Content :
- Introduction and necessity of preparation of final accounts.
- Provision in partnership deed and Indian Partnership Act 1932 relating to distribution of profit, interest ob capital and drawings, interest on partners loan, salary or commission to partner.
Learning objectives :
- Understand the meaning of final accounts.
- Know the importance of final accounts.
- Understand meaning and features of partnership .
- Understand the partnership Deed and provisions applicable in absence of partnership Deed.
- Know the basic provisions of Partnership Act 1932.
Introduction and necessity of Preparation of Final Accounts :
Final accounts are prepared on the basis of trial balance and adjustments. They are prepared at the end of each financial year. As per income tax act, financial year ends on 31st March, every year. It's start from 1st April and ends on 31st March. Like a proprietorship concern, partnership firm also has to prepare it's final account (balance sheet reconciliation best practices) to find out the net results of the business and to know it's financial position as on a particular date. Final accounts consist of Trading Account, Profit and Loss Account and Balance sheet.
Necessity of Preparation of Final Account :
a) To find out gross profit or gross loss and net profit or net loss of the business.
b) To know the financial position of the business i.e. assets and liabilities of the business as on a particular date.
c) To provide information for calculation of income tax and various taxes of the business.
d)To ascertain the amount receivable and amount payable by the business.
e) To prepare various financial statements for future planning.
f) To find out sources of funds and their application for expansion of business.
WHAT ARE THE PROVISIONS IN PARTNERSHIP DEED ?
Provision in partnership Deed and Indian Partnership Act 1932 :
Partnership is an association of two or more. it is an business organization. the business is managed by all the partners jointly or it may be managed by a partner on behalf of all other partners. in other words when two or more persons come together to carry on a business with the view to share profits or losses, such arrangement is known as partnership.
DEFINITION ; AS PER INDIAN PARTNERSHIP ACT 1932 ; (SEC.4) -
"Partnership is the relation between persons who have agreed to share the profits or losses of a business carried on by all or any of them acting for all."
WHAT ARE THE FEATURES OF PARTNERSHIP ?
Features of Partnership :
a) AGREEMENT -
Partnership comes into existence by an agreement among the partners. the agreement between partners may be oral or in written form. but to avoid future disputes, an agreement should be in written form. such written agreement is called partnership deed.
b) REGISTRATION -
Registration of the partnership firm is not compulsory. registration means entering the name of the firm in the register maintained by the registrar, on the basis of application forwarded by the firm.
c) MEMBERSHIP NUMBERS -
Minimum two persons are required to form the partnership firm and maximum twenty persons are permitted in the firm by law. in case of banking business the maximum limit of partners is ten.
d) UNLIMITED LIABILITY -
The liability of partners is unlimited. the personal assets of partners may be utilized for the purpose of repayments of the liabilities of the outsiders, if required.
e) RELATION BETWEEN THE PARTNERS -
The business activities of the firm are carried on by all partners collectively or any one partner acting on behalf of all partners. hence, every partner is an agent as well as principal.
f) PROFIT SHARING RATIO -
Partners share profits or losses of the firm in an agreed ratio. in absence of any specific agreement they share profit and losses equally.
g) MANAGEMENT -
All partners can participate equally in the management of the firm. they are also jointly and severally responsible for all the activities of the firm.
WHAT IS PARTNERSHIP DEED ?
PARTNERSHIP DEED :
A partnership firm informed by two or more persons by an agreement among the partners.
"The written agreement between the partners is called the partnership deed." A partnership deed governs the business activities of the firm as well as relation among the partners. Partnership deed may or may not be registered. Through not compulsory by law, it is advisable to have a partnership deed in the writing so as to avoid future disputes.
GENERALLY THE FOLLOWING ARE THE CONTENTS OF A PARTNERSHIP DEED :
1. The name of the firm.
2. Nature and location of the business.
3. Name, addresses and other information of the partners.
4. The amount of the capital to be contributed by each of the partners and interest of the capital, if any.
5. Profit sharing ratio of partners.
6. The amount of drawings, if any, and interest on drawings.
7. The amount of salary or commission allowed to partners.
8. Interest on loan given by the partners to the firm.
9. Method of valuation of goodwill.
10. Type of partners.
11. Admissions and retirement procedure of a partner.
12. Accounting procedure and audit of the firm.
13. Signatories to operate the bank account of the firm.
14. Other terms and conditions which are agreed by all the partners.
PROVISION OF INDIAN PARTNERSHIP ACT 1932 :
1) Distribution of Profits
2) Interest on Capital
3) Interest on Drawings
4) Interest on Partner's Loan
5) Salary or Comission to Partner
6) Inspection of Books of Accounts of the firm
7) Involvement of Partners
8) Admission of a new partner
