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Accounting for Partnership: Basic Concepts

NCERT Class 12 · Accountancy Based on NCERT Class 12 Accountancy textbook · Free CBSE study kit

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Chapter Notes

Overview
This chapter introduces the fundamental accounting concepts for partnership firms, which differ from sole proprietorship due to the presence of multiple owners. It covers the nature of partnership, the importance of the partnership deed, and the provisions of the Indian Partnership Act 1932 that apply when the deed is silent. The central idea is how to maintain partners' capital accounts (fixed vs. fluctuating capital method) and how to distribute profits or losses among partners through the Profit and Loss Appropriation Account, including adjustments for interest on capital, interest on drawings, salary, and commission.
Key Concepts (13)
Partnership
Section 4 of the Indian Partnership Act 1932 defines partnership as the 'relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all'.
e.g. Rohit and Sachin jointly purchase a plot of land — this is co-ownership, not partnership. But if they are in the business of purchase and sale of land for profit, they are partners.
Partnership Deed
A written document that contains the terms of the agreement between partners. It is not mandatory but is preferred to avoid disputes.
e.g. A deed may specify that profit sharing ratio is 3:2, interest on capital is 6% p.a., and partner A gets a salary of Rs. 10,000 per month.
Profit and Loss Appropriation Account
An extension of the Profit and Loss Account that shows how the net profit or loss is appropriated or distributed among partners, including adjustments for interest on capital, interest on drawings, salary, commission, and share of profit/loss.
e.g. If net profit is Rs. 50,000, the appropriation account will show interest on capital, salary, and then the remaining profit distributed in the profit-sharing ratio.
Fixed Capital Method
A method of maintaining partners' capital accounts where the capital balance remains fixed unless additional capital is introduced or a part is withdrawn. All other transactions (drawings, interest, salary, share of profit) are recorded in a separate Partner's Current Account.
e.g. Partner A's capital account always shows Rs. 1,00,000. His drawings of Rs. 10,000 and salary of Rs. 5,000 are recorded in his current account.
Fluctuating Capital Method
A method where only one account (Capital Account) is maintained for each partner. All adjustments (drawings, interest, salary, share of profit/loss) are recorded directly in the capital account, causing its balance to fluctuate.
e.g. Partner B's capital account starts at Rs. 50,000. After adding salary Rs. 5,000 and deducting drawings Rs. 10,000, the closing balance becomes Rs. 45,000.
Interest on Capital
Interest allowed to partners on the amount of capital contributed, only if expressly agreed in the partnership deed. If the deed is silent, no interest is payable. It is calculated with reference to the time period for which capital remained in business.
e.g. If capital is Rs. 2,00,000 for the full year and additional capital of Rs. 1,00,000 is introduced on October 1, interest @ 6% p.a. = (6% of 2,00,000) + (6% of 1,00,000 for 6 months) = Rs. 12,000 + Rs. 3,000 = Rs. 15,000.
Interest on Drawings
Interest charged on money withdrawn by partners for personal use, only if the partnership deed provides for it. If the deed is silent, no interest is charged.
e.g. If a partner withdraws Rs. 10,000 at the beginning of each month and interest is 8% p.a., interest on drawings = Rs. 1,20,000 × 8% × 6.5/12 = Rs. 5,200.
Partner's Salary
Remuneration paid to a partner for taking part in the conduct of the business, only if the partnership deed provides for it. If the deed is silent, no salary is allowed.
e.g. If the deed says Amit is to be paid Rs. 1,000 per month, his salary for the year is Rs. 12,000, debited to Profit and Loss Appropriation Account.
Partner's Commission
A fixed amount or percentage of profit paid to a partner as per the partnership deed, recorded in the Profit and Loss Appropriation Account.
e.g. Babu is entitled to a commission of Rs. 5,000, which is debited to the appropriation account and credited to Babu's capital/current account.
Profit Sharing Ratio
The ratio in which partners share the profits and losses of the firm. If the partnership deed is silent, profits and losses are shared equally.
e.g. If Amit, Babu, and Charu agree to share in the ratio 3:2:1, and net profit after appropriations is Rs. 12,000, Amit gets Rs. 6,000, Babu Rs. 4,000, Charu Rs. 2,000.
Mutual Agency
The relationship between partners where each partner is both a principal and an agent for all other partners. Each partner can bind the firm by his acts and is bound by the acts of other partners.
e.g. If one partner signs a contract for the firm, all partners are liable, even if they did not personally sign.
Indian Partnership Act 1932
The governing law for partnership firms in India. Its provisions apply when the partnership deed is silent on specific matters.
e.g. If the deed is silent, profits are shared equally, no interest on capital or drawings, interest on partner's loan is 6% p.a., and no salary or commission is allowed.
Interest on Partner's Loan
If a partner advances a loan to the firm, he/she is entitled to interest at the rate of 6% per annum if the deed is silent.
e.g. Amitabh gave a loan of Rs. 50,000 to the firm. Interest on loan = Rs. 50,000 × 6% = Rs. 3,000, charged to Profit and Loss Account (not appropriation).
Formulas & Equations (8)
Interest on Capital = (Opening Capital × Rate × Time) + (Additional Capital × Rate × Time/12) - (Withdrawn Capital × Rate × Time/12)
Reads as: Interest on capital equals opening capital times rate times time, plus additional capital times rate times time over twelve, minus withdrawn capital times rate times time over twelve.
Variables: Opening Capital (Rs.), Rate (percentage per annum), Time (in months or years), Additional Capital (Rs.), Withdrawn Capital (Rs.)
Use when: When calculating interest on capital with additions or withdrawals during the year.
⚠ Students forget to convert months into years (divide by 12) or apply the full year rate to additional capital introduced mid-year.
Interest on Drawings (fixed monthly amount at beginning) = Total Drawings × Rate × (12+1)/(2×12) = Total Drawings × Rate × 13/24
Reads as: Interest on drawings equals total drawings times rate times thirteen over twenty-four.
Variables: Total Drawings (Rs.), Rate (percentage per annum)
Use when: When a fixed amount is withdrawn at the beginning of each month.
⚠ Using 6 months instead of 6.5 months (13/24) for beginning-of-month withdrawals.
Interest on Drawings (fixed monthly amount at end) = Total Drawings × Rate × (11+0)/(2×12) = Total Drawings × Rate × 11/24
Reads as: Interest on drawings equals total drawings times rate times eleven over twenty-four.
Variables: Total Drawings (Rs.), Rate (percentage per annum)
Use when: When a fixed amount is withdrawn at the end of each month.
⚠ Using 6 months instead of 5.5 months (11/24) for end-of-month withdrawals.
Interest on Drawings (fixed monthly amount mid-month) = Total Drawings × Rate × 6/12 = Total Drawings × Rate × 1/2
Reads as: Interest on drawings equals total drawings times rate times one-half.
Variables: Total Drawings (Rs.), Rate (percentage per annum)
Use when: When a fixed amount is withdrawn in the middle of each month.
⚠ Students often confuse this with beginning or end-of-month calculation.
Interest on Drawings (product method) = Sum of Products × Rate × 1/12
Reads as: Interest on drawings equals sum of products times rate times one over twelve.
Variables: Sum of Products = Σ (Amount withdrawn × Number of months remaining in the year), Rate (percentage per annum)
Use when: When varying amounts are withdrawn at different intervals.
⚠ Forgetting to multiply by 1/12 after calculating the sum of products, or using days instead of months incorrectly.
Interest on Drawings (quarterly at beginning) = Total Drawings × Rate × (12+3)/(2×12) = Total Drawings × Rate × 15/24
Reads as: Interest on drawings equals total drawings times rate times fifteen over twenty-four.
Variables: Total Drawings (Rs.), Rate (percentage per annum)
Use when: When a fixed amount is withdrawn at the beginning of each quarter.
⚠ Using 6 months instead of 7.5 months (15/24) for beginning-of-quarter withdrawals.
Interest on Drawings (quarterly at end) = Total Drawings × Rate × (9+0)/(2×12) = Total Drawings × Rate × 9/24
Reads as: Interest on drawings equals total drawings times rate times nine over twenty-four.
Variables: Total Drawings (Rs.), Rate (percentage per annum)
Use when: When a fixed amount is withdrawn at the end of each quarter.
⚠ Using 6 months instead of 4.5 months (9/24) for end-of-quarter withdrawals.
Interest on Partner's Loan (when deed silent) = Loan Amount × 6% × Time
Reads as: Interest on partner's loan equals loan amount times six percent times time.
Variables: Loan Amount (Rs.), Time (in years or fraction of a year)
Use when: When a partner has advanced a loan to the firm and the partnership deed is silent on the rate.
⚠ Students often use 10% or 12% instead of the statutory 6% per annum.
How It Works
Preparation of Profit and Loss Appropriation Account
  1. Step 1: Transfer net profit (credit balance) from Profit and Loss Account to Profit and Loss Appropriation Account by debiting Profit and Loss A/c and crediting Profit and Loss Appropriation A/c. If net loss, reverse the entry.
  2. Step 2: Credit interest on drawings to the appropriation account (debit Interest on Drawings A/c, credit Profit and Loss Appropriation A/c).
  3. Step 3: Debit the appropriation account for all appropriations: interest on capital, partner's salary, partner's commission.
  4. Step 4: After all appropriations, the remaining balance (profit or loss) is transferred to partners' capital/current accounts in their profit-sharing ratio.
  5. Step 5: If there is a net loss, no interest on capital, salary, or commission is allowed; the loss is distributed directly.
💡 Interest on partner's loan is a charge against profit (debited to Profit and Loss A/c, not Appropriation A/c), while interest on capital, salary, and commission are appropriations of profit (debited to Appropriation A/c).
Calculation of Interest on Capital with Additions and Withdrawals
  1. Step 1: Calculate interest on opening capital for the full year.
  2. Step 2: For additional capital introduced during the year, calculate interest from the date of introduction to the end of the financial year.
  3. Step 3: For capital withdrawn during the year, calculate interest on the withdrawn amount from the beginning of the year to the date of withdrawal, then on the reduced capital for the remaining period.
  4. Step 4: Sum up all components to get total interest on capital for each partner.
💡 If the firm incurs a net loss, no interest on capital is allowed. If profit is less than the total interest due, interest is paid only to the extent of profit, distributed in the ratio of interest on capital.
Calculation of Interest on Drawings using Product Method
  1. Step 1: For each withdrawal, note the date and amount.
  2. Step 2: Calculate the period (in months) from the date of withdrawal to the last day of the accounting year.
  3. Step 3: Multiply each withdrawal amount by its period to get the product.
  4. Step 4: Sum all products.
  5. Step 5: Apply the formula: Interest = Sum of Products × Rate × 1/12.
💡 The period is counted from the date of withdrawal to the end of the financial year, not from the start of the year.
Determining Opening Capital from Closing Capital
  1. Step 1: Start with the closing capital balance.
  2. Step 2: Add back drawings made during the year.
  3. Step 3: Subtract the share of profit credited (or add the share of loss debited) during the year.
  4. Step 4: Subtract any additional capital introduced during the year.
  5. Step 5: The result is the opening capital balance.
💡 This process is used when opening capital is not directly given but closing capital and other transactions are known.
Exam Traps — Don't Make These Mistakes
⚠ Confusing Interest on Partner's Loan with Interest on Capital
✗ Students often debit interest on partner's loan to the Profit and Loss Appropriation Account.
→ Interest on partner's loan is a charge against profit, not an appropriation. It is an expense of the firm and must be debited to the Profit and Loss Account (not the Appropriation Account), even if the firm incurs a loss.
✓ Debit 'Interest on Partner's Loan A/c' and credit 'Partner's Loan A/c'. Then transfer this interest to the debit side of the Profit and Loss Account. It is never shown in the Profit and Loss Appropriation Account.
⚠ Assuming Interest on Capital is Always Paid
✗ Students calculate interest on capital even when the partnership deed is silent or when the firm has made a loss.
→ Interest on capital is payable only if expressly agreed in the partnership deed. If the deed is silent, no interest is allowed. Also, if the firm incurs a net loss, no interest on capital is allowed even if the deed provides for it.
✓ First check the partnership deed. If silent, write 'No interest on capital is allowed as per the Indian Partnership Act 1932.' If the firm has a loss, write 'Since the firm incurred a loss, no interest on capital is allowed.'
⚠ Incorrect Average Period for Monthly Drawings
✗ Students use 6 months as the average period for all monthly drawings, regardless of when the withdrawal is made.
→ The average period depends on whether the withdrawal is at the beginning (6.5 months), middle (6 months), or end (5.5 months) of the month. Using 6 months for beginning-of-month withdrawals understates the interest.
✓ For beginning of month: average period = (12+1)/2 = 6.5 months. For end of month: (11+0)/2 = 5.5 months. For middle of month: 6 months.
⚠ Forgetting to Distribute Loss in Profit Sharing Ratio
✗ When the firm has a net loss, students sometimes skip the Profit and Loss Appropriation Account or distribute loss in capital ratio.
→ Even when there is a loss, the Profit and Loss Appropriation Account is prepared. The loss is distributed among partners in their profit-sharing ratio (or equally if the deed is silent), not in the ratio of capital.
✓ Debit partners' capital/current accounts individually and credit the Profit and Loss Appropriation Account with the loss amount in the profit-sharing ratio.
⚠ Treating Partner's Salary as an Expense
✗ Students debit partner's salary to the Profit and Loss Account as an expense.
