What is Partnership?

What is Partnership ?

When two or more persons join to set up a business and share its profits and losses it is called 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’.

Partners are the persons who have entered into partnership individually with one another. Partners collectively are called ‘firm’.

The essential features of the partnership are as follows.

Two or More Persons

There should be at least two persons coming together to form the partnership for a common goal. In other words, the minimum number of partners in a partnership firm can be two.

Indian Partnership Act, 1932 has put no limitations on maximum numbers of partners in a firm. But however, Indian Companies Act, 2013 puts a limit on a number of the partners in a firm as follow:

  • For Banking Business, Partners must be less than or equal to 10.
  • For Any Other Business, Partners must be less than or equal to 20.
  • If the number of partners exceeds the limits, the partnership becomes illegal.

The partnership is an agreement between two or more persons who decided to do business and share its profits and losses. To have a legal relationship between the partners, the partnership agreement becomes the basis. The agreement can be in written form or oral form. An oral agreement is equally valid. But, preferably the partners should have a written agreement, in order to avoid disputes in future.


To carry on some business there should be an agreement. Mere co-ownership of a property does not amount to the partnership. The business must also be legal in nature, a partnership to carry out illegal business is not valid.

Mutual Agency

The business of a partnership firm may be carried on by all the partners or any of them acting for all. This statement has two important implications. First, to participate in the conduct of the affairs of its business, every partner is entitled. Second that a relationship of mutual agency between all the partners exists.

For all the other partners, each partner carrying on the business is the principal as well as the agent. He can bind other partners by his acts. And also is bound by the acts of other partners with regard to the business of the firm.

Sharing of Profit

The agreement between partners must be to share profits and losses of a business. Sharing of profits and losses is important. The partnership is not for the purpose of some charitable activity.

Liability of Partnership

Each partner is liable jointly with all the other partners. And also when is a partner, severally liable to the third party for all the acts done by the firm. Liability of the partner is not limited. This implies that for paying off the firm’s debts, his private assets can also be used.

Partnership Firm is a very special form of business organization. There are a few differences which are: Maintenance of Partner’s Capital Accounts, Distribution of Profit and Loss among the partners, Adjustments for the wrong appropriation profits etc. Now, let’s discuss the maintenance of various Special Aspects of the Partnership Accounts.
Maintenance of Partner’s Capital Accounts

Most of the transactions relating to the partners of the firm are recorded in the books of the firm through their capital accounts. This includes various transactions like money brought in by the partner, withdrawal of the capital, the share of profit, interest on drawings, interest on capital, etc.

There are 2 methods by which the capital of the partners is maintained. These special aspects accounts are : (a) Fixed Capital Method and (b) Fluctuating Capital Method.

1] Fixed Capital Method

Under this method, a firm maintains 2 capital accounts in order to keep the capital account balance stable from regular capital related transactions. These 2 accounts are as follows: (a) Capital Account and (b) Current Account. Capital Account only includes transactions like Initial investment, an addition of capital and permanent withdrawal of capital.

2] Fluctuating Capital Method

Under this method, a firm records all the capital related transaction (Permanent as well as Non-Permanent) under a single account and that is Capital Account.

Reconstitution of Partnership Firm

Reconstitution means a change in the terms of the agreement of the partners or the ‘Partnership Deed’. Thus, the old agreement between the partners come to an end and a new existence comes into existence.

Reconstitution of partnership firm takes place when there is a change in the profit sharing ratio of the partners, admission of the partners, retirement or death of a partner.

Admission of a Partner

Admission of a partner has some Special Aspects too. When a firm requires additional capital or managerial help it can admit a new partner in its business.

As per the Partnership Act, 1932, a new partner can only be admitted with mutual consent unless otherwise provided in the partnership deed.

When a new partner is admitted a new agreement is formed and thus the firm is reconstituted.

Retirement or Death of a Partner

Although retirement and death of a partner are two totally different events, in accounting most of the treatment is similar in nature.

A partner may decide to retire or withdraw from the firm due to his own reasons.

In case of Partnership at Will, a partner may retire at any time. Death or insolvency of a partner also results in the reconstitution of the firm when the remaining partners wish to continue the firm.

In case of death of a partner, the firm pays the due amount to the partner’s legal heir.

Dissolution of Partnership Firm

Dissolution of a partnership merely involves a change in the relation of partners; whereas the dissolution of firm amounts to a complete closure of the business.

Dissolution of partnership changes the mutual relations of the partners. But in case of dissolution of a firm, all the relations and the business of the firm comes to an end.

Partnership Deed is an agreement to carry on a business between the partners, partnership comes into existence. The partnership agreement can be either oral or written. The Partnership Act does not require that the agreement must be in writing. But when the agreement is in written form, it is called ‘Partnership Deed’. Partnership deed should be duly signed by the partners, stamped & registered.

Partnership deed generally contains the following details:

Name and Addresses of the firm and its main business;

Names and Addresses of all partners;

capital by each partner;

The accounting period of the firm;

The date of commencement of partnership;

Rules regarding an operation of Bank Accounts;

Profit and loss sharing ratio;

The rate of interest on capital, loan, drawings, etc;

Mode of auditor’s appointment, if any;

Salaries, commission, etc, if payable to any partner;

The rights, duties, and liabilities of each partner;

Treatment of loss arising out of insolvency of one or more partners;

Settlement of accounts on the dissolution of the firm;

Method of a settlement of disputes among the partners;

Rules to be followed in case of admission, retirement, a death of a partner; and

Any other matter relating to the conduct of business. Normally, all the matters affecting the relationship of partners amongst themselves are covered in partnership deed.

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