Written Agreement » Partnership Deed

The agreement between the partners put down in writing forms the "Partnership Deed". It is a document containing the various aspects agreed upon by the partners. It is also called a "Partnership Agreement" or "Articles of Partnership" Contents of the Partnership Deed The partnership generally covers/includes the following aspects Names of the partners of the firm and their addresses Duration of Partnership Capital contribution of each Partner and aspects relevant to it like introduction of additional capital, drawings that can be made etc. Interests to be paid on Capital, Loans given by partners to the firm, charged on Drawings and the relevant rates of interest Aspects relating to salaries, commissions, etc., to be paid to partners The ratio in which the profits and losses are to be shared among partners Goodwill valuation methodology at the time of incorporating changes in the partnership. Rights and Duties of Partners inter se among themselves. Name of the Bank/Banks where the business banking accounts should be maintained and the person/persons who are vested with the power to operate the accounts. The person/persons responsible for accounting for the business transactions and the place where the books of accounts are to be kept generally. To say in brief, everything that is relevant to the relationship between the partners forms part of the agreement. Even aspects relating to Arbitration (in case of disputes among themselves) etc., will be part of the agreement.

Role of Partnership Deed in Accounting

Any and every aspect relating to the partnership may be included in the "Partnership Deed". This deed forms the basis of any transaction involving the partners. Even accounting for partnership firms is a function that is to be carried on in accordance with the provisions in the "Partnership Deed". Salary to be paid to partners, profits to be shared among partners, interest on capital, interest on drawings, etc., are all to be decided based on the agreement between the partners (i.e. based on the partnership deed). Thus in accounting for transactions involving these, compliance with what is agreed upon should be ensured. • Where the Partnership Deed is silent Where the partnership deed or the agreement between the partners is silent on any aspect that is to be decided based on that agreement, the provisions in the "Indian Partnership Act, 1932" apply.

Role of Partnership Act in Accounting

The following provisions affect the accounting treatments in the absence of an agreement in that respect. • Partners Share of Profits In the absence of an agreement between the partners, they would share profits and losses equally among themselves (and not in the ratio of their capital contributions). If there is an agreement between the partners then the shares would be decided according to the agreement. » Separate Ratios for Profits and Losses The partners may decide that profits be shared in a certain ratio and losses in another ratio. » Share in Profits Only The partners may decide that one or more partners may share profits and will not have to share losses at all. » Share in Losses Only!!! There is no provision for one or more partners may sharing only losses and not sharing any profits. Partnership would exist only where there is a business and the partners have agreed to share the profits of the business. Indian Partnership Act, 1932 Hide/Show Sec 13. Mutual rights and liabilities Subject to contract between the partners,- (b) the partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm; • Remuneration to Partners In the absence of an agreement between the partners, a partner is not entitled to receive any remuneration (salary, commission, brokerage etc.,) for the services rendered by him to the firm. If there is an agreement between the partners then the partner may receive such remuneration as agreed upon. Indian Partnership Act, 1932 Hide/Show Sec 13. Mutual rights and liabilities Subject to contract between the partners,- (a) a partner is not entitled to receive remuneration for taking part in the conduct of the business; • Interest on Capital In the absence of an agreement between the partners, a partner is not entitled to receive any interest on Capital even there is a variation in the profit sharing ratio and the capital contribution. If there is an agreement between the partners then interest is to be paid at the rates agreed upon. » Interest to be paid only out of Profits Even where the agreement provides for payment of interest on capital, it will not be paid if there are losses. Indian Partnership Act, 1932 Hide/Show Sec 13. Mutual rights and liabilities Subject to contract between the partners,- (c) where a partner is entitled to interest on the capital subscribed by him such interest shall be payable only out of profits • Interest on Drawings No specific mention is made about drawings in the act. Therefore, it is assumed that the provisions that are applicable for Capital would also be applicable for Drawings, whereby, In the absence of an agreement between the partners, a partner is not entitled to pay any interest on Drawings. If there is an agreement between the partners then interest is to be charged at the rates agreed upon. • Interest on Partners Loans or Advances In the absence of an agreement between the partners, a partner is entitled to receive interest at the rate of 6% p.a. on any payment or advance made beyond the amount of Capital he has to contribute. If there is an agreement between the partners then interest is to be paid at the rates agreed upon, . Indian Partnership Act, 1932 Hide/Show Sec 13. Mutual rights and liabilities Subject to contract between the partners,- (d) a partner making, for the purposes of the business, any payment or advance beyond the amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of six per cent per annum;

Some Conventions followed in Accounting

In addition to the specific provisions available in the "Indian Partnership Act, 1932", a few other conventions are followed in solving problems involving partnerships. • Rate of Interest Where the partners have agreed upon to pay interest on capital and/or charge interest on drawings but the agreement is silent as to the rate of interest to be paid or charged, we consider the rate of interest to be 6%. This may be based on the fact that in providing interest for advances, the act specifies 6% rate of interest. Since 6% is considered reasonable in one case it may be taken in other cases also. • Partners Relative's Loans Practically, partner's relatives are outsiders for the firm and it would not be appropriate to think about them based on the agreement between parties. But where the information is missing and you have to make an assumption to go along with problem solving, you may apply the same rule that is applied to the partners advances to loans/advances made by the partners relatives also. This should be a last resort attempt only. Where there is no information relating to interest payment to partners relatives as well as the rate of interest, interest should be paid at the rate of 6% p.a.

Author Credit : The Edifier

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