Partnership

Step 1: Definition.
As per the 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.”
Step 2: Key characteristics.

Agreement: It is based on an agreement (oral or written).
Number of partners: Minimum 2, maximum 50 in India (as per Companies Act rules).
Profit-sharing: Partners share profits and losses in agreed ratio or equally if no agreement.
Mutual agency: Every partner is both an agent and principal; acts of one bind all.
Unlimited liability: Partners’ liability is unlimited and joint.
No separate legal entity: Firm is not separate from partners.
Registration: Registration is desirable but not compulsory.

Final Answer: % Quciktip

Step 1: Define.
Also called \emph{partnership agreement}; while writing is not compulsory, a deed avoids disputes and overrides default rules of the Partnership Act.
Step 2: Contents (indicative).
Names/addresses, business nature, capitals, profit/loss ratio, interest on capital/drawings, partners’ remuneration, admission/retirement clauses, valuation of goodwill, settlement on dissolution, arbitration, etc.
Final Answer: % Quciktip

Step 1: When used.
Gaining ratio is used on \emph{retirement/death} of a partner or when remaining partners increase their shares.
Step 2: Compute for each partner.
For partner : , similarly for , etc. Positive result indicates gain; negative indicates sacrifice.
Step 3: Purpose.
To apportion goodwill/reserve adjustments and revaluation effects fairly among the gaining partners.
Final Answer: % Quciktip

Step 1: Identify amounts \emph{owed by the deceased to the firm.}
Any personal withdrawals (Drawings) until the date of death reduce the amount payable and are therefore debited. Interest on those drawings is also debited.
Step 2: Bring assets and liabilities to fair value.
If Revaluation A/c shows a \emph{loss}, each partner—including the deceased—is debited in the old ratio. Hence the deceased partner’s capital bears his share of revaluation loss.
Step 3: Adjust accumulated losses/fictitious assets.
Balances such as debit P& L, Deferred Revenue Expenditure, Advertisement Suspense, etc., are written off by debiting partners’ capital accounts in the old ratio, including the deceased partner.
Step 4: Record current-period loss up to the date of death.
The deceased partner’s share in business loss up to the date of death (ascertained by time/turnover method or interim accounts) is debited to his Capital A/c. (Note.) Items like Interest on Capital, Salary/Commission, Share of reserves and revaluation \emph{profit} are \emph{credited}, not debited.
Final Answer: % Quciktip

Point 1: Sacrificing ratio. Old share – New share = Sacrifice. Used to compensate sacrificing partners with goodwill. Point 2: Gaining ratio. New share – Old share = Gain. Used to distribute goodwill brought in by new partner.
Final Answer: % Quciktip

Step 1: Meaning of reconstitution.
Reconstitution of partnership occurs when there is a change in agreement, e.g., admission, retirement, death, or change in profit-sharing ratio.
Step 2: Legal necessity.
It is necessary to ensure fair distribution of rights and liabilities among partners. Without reconstitution, old terms would remain unfair.
Step 3: Conclude.
Therefore, reconstitution of partnership is necessary.
Final Answer:

Step 1: Meaning of sacrificing ratio.
Sacrificing ratio = the ratio in which old partners sacrifice their share of profit in favour of the new partner.
Step 2: Treatment of goodwill.
The amount of goodwill brought by the new partner is distributed to the old partners in their sacrificing ratio, to compensate them for loss of future profits.
Step 3: Conclude.
Hence, goodwill is always shared in sacrificing ratio.
Final Answer:

Step 1: Old ratio.
Hari : Roy : Prasad = 3 : 5 : 1. Total parts = 9.
Step 2: Shares of each partner.
Hari = 3/9, Roy = 5/9, Prasad = 1/9.
Step 3: Adjustment after retirement.
Roy retires. His share = 5/9 is taken by Prasad. So, new shares: Hari = 3/9 = 1/3
Prasad = 1/9 + 5/9 = 6/9 = 2/3
Step 4: Ratio.
Hari : Prasad = 1 : 2. Wait carefully! Actually above shows 1:2, but let us check again. Hari = 3/9 = 1/3. Prasad = 1/9 + 5/9 = 6/9 = 2/3. Ratio Hari : Prasad = 1/3 : 2/3 = 1 : 2. Correction. The correct ratio is 1 : 2.
Final Answer:

Step 1: Old ratio.
X : Y : Z = 3 : 4 : 3. Total = 10. So X = 3/10, Y = 4/10, Z = 3/10.
Step 2: After retirement.
Y retires → his 4/10 share is to be divided. X and Z share equally = 2/10 each.
Step 3: New shares.
X = 3/10 + 2/10 = 5/10. Z = 3/10 + 2/10 = 5/10.
Step 4: Ratio.
X : Z = 5/10 : 5/10 = 1 : 1.
Final Answer:

Step 1: Nature of accumulated profits.
Accumulated profits (Reserves, General Reserve, Undistributed Profits) belong to existing partners.
Step 2: Adjustment during reconstitution.
At admission, retirement, or death of a partner, these profits are transferred to partners’ capital accounts in their old profit-sharing ratio.
Step 3: Conclude.
Thus, accumulated profits are transferred to Partners’ Capital A/c.
Final Answer:

Step 1: Credit items in Capital A/c.
Partner’s Capital A/c is credited with all benefits given to partners: Capital introduced, Interest on Capital, Share of Profit, Goodwill, etc.
Step 2: Debit items in Capital A/c.
It is debited with amounts withdrawn by partners (Drawings), Interest on Drawings, and Share of Loss.
Step 3: Conclude.
Hence, Interest on Capital is credited to the Partner’s Capital A/c.
Final Answer:

Step 1: Usual treatment of goodwill.
When goodwill is brought in cash by a new partner, it is credited to the old partners’ capital accounts in their sacrificing ratio.
Step 2: Case of non-payment.
If the new partner does not bring goodwill in cash, then his capital account is debited (reduced), and the sacrificing partners are compensated by crediting their capital accounts.
Step 3: Conclude.
Hence, when goodwill is not brought in cash, it is debited to the New Partner’s Capital A/c.
Final Answer:

Step 1: Provision of Partnership Act, 1932.
If no partnership deed is made, certain rules of the Act automatically apply.
Step 2: Rule regarding salaries.
As per the Act, no partner is entitled to salary for participating in business unless a written agreement (deed) allows it.
Step 3: Conclude.
Therefore, in the absence of a partnership deed, partners shall not be paid salaries.
Final Answer:

Step 1: Meaning of partnership agreement.
A partnership agreement (also called Partnership Deed) contains terms and conditions agreed upon by partners.
Step 2: Legal requirement.
As per the Indian Partnership Act, 1932, preparation of partnership deed is not compulsory. If partners wish, they may prepare it in writing, otherwise oral agreement is valid.
Step 3: Consequence if not prepared.
If no deed is prepared, provisions of the Partnership Act apply by default (e.g., no salary, equal profit-sharing).
Step 4: Conclude.
Thus, preparation of partnership agreement is voluntary, not compulsory.
Final Answer:

Step 1: Legal capacity.
According to the Indian Contract Act, only a person competent to contract can become a partner.
Step 2: Condition of majority.
A person must be an adult (18 years or above) of sound mind to become a full partner. A minor cannot be a partner, but may be admitted to benefits of partnership with consent of all partners.
Step 3: Conclude.
Hence, it is essential to be an Adult to become a partner.
Final Answer:

Step 1: Historical context.
The Indian Partnership Act was enacted to regulate the rights, duties, and liabilities of partners.
Step 2: Year of commencement.
The Act was passed in 1932 and came into effect from 1st October 1932.
Step 3: Conclude.
Thus, the Partnership Act came into force in 1932.
Final Answer: