Bad Debts a/c Dr. Rs. 1,000
To Sundry Debtors a/c Rs. 1,000

Provision for bad and uncertain Debts: Every business features a heap of dealings by the method of
credit transactions. This provides rise to a large number of book debts or debtors. However, it’s rarely
that 100% of those debts are recovered. Hence, it becomes necessary to bring down the debtor’s balance
thereto to a true position. The same old observe is to calculate such uncertain debts at an explicit share,
supported past expertise on debtors. It’s known as Provision or Reserve for uncertain Debts. However,
the supply for bad and uncertain debts is calculated on smart debts, i.e., when deducting bad debts not
adjusted earlier. Example: The sundry debtors of a merchant at the shut of the year stood at Rs.21, 000.
It’s calculable that Rs. 1,000 is written off as bad debts, and five-hitter provision is made for uncertain
debts.

Adjusting Entries:
Bad Debts a/c Dr. Rs. 1,000
To Sundry Debtors a/c Rs. 1,000
Profit and Loss a/c Dr. Rs. 2,000
To bad Debts a/c Rs. 1,000
To Provision for uncertain Debts one,000
Profit and Loss Account
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If there’s a recent provision for uncertain debts, it ought to be adjusted [deducted] against the new
provision.

Balance Sheet

Provision for Discount on Debtors: Cash discounts are allowed to debtors so as to encourage them to
form prompt payments. When providing for bad and uncertain debts, the balance of debtors represents
debts due to sound parties. They may attempt to pay their dues on time and avail themselves of the
money discounts permissible. Hence, this discount ought to be anticipated and provided for. It is.
Therefore, the same old observe in business is to supply for a discount on debtors at a sure share on
smart debts. Example:
Suppose a merchant has sundry debtors amounting to Rs.20, 000 and he estimates that when a provision
of fifty for uncertain debts, a provision for discounts at two is fascinating. Then, on the sound debts, i.e.,
Rs. 19,000 a provision of twenty-two is formed as Reserve for Discount on Debtors.

Adjusting Entry:
Profit and Loss a/c Dr. Rs.380
To order for Discount on Debtors a/c Rs.380
Provision for Discount on Debtors
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Provision for Discount on Creditors: Creditors represent the quantity owed by the business to
suppliers of products on credit. Sound business issues create it a observe to settle accounts with creditors
in time to earn the goodwill of the creditors and additionally the discount allowed by them.
In that case, the liability in respect of sundry creditors may be reduced to the extent of discounts
anticipated. Supported the past observe, an explicit share on creditors balance is calculated as Provision
for discounts and subtracted from the creditor’s balance within the B/S, and therefore, the same amount
is attributable as again within the P&L a/c. Example: A merchant had sundry creditors at Rs. 10,000 on
thirty-first December 2002. It’s desired to form a provision of three on this quantity for discounts.

Adjusting Entry:
Reserve for Discounts on Creditors a/c Dr. Rs. 300
To Profit and Loss a/c Rs. 300
Profit and Loss Account

Balance Sheet

Interest on Capital: Often, interest at a traditional rate is allowed on the capital of the businessman
utilized within the business. This can be necessary so as to assess the potency of the business.
Otherwise, the profits would come with interest and seem at a better rate.
The interest, therefore, a charge may be a loss to the business and gain to the businessman. Therefore
it’s debited to the Profit and Loss a/c and else to the capital within the record.
Adjusting Entries:
Interest on Capital a/c Dr.
To Capital a/c
Profit and Loss a/c Dr.
To Interest on Capital a/c
Interest on Drawings: Drawings are cash withdrawn by the businessman from his capital. Even as the
business permits interest on capital, it charges interest on drawings. It’s again to the business and a loss
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to the businessman. So, it’s attributable to the Profit and Loss a/c and subtracted from the capital within
the balance sheet.

PROBLEM:
Sohail and Maham are partners in a firm sharing profit in the ratio of 5:3. The partnership
agreement provided that Sohail was to be paid salary of Rs. 1,500 per month and Maham
was to get a commission of Rs. 12,000 per year. Interest on capital was to be allowed @ 4%
p.a. and interest on drawings was to be charged @ 5% p.a. Interest on Sohail’s drawings was
Rs. 1,800 and Maham’s drawings was Rs. 1,200. Capital of Sohail was Rs. 140,000 and
Maham Rs. 100,000. The firm earned a profit Rs. 75,000 for the year ended December 31 st,
2019.
Required: Prepare Profit and Loss Appropriation Account of the firm.
 
Solution:

 
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ANALYSIS OF DATA:
Final accounts is a somewhat archaic accountancy term that refers to the ultimate balance at the end of
an accounting amount from that the monetary statements are derived. This final balance includes all of
the journal entries used to shut the books, such as:

 Wage and payroll tax accruals

 Income tax accruals Asset write-downs

 Adjustments to reserves for returns, uncertain debts, and bad inventory

 Depreciation and amortization

 Overhead allocation

 Customer billings

Thus, final accounts will refer to the ultimate balance or the monetary statements upon that they’re
based mostly. The first monetary statements are the financial statement, balance sheet, and statement of
money flows. Since final accounts refers to a company’s ending account balances, that successively are
used to produce monetary statements, this suggests that the ultimate accounts reveal the results of the
business throughout an amount, its monetary position at the end of that amount, and its sources and uses
of funds throughout that amount (which is that the purpose of the monetary statements). A final account,
or final accounting, can even be the summarized statement issued once a business dealing has been
terminated.
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CONCLUSION:
The purpose of the financial statements of a corporation is to supply insights into operations, the money
position, and the money flows of a corporation. These financial statements of a corporation are
employed by the readers to create choices relating to the allocation of resources. At a lot of refined
levels, there’s a special purpose related to every of the money statements. The financial statement
informs the reader regarding the flexibility of a business to come up with a profit. Additionally, it helps
the reader interpret the number of sales, and also the nature of the varied expenses incurred, relying
upon, however, and expense data is mass. The purpose of the balance sheet is to tell the reader regarding
this standing of the business as of the date listed on the record. This data is employed to estimate the
liquidity, funding, and debt position of an entity, and is that the basis for a variety of liquidity ratios.
Finally, the aim of the statement of money flows is to point out the character of money receipts and
disbursements, in a very kind of classes. This data is of sizeable use since money flows don’t
perpetually match the revenues and expenses shown within the financial statement. Financial statements
of a corporation have a variety of functions, relying upon who is reading the knowledge and that money
statements square measure getting used.
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References:

Books:

 A.K.Jain and Varun Jain (VK Publication):2020::Accountancy: P-13.6 to P-13.28

Websites:

 Zenwolth.com
 www.wallstreammojo.com
 Lumenlearning.com