Basics of Accounting for Partnership

1. PartnershipPartnership
Prasanth.S.RPrasanth.S.R
M.Com., M.Ed.M.Com., M.Ed.

2. What is Partnership ?What is Partnership ?
A partnership is the relation whichA partnership is the relation which
subsists between persons carrying on asubsists between persons carrying on a
business in common with a view of profit.business in common with a view of profit.
Unlike a limited company, each partner inUnlike a limited company, each partner in
a partnership is personally liable for thea partnership is personally liable for the
acts of the other partners and for all ofacts of the other partners and for all of
the debts of the company. On the otherthe debts of the company. On the other
hand, all partners are entitled to share inhand, all partners are entitled to share in
the profits of the company equally unlessthe profits of the company equally unless
they agree otherwise.they agree otherwise.

4. General partnershipGeneral partnership
In a general partnership, the liability ofIn a general partnership, the liability of
each partner is unlimited. It means thateach partner is unlimited. It means that
the firm's creditors can realise their duesthe firm's creditors can realise their dues
in full from any of the partners byin full from any of the partners by
attaching their personal property if theattaching their personal property if the
firm's assets are found to be inadequatefirm's assets are found to be inadequate
to pay off its debts.to pay off its debts.

5. Limited partnershipLimited partnership
A limited partnership is a partnershipA limited partnership is a partnership
consisting of some partners whose liability isconsisting of some partners whose liability is
limited to the amount of capital contributed bylimited to the amount of capital contributed by
each. The personal property of a limitedeach. The personal property of a limited
partner is not liable for the firm's debts . Hepartner is not liable for the firm's debts . He
cannot take part in the management of thecannot take part in the management of the
firm. His retirement, insolvency, lunacy orfirm. His retirement, insolvency, lunacy or
death does not cause dissolution of the firm.death does not cause dissolution of the firm.
There is at least one partner having unlimitedThere is at least one partner having unlimited
liability. A limited partnership must beliability. A limited partnership must be
registered.registered.

6. Partnership at willPartnership at will
It is a partnership formed for an indefiniteIt is a partnership formed for an indefinite
period. The time period or the purpose of theperiod. The time period or the purpose of the
firm is not mentioned at the time of itsfirm is not mentioned at the time of its
formation. It can continue for any length offormation. It can continue for any length of
time depending upon the will of the partners.time depending upon the will of the partners.
It can be dissolved by any partner by givingIt can be dissolved by any partner by giving
a notice to the other partners of his desire toa notice to the other partners of his desire to
quit the firm.quit the firm.

7. Particular partnershipParticular partnership
It is a partnership formed for a specificIt is a partnership formed for a specific
time period or to achieve a specifiedtime period or to achieve a specified
objective. It is automatically dissolved on theobjective. It is automatically dissolved on the
expiry of the specified period or on theexpiry of the specified period or on the
completion of the specific purpose for whichcompletion of the specific purpose for which
it was formed.it was formed.

9. Active or workingActive or working
partnerpartner
Such a partner contributes capital andSuch a partner contributes capital and
also takes active part in the management ofalso takes active part in the management of
the firm. He bears an unlimited liability forthe firm. He bears an unlimited liability for
the firm's debts. He is known to outsiders.the firm's debts. He is known to outsiders.
He shares profits of the firm. He is a full-He shares profits of the firm. He is a full-
fledged partner.fledged partner.

10. Sleeping or dormantSleeping or dormant
partnerpartner
A sleeping or inactive partner simplyA sleeping or inactive partner simply
contributes capital. He does not take activecontributes capital. He does not take active
part in the management of the firm. Hepart in the management of the firm. He
shares in the profits or losses of the firm.shares in the profits or losses of the firm.
His liability for the firm's debts is unlimited.His liability for the firm's debts is unlimited.
He is not known to the outside world.He is not known to the outside world.

