📑 Topics on this page (Jump to Topic):
📌 1. Partnership & Deed
- Indian Partnership Act 1932, Section 4: "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."
- Minimum 2 partners; maximum 50 (Section 464 of the Companies Act 2013 and the Companies (Miscellaneous) Rules 2014).
- Partnership deed — written agreement: profit ratio, capital, interest, salary, drawings etc. Registration is not compulsory but desirable.
- Limited Liability Partnerships come under a separate law — the LLP Act 2008.
| Item | Rule in absence of deed (Section 13) |
|---|---|
| Sharing profits/losses | Equally |
| Interest on capital | Not allowed |
| Interest on drawings | Not charged |
| Salary/commission to partner | Not allowed |
| Interest on partner's loan | 6% per annum |
📌 2. Fixed & Fluctuating Capital
| Basis | Fixed capital method | Fluctuating capital method |
|---|---|---|
| Accounts | Two — capital A/c and current A/c | One — capital A/c only |
| Interest, salary, profit, drawings | In current A/c | In capital A/c |
| Balance | Capital A/c always credit; current A/c debit or credit | Usually credit, can be debit |
📌 3. P&L Appropriation Account
It is an extension of the P&L account showing how net profit is distributed among partners. Debit: interest on capital, partners' salary/commission, transfer to reserve, residual profit. Credit: net profit, interest on drawings.
| Profit & Loss Appropriation Account (A and B, ratio 3:2) | |||||
|---|---|---|---|---|---|
| Dr. Date | Particulars | ₹ | Cr. Date | Particulars | ₹ |
| To Interest on Capital: A 6,000; B 4,000 | 10,000 | By Net Profit b/d | 1,00,000 | ||
| To B's Salary | 12,000 | By Interest on Drawings: A | 1,000 | ||
| To Profit transferred: A 47,400; B 31,600 | 79,000 | ||||
| Total | 1,01,000 | Total | 1,01,000 | ||
Working: 1,00,000 + 1,000 − 10,000 − 12,000 = 79,000; A = 79,000 × 3/5 = 47,400; B = 31,600.
- Interest on a partner's loan is a charge against profit → P&L A/c, not the appropriation account.
- Interest on capital is an appropriation of profit — not allowed in a loss year unless the deed says otherwise.
📌 4. Interest on Drawings
| Timing (equal monthly, 12 months) | Average period |
|---|---|
| At the beginning of each month | 6.5 months |
| In the middle of each month | 6 months |
| At the end of each month | 5.5 months |
Example: ₹2,000 drawn at the start of every month, interest 10% p.a. → 24,000 × 10% × 6.5/12 = ₹1,300.
⚠️ Exam Traps:
- Without a deed, a partner's loan earns 6% interest, but capital earns nothing.
- The appropriation account is for partnerships/companies; a sole trader adds net profit straight to capital.
💡 Memory Tip: Remember Section 13: "equal profits, 6% on loans, everything else nil".
📌 5. Worked Examples
Example: Profit & Loss Appropriation Account
A and B have capitals ₹2,00,000 and ₹1,00,000; interest on capital 10%; B's salary ₹24,000 a year; interest on drawings A ₹2,000, B ₹1,000; net profit before appropriation ₹90,000; profit ratio 3:2.
| Profit & Loss Appropriation Account | |||
|---|---|---|---|
| Dr. Particulars | ₹ | Cr. Particulars | ₹ |
| Interest on capital — A | 20,000 | Net profit | 90,000 |
| Interest on capital — B | 10,000 | Interest on drawings — A | 2,000 |
| Salary to B | 24,000 | Interest on drawings — B | 1,000 |
| Profit — A (3/5) | 23,400 | Total | 93,000 |
| Profit — B (2/5) | 15,600 | ||
| Total | 93,000 | ||
Divisible profit = 93,000 − (20,000 + 10,000 + 24,000) = ₹39,000; A = 39,000 × 3/5 = ₹23,400, B = ₹15,600. Interest on a partner's loan, if any, would go to the P&L account (as a charge), not the appropriation account.
📌 6. Practice MCQs
📝 Practice MCQs (prepared by SF Prep — not PYQs)
Q1. The Indian Partnership Act was passed in: Practice
Correct answer: (A)
In force from 1 October 1932 (except Section 69).
In force from 1 October 1932 (except Section 69).
Q2. In the absence of a deed, profits are shared: Practice
Correct answer: (C)
Section 13(b).
Section 13(b).
Q3. Without a deed, interest on a partner's loan is: Practice
Correct answer: (D)
Section 13(d).
Section 13(d).
Q4. Without a deed, interest on capital is: Practice
Correct answer: (B)
Only if the deed provides.
Only if the deed provides.
Q5. The maximum number of partners in a firm is: Practice
Correct answer: (B)
Section 464 of the Companies Act 2013 with the 2014 Rules.
Section 464 of the Companies Act 2013 with the 2014 Rules.
Q6. Interest on a partner's loan is shown in the: Practice
Correct answer: (C)
It is a charge against profit.
It is a charge against profit.
Q7. The credit side of the P&L appropriation account shows: Practice
Correct answer: (D)
It is income for the firm.
It is income for the firm.
Q8. Under the fixed capital method, each partner has: Practice
Correct answer: (A)
Interest, salary and profit go to the current account.
Interest, salary and profit go to the current account.
Q9. For equal drawings at the start of each month (12 months), the average period is: Practice
Correct answer: (D)
(12 + 1) ÷ 2 = 6.5.
(12 + 1) ÷ 2 = 6.5.
Q10. ₹2,000 drawn at the start of every month, interest 10% p.a. Interest on drawings for the year is: Practice
Correct answer: (A)
24,000 × 10% × 6.5/12 = 1,300.
24,000 × 10% × 6.5/12 = 1,300.
Q11. Net profit ₹1,00,000; interest on capital ₹10,000; B's salary ₹12,000; interest on drawings ₹1,000. Divisible profit is: Practice
Correct answer: (B)
1,00,000 + 1,000 − 10,000 − 12,000.
1,00,000 + 1,000 − 10,000 − 12,000.
Q12. Registration of a partnership deed is: Practice
Correct answer: (C)
An unregistered firm faces some legal limits (Section 69).
An unregistered firm faces some legal limits (Section 69).
Q13. Under the fluctuating capital method, a partner's salary is credited to his: Practice
Correct answer: (C)
There is only one account — capital.
There is only one account — capital.
Q14. The P&L appropriation account is: Practice
Correct answer: (D)
It shows how net profit is distributed.
It shows how net profit is distributed.
Q15. Limited Liability Partnerships are governed by: Practice
Correct answer: (A)
The 1932 Act does not apply to LLPs.
The 1932 Act does not apply to LLPs.
Q16. For equal drawings at the end of each month, the average period is: Practice
Correct answer: (B)
(11 + 0) ÷ 2 = 5.5.
(11 + 0) ÷ 2 = 5.5.
Q17. Under the fixed capital method, the capital account balance is: Practice
Correct answer: (A)
The current account may be debit or credit.
The current account may be debit or credit.
Q18. Partnership is defined in which section of the Indian Partnership Act? Practice
Correct answer: (C)
Section 13 gives the rules without a deed.
Section 13 gives the rules without a deed.
Q19. A and B share 3:2 and divisible profit is ₹79,000. A's share is: Practice
Correct answer: (D)
79,000 × 3/5.
79,000 × 3/5.
Q20. In a loss year (unless the deed says otherwise), interest on capital is: Practice
Correct answer: (B)
It is an appropriation, not a charge.
It is an appropriation, not a charge.