Class 12th Accountancy: Accounting for Partnership Firm Chapter Summary

Accounting for Partnership Firm is a crucial unit in Class 12 Accountancy, designed to provide a structured understanding of how financial records are maintained in partnership-based organisations. It explains the nature of partnership, statutory provisions, accounting procedures, and adjustments required when partners join, leave, or when the firm closes down. The chapter is governed by the Indian Partnership Act, 1932, and includes essential concepts such as goodwill, capital adjustments, revaluation, accumulated profits, and distribution of assets and liabilities. This comprehensive framework enables students to understand the financial functioning and lifecycle of a partnership firm in a systematic and professional manner.

Accounting for Partnership Firm Chapter Summary

1. Basic Concepts

• Governed by the Indian Partnership Act, 1932.

• Definition as per Section 4: Partnership is the relation between persons who agree to share the profits of a business carried on by all or any of them acting for all.

• Minimum partners: 2

• Maximum partners: 50 (Companies Act, 2013).

• Partners have unlimited liability.

• In the absence of an agreement, interest on loan to partners is allowed @ 6% p.a.

• A partnership firm is treated as a separate business entity from the accounting viewpoint.

2. Goodwill and Change in Profit Sharing Ratio (PSR)

• Change in PSR occurs when existing partners decide to alter their share of future profits/losses.

• Goodwill represents the reputation and earning capacity of the firm.

• Methods of Goodwill Valuation:

• Average Profit Method

• Super Profit Method

• Capitalisation Method

• Adjustments include sacrifice ratio, gain ratio, and treatment of goodwill (raised, adjusted, or written off).

3. Admission of a Partner

• Admission occurs to raise additional capital, bring managerial expertise, or enhance goodwill.
  
  

• Key accounting adjustments:

• Revaluation of assets and liabilities

• Distribution of accumulated profits/losses

• Determination and payment of premium for goodwil

• Adjustment of new profit sharing ratio

• The incoming partner contributes capital and sometimes goodwill to compensate existing partners.

4. Retirement and Death of a Partner

• Retirement is the voluntary withdrawal of a partner.

• Death is an involuntary exit; the deceased partner’s claim is settled with the legal representative.

• Key considerations include:

• Calculation of the partner’s share of goodwill

• Revaluation profit/loss

• Accumulated reserves

• Capital balance

• Interest on capital, salary, or share of profit till the date of retirement/death

• The amount payable is recorded in the Executor’s Account in case of death.
  
  

5. Dissolution of Partnership Firm

• Dissolution refers to the complete closure of the business entity.

• All assets are realised, and liabilities are discharged.

• The remaining balance is distributed among partners as per their capital ratios.

• Accounting is done through the Realisation Account, which records sale of assets, payment of liabilities, and distribution of any surplus or deficit.