→ Partner's salary is an appropriation of profit, not a charge against profit. It is recorded in the Profit and Loss Appropriation Account, not in the Profit and Loss Account. If the firm has a net loss, no salary is paid.
✓ Debit 'Salary to Partner A/c' and credit 'Partner's Capital/Current A/c'. Then transfer the salary account to the debit side of the Profit and Loss Appropriation Account.
Compare & Contrast
Number of accounts maintained per partner
Fixed Capital Method
Fluctuating Capital Method
Under fixed capital method, two accounts are maintained (Capital Account and Current Account) for each partner. Under fluctuating capital method, only one account (Capital Account) is maintained.
Treatment of drawings, interest, salary
Fixed Capital Method
Fluctuating Capital Method
Under fixed capital method, all adjustments (drawings, interest, salary, share of profit) are recorded in the Current Account, leaving the Capital Account unchanged. Under fluctuating capital method, all adjustments are recorded directly in the Capital Account, causing its balance to change each year.
Nature of transaction
Interest on Capital
Interest on Drawings
Interest on capital is an appropriation of profit (credited to partners) and is allowed only if the deed provides and the firm has profit. Interest on drawings is a charge against partners (debited to partners) and is charged only if the deed provides, regardless of profit or loss.
Purpose
Profit and Loss Account
Profit and Loss Appropriation Account
Profit and Loss Account shows the net profit or loss of the firm after accounting for all expenses and incomes (including interest on partner's loan and manager's commission). Profit and Loss Appropriation Account shows how that net profit is distributed among partners (interest on capital, salary, commission, and share of profit).
Exam Focus
Marks pattern: This chapter typically appears as: 2-3 MCQs (1 mark each), 1-2 Very Short Answer questions (1-2 marks), 1 Short Answer question (3-4 marks) on interest calculation or appropriation account, and 1 Long Answer question (5-6 marks) on preparation of capital accounts and appropriation account with multiple adjustments.
Most asked: Preparation of Profit and Loss Appropriation Account · Calculation of interest on capital with additional capital and withdrawals · Calculation of interest on drawings (monthly, quarterly, product method) · Fixed vs. Fluctuating Capital Method — journal entries and account formats · Provisions of Indian Partnership Act 1932 when deed is silent
Don't skip: A comprehensive question requiring preparation of Profit and Loss Appropriation Account and Partners' Capital/Current Accounts under fixed or fluctuating capital method, with adjustments for interest on capital, interest on drawings, salary, commission, and share of profit/loss.
One-Line Revision (read aloud before the exam)
  1. Partnership is defined by Section 4 of the Indian Partnership Act 1932 as a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
  2. Essential features of partnership: two or more persons, agreement, business, mutual agency, sharing of profit, and unlimited liability.
  3. Maximum number of partners in a firm is 50 as per the Companies Act 2013 and Central Government notification.
  4. If the partnership deed is silent, profits and losses are shared equally, no interest on capital or drawings, interest on partner's loan is 6% p.a., and no salary or commission is allowed.
  5. Under fixed capital method, two accounts are maintained per partner: Capital Account (fixed) and Current Account (for all adjustments).
  6. Under fluctuating capital method, only one Capital Account is maintained, and its balance changes every year.
  7. Profit and Loss Appropriation Account is an extension of the Profit and Loss Account and shows how net profit is distributed among partners.
  8. Interest on capital is calculated on the opening capital for the full year, plus interest on additional capital from the date of introduction, minus interest on withdrawn capital.
  9. If the firm incurs a net loss, no interest on capital, salary, or commission is allowed to partners.
  10. Interest on drawings for fixed monthly withdrawals at the beginning of each month is calculated for an average period of 6.5 months.
  11. Interest on drawings for fixed monthly withdrawals at the end of each month is calculated for an average period of 5.5 months.
  12. Under the product method, interest on drawings = Sum of (Amount × Period in months) × Rate × 1/12.
  13. Interest on partner's loan is a charge against profit, debited to Profit and Loss Account, not to Profit and Loss Appropriation Account.
  14. Partner's salary and commission are appropriations of profit, recorded in the Profit and Loss Appropriation Account.
  15. When profit is less than the total interest on capital due, interest is paid only to the extent of profit, distributed in the ratio of interest on capital.

