Accounting for partnership firms – fundamentals

Q1. Which section of Partnership is there in Indian Partnership Act, 1932 ?

Ans. Partnership is defined under Section 4 of The Indian Partnership Act, 1932.

Q2. Which act limits the maximum number of partners in a firm ?

Ans. The Companies Act, 1956 limits the maximum number of partners in a firm.

Q3. Which Act’s provisions are applied in the absence of partnership deed ?

Ans. The provisions contained under The Indian Partnership Act, 1932 are applied in the absence of partnership deed.

Q4. Which rate of interest is applicable on partner’s loan in the absence of partnership deed ?

Ans. As per the provisions of Indian Partnership Act, 1932, a partner is entitled to interest @ 6% p.a. on his loan advanced to the firm in the absence of partnership deed.

Q5. Mr Sohan Lal and Mr. Mohan Lal are partners in a firm. Mr. Sohan Lal suggests the admission of his friend Mr. Madan Lal but Mr. Mohan Lal does not agree to the same. Can Mr. Madan Lal be admitted in the firm ?

Ans. No, Mr. Madan Lal cannot be admitted in the firm. The reason being that every partner has a right not to allow the admission of a new partner and hence, a new partner can be admitted into the firm only upon the consent of all the partners.

Q6. Rekha, Ritu and Reena are partners in a partnership firm involved in the business of saree manufacturing. Ritu incurs an expense of Rs.10,000 for the repairs of a machinery and wants the firm to reimburse the amount to her. State whether Ritu is eligible to get the amount?                                                                                              

Ans. Yes, Ritu is entitled to get the amount. The reason being that a partner has a right to be indemnified of the expenses incurred for the firm’s business or payments made by the partner on behalf of the firm.

Q7. L,M and N are partners in a firm. M used Rs.10,000 belonging to the firm and suffered a loss of Rs.1,000. He wants the firm to bear the loss. State whether M is correct or not.                                                                                                                      

Ans. No, M is not correct. M must pay Rs.11,000 to the firm. The reason being that where a partner uses the firm’s property for the purposes other than in the due course of the firm’s business, he is liable to pay for any losses incurred.

Q8. . T,R and G are partners in a firm. R used Rs. 10,000 belonging to the firm and made a profit of Rs. 1,000. T and G want the amount to be given to the fir                     

Ans. Yes, T and G are correct. R must pay Rs.11,000 to the firm. The reason being that as per the provisions of Indian Partnership Act, 1932 if a partner derives any profit from the use of the property or business connection of the firm or the firm name, he shall account for that profit and pay it to the firm.

Q9. Red, Blue and Yellow are partners in a firm without any partnership deed. Red and Yellow want to purchase goods from Green Ltd. but Blue does not agree. Can the goods be purchased or not?                                                                                                 

Ans. Yes, the goods can be purchased. The reason being that as per the provisions of Indian Partnership Act,1932 any difference arising as to ordinary matters connected with the business may decided by a majority of the partners provided no change may be made in the nature of the business without the consent of all the partners.

Q10. There are 10 partners in a partnership firm carrying on a banking business. Mr. Ramesh, one of the partners, suggests the admission of his friend Mahesh to which all the partners have agreed. You are required to advise on the admission of Mr. Mahesh?                                                                                                                               

Ans. No, Mr. Mahesh cannot be admitted to the firm in spite of the consent of all the partners. The reason being that The Companies Act,1956 limits the maximum number of partners to 10 in a firm carrying on a banking business.

Q11. There are 20 partners in a partnership firm carrying on a retail business of readymade garments. Mr. Parekh, one of the partners, suggests the admission of his friend Farooq to which all the partners have agreed. You are required to advise on the admission of Mr. Farooq?                                                                                                   

Ans. No, Mr. Farooq cannot be admitted to the firm. The reason being that The Companies Act, 1956 limits the maximum number of partners to 20 in firm carrying on a non-banking business.

Q12. What is a partnerhip at will?                                                                                      

Ans. Partnership at will refers to the partnership where the partnership agreement between/among the partners does not provide for either the duration of the partnership or the determination of the partnership

Q13. Does the principal agent relationship among the partners hold good for all the acts in a firm?     

Ans. No, all the acts of a partner do not bind the firm. As per the provisions of Indian Partnership Act,1932 following are the acts to which all the partners must give their express consent to do :

1. Submit a dispute relating to the business of the firm to arbitration;


2. Withdraw a suit filed on behalf of the firm;


3. Acquisition of immovable property on behalf of the firm;


4. Transfer of immovable property on behalf of the firm;


5. Enter into partnership on behalf of the firm.

Q14. Where will you record the drawings made out of capital if the partners’ capitals are fixed?                                                                                                                             

Ans. If the partner’s capitals are fixed, drawings made out of capital are recorded on the debit side of Partner’s Capital Account.

Q15. Where will you record the Loss-share of a partner if the partners’ capitals are fluctuating?                                                                                                                           

Ans. If the partner’s capitals are fluctuating, loss-share of a partner is recorded on the debit side of Partner’s Current Account.

Q16. For how many months is the interest on total drawings calculated at the given rate of interest provided that a fixed amount is withdrawn in the beginning of each month?                                                                                                                                

Ans. When drawings of a fixed amount are made in the beginning of each month whole of the accounting period, interest is charged at the given rate for a period of 6¹/₂ months on the total drawings.

Q17. What is the rate of interest applicable on drawings of fixed amount made by the partner at the end of each quarter in the absence of a partnership deed?       

Ans. As per the provisions of Indian partnership Act, 1932, interest on partner’s drawings is not chargeable in the absence of partnership deed.

Q18. Name the methods applied to compute the chargeable interest on drawings provided that the unequal amount is withdrawn at different dates.                                   

Ans. When drawings of unequal amount are made at different dates throughout the accounting period, interest on drawings is calculated using any of the following methods:

1. Simple Method


2. Product Method

Q19. Where will you charge the interest on partner’s loan?                                        

Ans. Interest on partner’s loan is a charge against profit and hence, charged in the Profit and Loss Account.

Q20. What is called average capital?                                                                                

Ans. The weighted average with reference to time the partner’s capital has been used in the business is computed to determine the ratio in which profit or loss will be shared by the partners. This is called Average Capital.

Q21. What do you mean by past adjustments?                                                                 

Ans. Past adjustments refer to the journal entries passed to adjust the effect of the transactions either recorded erroneously or omitted in the past. Past adjustments may also occur as a consequence of change in the terms of the partnership agreement with retrospective effect. For example; interest on drawings charged excessively, interest on capital omitted or treating manager as a partner with retrospective effect.

Q22. Give four items that may appear on the credit side of a Partner’s Current Account?      

Ans. The four items that may appear on the credit side of a Partner’s Current Account are:

1. Salary payable to the Partner;


2. Commission payable to the partner;


3. Profit-share of the partner;


4. Interest on Partner’s Capital.

Q23. Is written partnership agreement necessary to form a partnership firm? 

Ans. No. A partnership firm can be constituted with a partnership agreement implied between/among the partners while it is advisable only to have a written partnership agreement to avoid future disputes and also to produce to the income tax authorities and other interested parties dealing with the firm.

Q24. Does the fixed capital of partners also change?                                                      

Ans. Yes. The fixed capital of partners also changes in the following two conditions:

1. When a partner introduces additional amount as capital in the firm i.e. additional capital


2. When a partner withdraws an amount of capital invested in the firm i.e. drawings against capital/drawings out of capital.