Accounting for Partnership Firms - Fundamentals of Partnership

This set of vocabulary flashcards covers the fundamental concepts, formulas, and legal rules for partnership accounting based on Chapter 1.

Partnership Deed

A written agreement between partners containing terms and conditions such as name of firm, nature of business, capital, PSR, salary, interest, and commission.

Indian Partnership Act, 1932

The legislation that applies to a partnership firm in the absence of a written Partnership Deed.

Fixed Capital

A method where capital remains fixed and a separate Current Account is opened to record adjustments like Interest on Capital and Interest on Drawings.

Fluctuating Capital

A method where capital keeps on changing because all adjustments are made directly in the Capital Account itself, with no Current Account opened.

Interest on Capital (IOC)

Interest allowed on capital contributed by partners, but only if provided in the Partnership Deed and generally not allowed if there is a loss.

Interest on Capital Formula

$$\text{Interest on Capital} = \frac{\text{Capital} \times \text{Rate} \times \text{Time}}{100}$$

Interest on Drawings (IOD)

Interest charged on the amount withdrawn by partners for personal use, provided it is specified in the Deed.

Interest on Drawings Formula

$$\text{Interest on Drawings} = \frac{\text{Drawings} \times \text{Rate} \times \text{Period}}{100}$$

IOD Period (Beginning of Month)

$$6.5\,months$$

IOD Period (Middle of Month)

$6\,months$ (also used if the time is not specified).

IOD Period (End of Month)

$$5.5\,months$$

Salary/Commission to Partner

A charge on Profits allowed for work done or services rendered, provided it is mentioned in the Partnership Deed.

Commission Formula

$$\text{Commission} = \frac{\text{Profit} \times \text{Rate}}{100}$$

Profit Sharing Ratio (PSR)

The ratio in which profits and losses are shared among partners; it is determined by the Deed or is equal if not specified.

Partner's Share Formula

$$\text{Partner's Share} = \frac{\text{Share of Partner}}{\text{Total of Shares}}$$

Guarantee of Profit to Partner

A provision where a partner is guaranteed a minimum amount of profit; any deficiency is borne by other partners in their gaining ratio.

Past Adjustments

The rectification of errors or omissions from previous accounting periods (like omitted IOC or salary) in the current period, usually through partners' Capital Accounts.

DCIISPGP

A memory trick for: Deed, Capital, IOC, IOD, Salary, PSR, Guarantee, and Past Adjustments.