MCQs — 10 Questions with Answers

Q1. Which of the following is NOT an essential feature of partnership?

  • A. Mutual agency between partners
  • B. Separate legal entity distinct from partners ✓
  • C. Agreement to share profits and losses
  • D. Minimum two persons

Answer: B — Partnership has no separate legal entity; the firm is merely an aggregate of partners' rights and liabilities.

Q2. Under the Companies Act 2013, what is the maximum number of partners allowed in a firm?

  • A. 20 partners
  • B. 50 partners ✓
  • C. 100 partners
  • D. Unlimited

Answer: B — The Central Government has prescribed the maximum number of partners in a firm to be 50 as per Section 464 of the Companies Act 2013.

Q3. A partnership agreement must always be in writing.

  • A. True
  • B. False ✓
  • C. Only if capital exceeds ₹1 lakh
  • D. Only if partners are more than 5

Answer: B — The Partnership Act does not require the agreement to be in writing; oral agreements are equally valid, though a written deed is preferred to avoid disputes.

Q4. In a partnership, if the Partnership Deed is silent on profit-sharing ratio, profits should be distributed:

  • A. In the ratio of capital contributed
  • B. Equally among all partners ✓
  • C. As decided by the senior partner
  • D. In the ratio of time invested

Answer: B — Section 13 of the Indian Partnership Act 1932 states that if there is no agreement, profits and losses are shared equally among all partners.

Q5. Under the fixed capital method, where are partner drawings recorded?

  • A. Directly in Capital Account
  • B. In a separate Loan or Current Account ✓
  • C. In Drawings Account only
  • D. In P&L Account

Answer: B — In fixed capital method, the Capital Account remains constant, so all withdrawals and temporary transactions are recorded in a separate Loan Account or Current Account.

Q6. Calculate interest on capital: Capital = ₹50,000; Rate = 5% p.a.; Time = 6 months. Interest = ?

  • A. ₹1,250 ✓
  • B. ₹2,500
  • C. ₹5,000
  • D. ₹500

Answer: A — Interest on Capital = ₹50,000 × 5% × 6/12 = ₹50,000 × 5% × 0.5 = ₹1,250.

Q7. In the P&L Appropriation Account, how is interest on capital recorded?

  • A. Debited to P&L, credited to partner's current account
  • B. Credited to P&L, debited to partner's capital account
  • C. Debited to P&L Appropriation, credited to partner's capital account ✓
  • D. Shown as a deduction from partner's share of profit

Answer: C — Interest on capital is debited to the P&L Appropriation Account and credited to the respective partner's Capital Account (or Current Account in fluctuating method).

