CLASS - 12TH | CHAPTER- 1 | T.S. GREWAL | EXAMPLE- 68 | FUNDAMENTAL OF PARTNERSHIP | ACCOUNTS |2023

Partnership is a significant concept in accounting, wherein two or more individuals come together to combine their resources and skills to run a business with a common objective. The 12th-grade accounts curriculum includes a comprehensive study of partnership accounts, understanding the allocation of profits, sharing of responsibilities, and dissolution of partnerships. In this essay, we will delve into the partnership chapter, providing real-world examples to grasp the concepts better.
Nature and Characteristics of Partnership
Partnership is characterized by mutual trust, understanding, and cooperation among partners. An excellent example of a partnership firm is a law firm where lawyers with distinct expertise join hands to serve clients more effectively. They share profits and losses based on the agreed-upon ratio, and each partner has a voice in business decisions.
Partnership Deed
The partnership deed is a legal document that outlines the terms and conditions of the partnership. For example, John and Jane agree to start a bookstore with an initial investment of $10,000 each. The partnership deed will specify the profit-sharing ratio, responsibilities, salaries, and other relevant aspects.
Allocation of Profits and Losses
Partners share profits and losses as per the agreed ratio in the partnership deed. For instance, if Alex and Michael share profits in a 3:2 ratio and the annual profit is $60,000, Alex receives $36,000 (3/5 * $60,000), and Michael receives $24,000 (2/5 * $60,000).
Accounting for Partners' Capitals
In partnership accounting, each partner's capital account is maintained to record their initial investment, additional investments, and withdrawals. Suppose Tom invests $20,000 and Mary invests $30,000 in a software development partnership. The capital account of Tom will reflect $20,000, and Mary's will show $30,000.
Interest on Capital and Drawings
Partners may be entitled to interest on their capital at the agreed-upon rate. For instance, if the interest on capital is 10%, and David has invested $50,000, he will receive an additional $5,000 as interest. Drawings, which are the amounts partners withdraw for personal use, are deducted from their respective capital accounts.
Distribution of Reserves and Accumulated Profits
Partnership firms often set aside a portion of profits as reserves for future contingencies or expansion. For example, if a partnership makes a profit of $100,000 and decides to transfer $20,000 to the General Reserve, each partner's capital account will reflect their share of the remaining profit after deducting the reserve amount.
Treatment of Goodwill
Goodwill represents the value of the business's reputation, customer base, and other intangible assets. If two partners, Sam and Ben, decide to form a partnership, and the goodwill of the business is valued at $50,000, each partner will contribute half of the goodwill amount to their capital accounts.
Admission of a New Partner
When a new partner joins an existing partnership, the accounting entries must reflect the adjustments in capital accounts and the sharing of profits. Suppose Sarah joins a partnership and invests $25,000 with a profit-sharing ratio of 1:3 with existing partners Mike and Kate. The capital accounts will be adjusted accordingly.
Retirement of a Partner
When a partner decides to retire, the partnership must settle their dues. For instance, if John decides to retire with a credit balance of $30,000 in his capital account and the partnership has agreed to pay him in installments, the remaining partners will bear the responsibility of paying him his dues.
Dissolution of a Partnership
Partnerships can be dissolved due to various reasons, such as mutual agreement, death of a partner, or bankruptcy. Upon dissolution, the assets are liquidated, liabilities settled, and the remaining funds, if any, are distributed among the partners according to their profit-sharing ratio.
Conclusion
The partnership chapter in 12th class accounts books is a crucial aspect of understanding how businesses operate collaboratively. Through real-world examples like law firms, software development partnerships, and bookstores, students can grasp the nature, characteristics, and accounting procedures related to partnerships. This knowledge equips them to navigate the complexities of partnerships in the business world successfully.

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