Accountancy for Class 12, Part 1, Chapter 2 Accounting for Partnership: Basic Concepts

Learn CBSE Accountancy Index Terms for Class 12, Part I, Chapter 2 Accounting for Partnership: Basic Concepts

1. Partnership – A partnership is a plan where parties, known as business partners, consent to participate in propelling their common interests. The partners in a partnership may be people, organisations, interest-based organisations, schools, governments, or any combination.

A partnership is a special kind of company with two or more people. Each of them is called a “partner”. Partners may act as a team by sharing profits and expenses. A partnership is a legal relationship between two or more individuals by which the partners jointly benefit from their efforts, risks, and share in any profit.

A partnership is a temporary assemblage of persons for carrying on business for profit; it does not give rise to any ties that are binding on the individual members apart from those arising under the partnership agreement.

2. Partnership Deed – A partnership deed is a legal document showing that one has created a business relationship with another individual or entity. A partnership deed must be formalised with other partners who are associated with the business. The purpose of the partnership deed is to ensure that the partners are aware of their rights and obligations as well as provide for the day-to-day activities of the partnership.

A partnership deed is a document, dated and signed by the parties to a business, that details the terms of their relationship, including how they will make money, divide up responsibilities and carry out decisions. It is usually prepared by an attorney of CPA, but can also be filed directly with the court. A partnership deed is a legal document that creates, carries out, and dissolves the partnership between the partners.

The contents of a partnership deed are as follows:

  • Name and details of all the partners of the firm.
  • The date on which business commenced.
  • Firm’s existence duration.
  • Amount of capital contributed by each partner.
  • The profit-sharing ratio between the partners.
  • Duties, obligations, and power of each partner of the firm.
  • The salary and commission (if applicable) that is payable to partners.
  • The process of admission or retirement of a partner.
  • The method used for calculating goodwill.
  • The procedure that must be followed in cases of dispute arising between partners.
  • Procedure for instances when a partner becomes insolvent.
  • Procedure for settlement of accounts in the event of dissolution of a firm.
  • Name of the firm as determined by all the partners.

3. Profit – Profit in business refers to a business’s profit. In simple terms, the key to making profits is either by increasing revenue or decreasing costs. Profits are an important factor for business owners to consider, as they have a direct impact on the bottom line. How they spend their profits can also affect their company’s performance in the long run.

The profits of a business are the earnings made after paying all expenses. In other words, the difference between the revenues and costs is called the net income or profit available for distribution. Profit is the excess of a company’s earnings over its cost of doing business. Profits are listed on a balance sheet in either one account or multiple accounts.

4. Interest on Capital – Every business owner will be looking out for getting a return on the money invested in the business in the form of a fixed rate interest. This is known as the interest on capital.

In other words, interest on capital is the interest paid to owners for providing a firm with the required capital to start a business. It is similar to obtaining a loan from any financial institution.

The partners are paid interest on the capital that remains outstanding. The maximum rate of interest that can be paid to the owners is 12% as per the Income Tax Act under section 40(b). If a partner introduces any further capital to the business, then the additional capital is also taken into account for providing interest.

5. Interest on Drawings – Interest on drawings is revenue to the business organisation, and hence, the account is debited as it is payable to its partners. Interest is charged on the withdrawn money made by the partners or the goods taken by the partners for their personal use. Interest on drawings is debited in the capital account.

6. Partnership Firm – A partnership firm is an organisation in which the partners have equal degrees of liability for their debts and equal ownership of the property of the partnership. A partnership is a business entity that has its shareholder’s capital invested in the business, and they make decisions together.

A partnership is a form of business organisation in which partners invest money and share profits with one another. Partners must carry on the business agreed upon among them, and share the profit or loss, according to the provisions made by way of contract or otherwise. There can be two types of partnership: general partnership and limited partnership.

According to the Indian Partnership Act, 1932, Section 4 defines Partnership as – “An agreement between persons who have agreed to share profits of the business carried on by all or any one of them acting for all.”

The members involved in the partnership are known as partners individually, while they are jointly known as a firm. The agreement on which terms and conditions of a partnership are written is known as a partnership deed.

7. Average Collection Period – The average collection period or typical assortment time frame is a bookkeeping metric used to address the average number of days between a credit sale date and the date when the buyer transmits an instalment or makes the payment. An organisation’s typical assortment period or the average collection period is demonstrative of the viability of its accounts receivables management practices.

An average collection period is the amount of time it takes for all invoices for a particular customer to be paid. The average collection period defines the number of days in a standard collection period that it takes for a business to receive and process a payment.

We hope that the offered Accountancy Index Terms for Class 11 with respect to Part 1, Chapter 1: Accounting for Partnership: Basic Concepts will help you.

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