Q8. Assertion (A): In partnership, mutual agency is essential for the existence of partnership. Reason (R): Mutual agency means each partner can bind all other partners by acts relating to the business. Which is correct?

  • A. Both A and R are true; R is the correct explanation of A ✓
  • B. Both A and R are true; R is not the correct explanation of A
  • C. A is true, R is false
  • D. A is false, R is true

Answer: A — Both statements are correct, and the reason properly explains why mutual agency is essential—without it, there is no partnership relationship.

Q9. A partner's drawing on 1st July for ₹10,000. Interest on drawings = 6% p.a. Interest to be charged = ?

  • A. ₹300 ✓
  • B. ₹600
  • C. ₹150
  • D. ₹450

Answer: A — Interest on drawings = ₹10,000 × 6% × 6/12 = ₹10,000 × 6% × 0.5 = ₹300 (from July to December = 6 months).

Q10. Which clause of the Partnership Deed specifies the entitlement of partners to share business profits?

  • A. Capital Contribution Clause
  • B. Profit and Loss Sharing Ratio Clause ✓
  • C. Rights and Duties Clause
  • D. Accounting Period Clause

Answer: B — The Profit and Loss Sharing Ratio Clause in the Partnership Deed explicitly defines the ratio in which partners will share profits and losses.

Flashcards

Define partnership under Section 4 of Indian Partnership Act 1932.

Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

What is mutual agency in partnership?

Mutual agency means each partner can bind all other partners by acts relating to the business, and is bound by their acts.

What is a Partnership Deed?

A written document containing the terms of agreement between partners regarding capital, profit-sharing ratio, interest on capital, salaries, and other rights and duties.

What is the maximum number of partners allowed in a firm as per Companies Act 2013?

The maximum number of partners in a firm is 50 as prescribed by the Central Government.

In fixed capital method, where are partner withdrawals recorded?

Partner withdrawals are recorded in a separate Loan Account or Current Account, not in the Capital Account.

How is interest on capital treated in the P&L Appropriation Account?

Interest on capital is debited to P&L Appropriation Account and credited to respective partners' capital or current accounts.

How is interest on drawings calculated and recorded?

Interest on drawings is calculated on amounts withdrawn and debited to partners' capital or current accounts, then credited to P&L Appropriation Account.

What happens if the Partnership Deed is silent on profit-sharing ratio?

Profits and losses are shared equally among all partners as per Section 13 of Indian Partnership Act 1932.

State one essential feature of partnership that distinguishes it from sole proprietorship.

Two or more persons must come together with an agreement to share profits and losses, with mutual agency existing between them.

In fluctuating capital method, how are partner transactions recorded?

All transactions including capital contribution, drawings, salary, commission, and profit share directly affect the partner's Capital Account balance.

Important Board Questions

State any two essential features of partnership that distinguish it from a sole proprietorship business. [2 marks]

Focus on: (1) number of persons required, (2) mutual agency concept, (3) unlimited liability, or (4) separate agreement needed. Choose any two and explain briefly with one distinguishing point each.

A and B are partners with a capital of ₹60,000 each. The Partnership Deed provides for interest on capital at 5% p.a. The firm earned a profit of ₹20,000 during the year. The partnership agreement is silent on the profit-sharing ratio. Show how the profit will be distributed among the partners. Show all working steps. [5 marks]

Calculate interest on capital for both partners (₹60,000 × 5% = ₹3,000 each). Then apply Section 13 of Partnership Act 1932: remaining profit (₹20,000 − ₹6,000 = ₹14,000) is shared equally. Show journal entries and final credit to each partner's account.

Explain the difference between Fixed Capital Method and Fluctuating Capital Method for maintaining partners' capital accounts. How does the treatment of drawings differ in each method? Illustrate with an example showing the format of capital accounts under both methods. [6 marks]

In Fixed Capital: capital account shows opening balance, interest on capital, and closing balance (same opening figure each year); drawings go to separate Loan/Current Account. In Fluctuating Capital: opening capital + interest on capital + profit share − drawings − interest on drawings = closing capital (all in one account). Show a simple T-account format for both methods with assumed figures to clarify the difference.

Assertion-Reason Questions for Accounting for Partnership: Basic Concepts

Q1. Assertion (A):

A partnership firm has no separate legal entity apart from the partners constituting it.

Reason (R):

This is because partnership is created by agreement between individuals and lacks the formal registration requirements of a company.

Answer: A — Both A and R are true, and R is the correct explanation of A — Both the assertion and reason are true, and the reason correctly explains why a partnership lacks separate legal entity. Unlike a company, which is a separate juristic person, a partnership is merely a collection of individuals bound by agreement.

Q2. Assertion (A):

According to the Indian Partnership Act 1932, when a partnership deed is silent on interest on capital, no interest is payable to partners.

Reason (R):

This provision applies because the Act treats interest on capital as an expense that must be explicitly agreed upon by all partners.

Answer: B — Both A and R are true, but R is NOT the correct explanation of A — The assertion is correct—the Act provides no interest unless agreed. The reason is partially misleading; it's not that interest is an 'expense' to be agreed upon, but rather that the Act does not presume any entitlement to interest on capital without express agreement. The reason is true but does not correctly explain the assertion's legal basis.

Q3. Assertion (A):

A partnership agreement must always be in written form to be valid.

Reason (R):

The Indian Partnership Act 1932 explicitly requires all partnership agreements to be documented in writing.

Answer: D — A is false but R is true — Both the assertion and reason are false. The Partnership Act does not require partnership agreements to be in writing; oral agreements are equally valid. While a written deed is preferred to avoid disputes, it is not mandatory for legal validity.

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Case-Based Questions (CBQ) for Accounting for Partnership: Basic Concepts

Case Study:

The 'Green Earth Club' is a not-for-profit organisation. For the year ended 31st March 2026, its Receipts and Payments Account shows a subscription received of ₹1,80,000. Additional information: Subscriptions outstanding on 1st April 2025 were ₹15,000, and on 31st March 2026 were ₹20,000. Subscriptions received in advance on 1st April 2025 were ₹10,000, and on 31st March 2026 were ₹12,000.

Q1. What is the amount of subscriptions to be credited to the Income and Expenditure Account for the year ended 31st March 2026?

  • A. ₹1,77,000
  • B. ₹1,83,000 ✓
  • C. ₹1,80,000
  • D. ₹1,73,000

Answer: B

Q2. If the club had also written off ₹5,000 as bad debts for subscriptions outstanding from the previous year, what would be the adjusted amount credited to the Income and Expenditure Account?

  • A. ₹1,78,000 ✓
  • B. ₹1,82,000
  • C. ₹1,72,000
  • D. ₹1,88,000

Answer: A

Q3. In the Balance Sheet as on 31st March 2026, how will the outstanding subscriptions of ₹20,000 be shown?

  • A. As a liability
  • B. As an asset ✓
  • C. As an expense
  • D. As an income

Answer: B

Q4. The subscriptions received in advance of ₹12,000 as on 31st March 2026 will appear in the Balance Sheet as:

  • A. Current liability ✓
  • B. Current asset
  • C. Reserve and surplus
  • D. Fixed asset

Answer: A

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Previous Year Questions (PYQ) for Accounting for Partnership: Basic Concepts

Real CBSE board exam questions from past papers — free to attempt.

CBSE 2026 · Set 67/3/1 · 1 mark

Atul, Bajaj and Madan were partners in a firm sharing profits and losses in the ratio of 1 : 2 : 5. The partnership deed provides that interest on drawings shall be charged at 18% per annum. During the year ended 31st March, 2025, Bajaj withdrew ₹7,000. The interest on Bajaj's drawings for the year will be:

  • ₹1,890
  • ₹3,150
  • ₹420
  • ₹5,040

CBSE 2026 · Set 67/3/1 · 1 mark

Divya and Bholi were partners in a firm sharing profits and losses in the ratio of 3 : 1. On 1st April, 2024, their fixed capitals were ₹8,00,000 and ₹6,00,000 respectively. On 30th September, 2024, Bholi introduced ₹50,000 as additional capital. Partnership deed provided that interest on capital is allowed at 12% per annum. The interest on capital for the year ended 31st March, 2025 was:

  • ₹78,000
  • ₹75,000
  • ₹72,000
  • ₹3,000

CBSE 2026 · Set 67/3/1 · 1 mark

Persons who have entered into partnership with one another are collectively called:

  • Firm
  • Partnership
  • Partners
  • All of the above

CBSE 2026 · Set 67/3/1 · 1 mark

When capitals of the partners are fluctuating, then the adjustments for interest on capital are shown in the __________.

  • Current Account of partners
  • Capital Account of partners
  • Drawings Account
  • Profit and Loss Appropriation Account

CBSE 2026 · Set 67/3/1 · 3 marks

Laxmi, Rani and Priya were partners in a firm sharing profits and losses in the ratio of 5 : 7 : 8. Their fixed capitals were ₹8,00,000; ₹7,00,000 and ₹5,00,000 respectively. The partnership deed provided interest on capital @ 9% per annum. For the year ending 31st March, 2025, interest on capital was provided @ 12% per annum. Showing your workings clearly, pass a single adjustment entry to rectify the error.

CBSE 2026 · Set 67/3/2 · 1 mark

Divya and Bholi were partners in a firm sharing profits and losses in the ratio of 3 : 1. On 1st April, 2024, their fixed capitals were 8,00,000 and 6,00,000 respectively. On 30th September, 2024, Bholi introduced 50,000 as additional capital. Partnership deed provided that interest on capital was allowed @ 6% p.a. The interest on capital for the year ended 31st March, 2025 was:

  • 78,000
  • 75,000
  • 72,000
  • 3,000

CBSE 2026 · Set 67/3/2 · 1 mark

When capitals of the partners are fluctuating, then the adjustments for interest on capital are shown in the _________.

  • Current Account of partners
  • Capital Account of partners
  • Drawings Account
  • Profit and Loss Appropriation Account

CBSE 2026 · Set 67/3/2 · 1 mark

Atul, Bajaj and Madan were partners in a firm sharing profits and losses in the ratio of 1 : 2 : 5. The partnership deed provides that interest on drawings @ 18% p.a. During the year ended 31st March, 2025, Bajaj withdrew 7,000 on 1st July, 2024. The interest on drawings for the year will be:

  • 1,890
  • 3,150
  • 420
  • 5,040

CBSE 2026 · Set 67/3/2 · 3 marks

Laxmi, Rani and Priya were partners in a firm sharing profits and losses in the ratio of 5 : 7 : 8. Their fixed capitals were 8,00,000; 7,00,000 and 5,00,000 respectively. The partnership deed provided interest on capital @ 9% per annum. For the year ending 31st March, 2025, interest on capital was provided @ 12% per annum. Showing your workings clearly, pass a single adjustment entry to rectify the error.

CBSE 2026 · Set 67/3/3 · 1 mark

When capitals of the partners are fluctuating, then the adjustments for are shown in the _________.

  • Current Account of partners
  • Capital Account of partners
  • Drawings Account
  • Profit and Loss Appropriation Account

CBSE 2026 · Set 67/3/3 · 1 mark

Divya and Bholi were partners in a firm sharing profits and losses in the ratio of 3 : 1. On 1st April, 2024, their fixed capitals were ₹8,00,000 and ₹6,00,000 respectively. On 30th September, 2024, Bholi introduced ₹50,000 as additional capital. Partnership deed provided that interest on ended 31st March, 2025 was:

  • ₹78,000
  • ₹75,000
  • ₹72,000
  • ₹3,000

CBSE 2026 · Set 67/3/3 · 1 mark

Atul, Bajaj and Madan were partners in a firm sharing profits and losses in the ratio of 1 : 2 : 5. The partnership deed provides that annum. During the year ended 31st March, 2025, Bajaj withdrew be:

  • ₹1,890
  • ₹3,150
  • ₹420
  • ₹5,040

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