Following are the statements related to partnership form of business organisation.
Rewrite the statement in correct form if found wrong.
(a) Maximum 20 partners can join in a partnership firm running banking business.
(b) Partnership Deed may be either oral or in writing.
(c) There is an employer-employee relationship among the partners.
(d) In a partnership firm Hari and Madhu contributed Rs. 10,000 each Madhu’s
liability would be limited to Rs. 10,000 in case of losses in firm’s business.
(e) A person acquired interest in a partnership firm by virtue of his relationship
with the existing partners
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Accountancy > Accounting for Partnership > Nature of Partnership and Partnership Deed
Accounting for Partnership
Nature of Partnership and Partnership Deed
Before we dive into the accounting of a partnership firm, it is important that we learn the basics of partnership. The essentials that make a partnership are unique and valuable information before we learn accounting effects. Also, we will look at the basics of a partnership deed. Let us get started.
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Objectives of Business
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Nature of Partnership
When two or more persons join hands to set up a business and share its profits and losses it is called Partnership. Section 4 of the Indian Partnership Act 1932 defines partnership as 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’.
Partners are the persons who have entered into partnership individually with one another. Partners collectively are called ‘firm’. The essential features of the partnership are as follows.
Browse more Topics under Accounting For Partnership
Distribution of Profit Among Partners
Guarantee of Profit to a Partner, Past Adjustments and Final Accounts
Special Aspects of Partnership Accounts and its Maintenance
Two or More Persons
There should be at least two persons coming together to form the partnership for a common goal. In other words, the minimum number of partners in a partnership firm can be two.
Indian Partnership Act, 1932 has put no limitations on maximum numbers of partners in a firm. But however, Indian Companies Act, 2013 puts a limit on a number of the partners in a firm as follow:
For Banking Business, Partners must be less than or equal to 10.
For Any Other Business, Partners must be less than or equal to 20.
If the number of partners exceeds the limits, the partnership becomes illegal.
Agreement
The partnership is an agreement between two or more persons who decided to do business and share its profits and losses. To have a legal relationship between the partners, the partnership agreement becomes the basis. The agreement can be in written form or oral form. An oral agreement is equally valid. But, preferably the partners should have a written agreement, in order to avoid disputes in future.
Business
To carry on some business there should be an agreement. Mere co-ownership of a property does not amount to the partnership. The business must also be legal in nature, a partnership to carry out illegal business is not valid.
Mutual Agency
The business of a partnership firm may be carried on by all the partners or any of them acting for all. This statement has two important implications. First, to participate in the conduct of the affairs of its business, every partner is entitled. Second that a relationship of mutual agency between all the partners exists.
For all the other partners, each partner carrying on the business is the principal as well as the agent. He can bind other partners by his acts. And also is bound by the acts of other partners with regard to the business of the firm.
Sharing of Profit
The agreement between partners must be to share profits and losses of a business. Sharing of profits and losses is important. The partnership is not for the purpose of some charitable activity.
Liability of Partnership
Each partner is liable jointly with all the other partners. And also when is a partner, severally liable to the third party for all the acts done by the firm. Liability of the partner is not limited. This implies that for paying off the firm’s debts, his private assets can also be used.