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Introduction to Accounting for Partnership

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  • Last Updated : 29 Jun, 2022
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A partnership generally means a relationship among people sharing a mutual interest. In accountancy, a partnership means a business set up together by two or more persons sharing a common interest to earn profit. The concept of partnership is a solution to the problems of the sole proprietorship, such as a single person bearing the risk, investing, and managing the capital alone. Hence, it can be concluded that a partnership is an agreement where two or more people agree to conduct a business together or any one of them acting on behalf of others, sharing risk, and investing capital together into a joint business to earn profit. In India, the partnership business is governed by The Indian Partnership Act, 1932. 

Definition of Partnership:

“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.” – Section 4 of The Indian Partnership Act, 1932.

 “Partnership is an agreement between persons having the contractual capacity to carry on a business in common with a view to private gain.” – L. H. Haney.

“A partnership is an association of two or more persons to carry on, as co-owners, a business for profit.” – The U.S.A. Partnership Act.

Nature Of Partnership:

A partnership is a solution to the limitations of the sole proprietorship business. Basically, the partnership is based on mutual trust and faith among the partners. So, it becomes necessary to maintain the accounts of the partnership firm as per the clauses of The Indian Partnership Act, 1932 to ensure the accounts’ accuracy, transparency, and equitability in order to maintain trust and faith amongst the partners.

Features of Partnership Firms:

1. Minimum two persons: In order to form a partnership, at least two people shall join hands together to form an agreement. There is no maximum limit on the partners mentioned in the Partnership Act, however, The Companies Act, 2013 under section 464, specifies the maximum number of partners that a firm can have is 50.

2. Agreement: The Partnership is a result of the agreement. A partnership comes into existence when all the partners agree to all the terms and conditions of the agreement. Such an agreement can be oral or written.

3. Conducting business to earn a profit: Every partnership firm comes into existence to conduct some kind of legal business with a motive to earn profit out of such business operations.

4. Profit-Sharing: One of the major reasons for the existence of the partnership firm is to earn and share the profit amongst the members. Any person who is not liable to share the profit of the firm shall not be considered a partner. But, the losses of the firm shall not be borne by all the partners. It may be agreed upon amongst the partners that one or more partners shall not be liable for losses. 

5. Principal and Agent Relationship: Every partner is both the principal as well as the agent of the firm. As the Principal, he is bound by the act of the other partners and as an agent, he can bind other partners by his act.

6. Business conducted by all or any of the partners on the behalf of the others: All the partners together can conduct a business or may agree upon a clause that one of the partners shall conduct the business on the behalf of the others. However, each partner is bound by the act of the partner conducting the business. 

Legal Status of a Firm:

A partnership firm does not have a separate legal identity in the eyes of law. It is just a collection of people conducting business together. As a result of this-

  • The firm can neither sue nor be sued in its own name. 
  • The firm cannot hold any property in its own name.
  • Assets of the firm belong to the partners jointly.
  • All partners either jointly or individually bear the liabilities of the firm.

Rights of a Partner:

1. Right to conduct the business: Every partner has a right to participate in day to day operation of business activities.

2. Right to share Profits and Losses: Every partner has a right to claim his/her share in the profit of the firm equally, or otherwise as agreed amongst the partners. However, one or more of the partners may not be liable to bear the losses, as it may be agreed by all the partners.

3. Right to be consulted: Every partner in a firm has a right to be consulted in all business-related matters

4. Right to inspect the accounts: Every partner has a right to inspect the accounts of the firm to ensure accuracy and transparency.

5. Right to Deny; Each and every partner has a right to disallow or deny the admission of a new partner.

6. Right to Retire: Every partner has a right to retire from the firm at his/her will after giving prior notice.

7. Right of Ownership: Every partner has a right to enjoy joint ownership of the partnership property.

8. Right to receive Interest on Loan: If a partner extends any kind of loan to a firm, then he/she has the right to receive interest on such amount at the rate mentioned in the partnership deed. In case of absence of deed, interest shall be allowed @6% per annum.

9. Right to Indemnify: If any of the partners pays off the expenses of the firm, then he/she has a right to be reimbursed for the same by the firm. 

Duties of a Partners:

1. It is the duty of every partner to conduct the business diligently and in accordance with the law of the nation.

2. To be faithful towards the firm and the other partners.

3. Duty not to be engaged in any kind of competitive business. If so, he shall be accountable for the profit made by such a competitive business.

4. He shall be liable to indemnify for the losses caused due to his negligence or breach of the agreement.

5. He shall act in accordance with the clauses of the Partnership Deed if any, or else in accordance with the Applied Act.

6. No partner can assign his interest in the business to any other person.

Meaning of a Partner, Firm and Firm’s Name:

Partner: A partner is an individual who has agreed to establish and carry on the business jointly with other persons with a motive to earn and share the profit of such business.

Firm: All the persons who have agreed to establish and carry on the business jointly with each other and enter into a partnership are collectively known as a Firm.

Firm’s Name: The name under which all the partners agree to conduct the business is known as a Firm’s Name.

Limited Liability Partnership:

A Limited Liability Partnership is a form of partnership where all or some of the partners have liability limited to their capital contribution. No personal property of such partners can be used for paying off the liabilities of the firm. In simple, we can understand, a Limited Liability Partnership as a hybrid of a partnership and a company. A limited Liability Partnership has features of a partnership, along with some of the features of the Company, i.e., limited liability, separate legal entity, perpetual succession, right to hold properties in the name of the firm, a common seal, etc. However, the power to conduct the business directly is restrained by the partners. So, A Limited Liability Partnership is a modified version of a partnership under which the partners can enjoy the benefits of a corporate body.

Difference Between Limited Liability Partnership and Ordinary Partnership Firm:

Basis

Limited Liability Partnership

Partnership Firm

Legal IdentityA Limited Liability Partnership has a separate legal identity in the eyes of law.An Ordinary Partnership does not have a separate legal identity apart from its partners.
Applicable ActA Limited Liability Partnership is governed under the Limited Liability Partnership Act, 2008.A partnership firm is governed under the section of the Partnership Act, 1932.
Maximum number of partnersThere is no upper limit of partners specified.A partnership firm can have a maximum of 50 members, as per the Companies Act, 2013.
 Minor partnerA Limited Liability Partnership cannot have a minor as a partner.A minor can join as a partner in a partnership firm.
Liability In a Limited Liability Partnership, all or some of the partners shall have liability limited to their capital contribution.Partners have unlimited liability,i.e., the personal assets of the partners can be used to pay the debts of the firm. 
EstablishmentA Limited Liability Partnership is created by the Law.A partnership firm comes into existence under a contract.
Perpetual Succession A Limited Liability Partnership continues to exist despite partners leaving or joining the firm.A partnership agreement comes to end whenever a partner leaves or a new one joins a firm.
Common SealA Limited Liability Partnership has a common seal that severs as a signature of the firm. There is no concept of the common seal. The documents are signed by the partners jointly or by any one of the partners on the behalf of the others.  
Ownership of the assetsA Limited Liability Partnership can own the assets in its own name.An asset of the firm is owned by the partners jointly.
Right to sueA Limited Liability Partnership can sue or can be sued by others in its own name.A partnership firm cannot sue nor can be sued by others in its own name. The partners are held responsible for all the acts of the firm.
Binding DocumentsA Limited Liability Partnership is bound by an agreement.A Partnership Deed is a major binding document.
Registration RequirementIt is mandatory to register a Limited Liability Partnership under the Limited Liability Partnership Act, 2008.Registration of the partnership is optional.

  


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