CBSE Class 12 Accountancy - Chapter 2: ACCOUNTING FOR PARTNERSHIP FIRMS FUNDAMENTALS (Questions and Answers) (#eduvictors)(#cbsenotes)(#Class12Accountancy)

Chapter 2: ACCOUNTING FOR PARTNERSHIP FIRMS FUNDAMENTALS 

(Questions and Answers)

CBSE Class 12 Accountancy

Q1: Define Partnership.

Answer: Section 4 of the Indian Partnership Act 1932 defines partnership as follows:

Partnership is the relations between two or more persons who have agreed to share the profits of a business carried on by all or any one of them acting for all.

In most respects a partnership is like a proprietorship except that more than one owner is involved. Like a proprietorship, for accounting purposes the partnership transactions must be kept separate from the personal activities of the partners. Partnerships are often used to organize retail and service-type businesses, including professional practices (lawyers, doctors, architects, and certified public accountants).

Q2: What are the essential features of Partnership?

Answer: Essential features of partnership are:

1. Two or More Persons

2. Agreement

3. Lawful Business

4. Mutual Agency

5. Sharing of Profit

6. Relationship of Mutual agency among the partners

Essential feature in details are:

1. There must be at least two persons to form a valid partnership. The maximum number of partners cannot exceed 10 for carrying on banking business and 20 for other kind of business.

Note:

❉ By virtue of Section 464 of the Companies Act 2013, the Central Government is empowered to prescribe maximum number of partners in a firm but the number of partners cannot be more than 100

❉ The Central government has prescribed the maximum number of partners in a firm to be 50 under Rule 10 of the Companies (Micellanous) Rules, 2014, So, a partnership firm cannot have more than 50 partners.

2. 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. A partnership can be formed for the purpose of carrying on legal business.

4. An agreement between the partners must be aimed at sharing the profits. Specific provision in the deed may allow some partners not to bear losses.

5. A partnership can be carried on by all or any one of them acting for all.

Q3: What is a partnership deed?

Answer: The Partnership Act does not require that the agreement must be in writing. But wherever it is in writing, the document, which contains terms of the agreement is called 'Partnership Deed'. 

The partnership deed is a written agreement among the partners which contains the terms of agreement.

Q4: What should a partnership deed document have?

Answer: 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. Terms 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.

Q5: In the absence of partnership deed or if partnership deed is silent, how does Indian Partnership Act apply?

Answer: In the absence of partnership deed or if partnership deed is silent, still the relevant provisions of the Indian Partnership Act 1932, are applicable:

1. Profits/losses are shared equally by all the partners

2. Interest on capital is not allowed to partners

3. Interest on drawing is not charged from partners

4. Interest on advances/loan by a partner is paid @6% p. a.

5. Remuneration (Salary and Commission etc.) to Partners not allowed.

Q6: What are the benefits of Partnership Deed?

Answer: Benefits are:

① Helps to avoid dispute in future.

② It is an evidence in the court.

③ Facilitates functioning of business by avoiding misunderstanding.

Q7: What do you mean by Partners and firm?

Answer: Persons who have entered into partnership with one another are individually called partners and collectively called 'firm'.

Q8: Is Partnership firm a legal entity?

Answer: No. A partnership firm has no separate legal entity, apart from the partner's constituting it.

Q9: What are the rights of partners?

Answer:

1. Right to participate in the management of the business.

2. Right to be constituted about affairs of the company

3. Right to inspect the books of account and have a copy of it.

4. Right to spare profits or losses with others in the agreed ratio etc.

Q10: How does distribution of profits among partners occur?

                                                    or 

         What is a Profit and Loss Appropriation Account?

Answer: A Profit and Loss Appropriation Account is prepared to show the distribution of profits among partners as per the provision of Partnership Deed (or as per the provision  of Indian Partnership Act, 1932 in the absence of Partnership Deed). It is an extension of Profit and Loss Account. It is nominal account.

All adjustments in respect of partner's salary, partner's commission, interest on capital, interest on drawings, etc are made through this account.

Q11: List the journal entries regarding Profit and Loss Appropriation Account.

Answer: The Journal Entries regarding Profit and Loss Appropriation Account are:

1. For transfer of balance of Profit and Loss Account

    Profit and Loss A/c                                                              Dr.

    To Profit and Loss Appropriation A/c

    (Being net profit transferred to P&L Appropriation A/c)

2. For Interest on Capital

    For allowing Interest on capital

1. Interest on Capital A/c

    To Partners' Capital/Current A/cs

    (Being interest on capital allowed @ % p.a.)

2. For transferring Interest on Capital to Profit and Loss

    Appropriation A/c :

    Profit and Loss Appropriation A/c         Dr.

    To Interest on Capital A/c

    (Being interest on capital transferred to P&L Appropriation A/c)

3. For Salary or Commission payable to a partner

i. For allowing Salary or Commission to a partner :

   Partners Salary/Commission A/c Dr.

   To Partner's Capital/Current A/cs

   (Being salary/commission payable to a partner)

ii. For transferring Partner's Salary/Commission A/c to Profit and Loss Appropriation A/c :

    Profit and Loss Appropriation A/c                   Dr.

    To Partner's Salary/Commission A/c

4. For transfer of Reserves :

Profit and Loss Appropriation A/c          Dr.

To Reserve A/c

(Being reserve created)

5. For Interest on Drawings:

1. For charging interest on a partner's drawings :

    Partner’s Capital/Current A/c.                    Dr.

    To Interest on Drawings A/c

    (Being interest on drawings charged @ —% p.a.)

2. For transferring Interest on drawings to Profit and Loss

    Appropriation A/c :                         Dr.

    Interest on Drawings A/c

    To Profit and Loss Appropriation A/c

    (Being interest on drawings transferred to P&L Appropriation A/c)

6. For transfer to Profit (i.e. Credit Balance of Profit and Loss Appropriation Account

Profit and Loss Appropriation A/c       Dr.

To Partners Capital A/c

(Being profits distributed among partners)

Q12: How is commission to partners computed?

Answer: It may be computed as follows:

1. If it is given as a percentage of net profit or of net profit before charging such commission.

    COMMISSION = Net Profit (before commission ) × rate of commission/100

2. If it is given as a percentage of net profit after charging such commission.

   COMMISSION=Net Profit (before commission) × rate of commission/100 +rate of commission

Q13 (MCQ): Partner's salary is debited to

    (a) Trading Account 

    (b) Profit and Loss Account

    (c) Profit & Loss Appropriation Account

    (d) None of these

Answer:    (c) Profit & Loss Appropriation Account

Q14(MCQ): Current Account of the partners should be opened, when capital are?

    (a) Fluctuating 

    (b) Fixed

    (c) Circulating 

    (d) None of these 

Answer: (b) Fixed

Q15: What time would be taken into consideration if equal monthly amount is drawn as drawings at the beginning of each month?

   (a) 7 months 

   (b) 6 months

   (c) 5 months 

   (d) 6.5 months

Answer:    (d) 6.5 months

☞See also:

Accountancy Sample Question Paper (2015)
Accountancy Sample Question Paper with Marking Scheme (2016)
Accountancy Sample Question Paper (2017-18)
Accountancy Sample Question Paper + Marking Scheme (2018-19)
Accountancy Sample Question Paper (+ MS) Set -1 (2019-2020)

Ch 1: Not For Profit Organisations (NPOs) Q & A Part-1
Ch 1: Not For Profit Organisations (NPOs) Q & A Part-2
Accountancy Basics of Partnership (Short Q & A)

MCQs -COMPARATIVE & COMMON – SIZE STATEMENTS