11. Secret partnerSecret partner
This type of partner contributes capitalThis type of partner contributes capital
and takes active part in the management ofand takes active part in the management of
the firm's business. He shares in the profitsthe firm's business. He shares in the profits
and losses of firm and his liability isand losses of firm and his liability is
unlimited. However, his connection with theunlimited. However, his connection with the
firm is not known to the outside world.firm is not known to the outside world.

12. Limited partnerLimited partner
The liability of such a partner is limited toThe liability of such a partner is limited to
the extent of his share in the capital andthe extent of his share in the capital and
profits of the firm. He is not entitled to takeprofits of the firm. He is not entitled to take
active part in the management of the firm'sactive part in the management of the firm's
business. The firm is not dissolved in thebusiness. The firm is not dissolved in the
event of his death, lunacy or bankruptcy.event of his death, lunacy or bankruptcy.

13. Partner in profits onlyPartner in profits only
He shares in the profits of the firm butHe shares in the profits of the firm but
not in the losses. But his liability for thenot in the losses. But his liability for the
firm's debts is unlimited. He is not allowedfirm's debts is unlimited. He is not allowed
to take part in the management of the firm.to take part in the management of the firm.
Such a partner is associated for his moneySuch a partner is associated for his money
and goodwill.and goodwill.

14. Nominal or ostensibleNominal or ostensible
or quasi partneror quasi partner
Such a partner neither contributesSuch a partner neither contributes
capital nor takes part in the management ofcapital nor takes part in the management of
business. He does not share in the profitsbusiness. He does not share in the profits
or losses of the firm. He only lends hisor losses of the firm. He only lends his
name and reputation for the benefit of thename and reputation for the benefit of the
firm.firm.

15. Partner by estoppelsPartner by estoppels
A person who by his words (spoken orA person who by his words (spoken or
written) or conduct represents himself as awritten) or conduct represents himself as a
partner becomes liable to those whopartner becomes liable to those who
advance money to the firm on the basis ofadvance money to the firm on the basis of
such representation.such representation.

16. Partner by holding outPartner by holding out
When a person is declared as a partnerWhen a person is declared as a partner
and he does not deny this even afterand he does not deny this even after
becoming aware of it, he becomes liable tobecoming aware of it, he becomes liable to
third parties who lent money or credit to thethird parties who lent money or credit to the
firm on the basis of such a declaration.firm on the basis of such a declaration.

17. Minor as a partnerMinor as a partner
A minor is a person who has notA minor is a person who has not
completed 18 years of age. A minor cannotcompleted 18 years of age. A minor cannot
become a partner because he is notbecome a partner because he is not
qualified to enter into a contract. But hequalified to enter into a contract. But he
may be admitted to the benefits ofmay be admitted to the benefits of
partnership with the mutual consent of allpartnership with the mutual consent of all
the partners.the partners.

18. Sub partnerSub partner
He is a third person with whom a partnerHe is a third person with whom a partner
agrees to share his profits desired from theagrees to share his profits desired from the
firm. He does not take part in thefirm. He does not take part in the
management of the firm. He is not liable formanagement of the firm. He is not liable for
the firm's debts.the firm's debts.

19. Advantages ofAdvantages of
PartnershipPartnership
 It is easier to raise finance as aIt is easier to raise finance as a
partnership than as a sole proprietor.partnership than as a sole proprietor.
 Partners pay tax on their share of thePartners pay tax on their share of the
partnership profits at their respectivepartnership profits at their respective
marginal tax rates, and their share in themarginal tax rates, and their share in the
partnership losses can be offset againstpartnership losses can be offset against
their other incometheir other income

20. Disadvantages of PartnershipDisadvantages of Partnership
 Partners do not have the benefit of limitedPartners do not have the benefit of limited
liability.liability.
The participation of all the partners isThe participation of all the partners is
needed for most legal transactions, whichneeded for most legal transactions, which
can result in disputes among the partners.can result in disputes among the partners.