Lesson
Learn how accounting changes when two or more people run a business together.
Understand the simple ideas behind partnership accounts: partners, capital, drawings, profit sharing, interest, salary, commission, and appropriation of profit.
Concept explanation
Partnership means two or more people agree to run a business together and share its profit or loss.
In a sole proprietorship, one owner runs the business.
In a partnership, two or more owners run the business together.
Example: Riya and Amit start a stationery shop together. Riya brings money. Amit manages daily sales. Both agree to share profit.
Simple line: Partnership means business by two or more people together.
Riya and Amit are friends.
They start a small mobile accessories shop.
Riya brings Rs.60,000 capital.
Amit brings Rs.40,000 capital.
They agree that profit will be shared equally.
Amit will get salary Rs.5,000 per month because he manages the shop daily.
Riya will get interest on capital.
If any partner withdraws money for personal use, interest on drawings may be charged.
At the end of the year, the shop earns profit.
Now the question is: how should the profit be divided between Riya and Amit?
This is where partnership accounts are needed.
Partner means a person who is part-owner of the partnership business.
Partnership firm means the business run by partners, such as Riya & Amit Mobile Accessories.
Partnership deed means a written agreement between partners.
Profit sharing ratio means the ratio in which partners share profit or loss.
Capital means money or assets brought by partners into the business.
Drawings means money or goods taken by a partner for personal use.
Interest on capital means interest allowed to partners on the capital they invested.
Interest on drawings means interest charged from partners when they withdraw money or goods.
Partner salary or commission means amount given to a partner for special work or responsibility.
In sole proprietorship, there is only one owner.
But in partnership, there are multiple partners.
Each partner may bring different capital.
Profit must be shared among partners.
Partners may get salary or commission.
Partners may get interest on capital.
Partners may be charged interest on drawings.
Simple line: Partnership accounts show how profit is shared among partners.
A Partnership Deed is a written agreement between partners.
It reduces confusion because it clearly says how the partnership will work.
It may include the name of firm, names of partners, capital of each partner, and profit sharing ratio.
It may also include interest on capital, interest on drawings, partner salary, partner commission, and duties of partners.
It may include rules for admission or retirement later.
Simple line: Partnership deed is the rulebook of the partnership.
If the deed is silent, normal partnership rules are followed as per the law and basic accounting rules taught later.
Profit Sharing Ratio is the ratio in which partners share profit or loss.
Example: Riya and Amit share profit equally. Ratio = 1:1.
If profit is Rs.40,000, Riya gets Rs.20,000 and Amit gets Rs.20,000.
Example: Riya and Amit share profit in 3:2.
If profit is Rs.50,000, total parts are 3 + 2 = 5.
Riya's share is Rs.50,000 x 3/5 = Rs.30,000.
Amit's share is Rs.50,000 x 2/5 = Rs.20,000.
Simple line: Profit sharing ratio decides each partner's share of profit or loss.
Capital contribution means money or assets brought by partners into the business.
Example: Riya brings Rs.60,000 and Amit brings Rs.40,000.
Total capital is Rs.1,00,000.
Capital ratio and profit sharing ratio may be different.
Example: Riya brings more capital, but partners may still share profit equally if the deed says so.
Simple line: Capital shows investment. Profit sharing ratio shows profit division.
Drawings mean money or goods taken by partners for personal use.
Example: Amit withdraws Rs.5,000 from business for personal expenses.
Drawings reduce the partner's capital.
If the partnership deed says interest on drawings will be charged, then the partner has to pay interest for using business money personally.
Simple line: Drawings reduce partner's claim in the business.
Interest on capital means the business gives interest to a partner for investing capital.
Example: Riya's capital is Rs.60,000 and interest on capital is 10%. Interest is Rs.6,000.
This is allowed to Riya before sharing profit if the deed allows it.
Interest on drawings means the business charges interest when a partner withdraws money for personal use.
Example: Amit's drawings are Rs.10,000 and interest on drawings is 5%. Interest is Rs.500.
Memory line: Interest on capital is given to partner.
Memory line: Interest on drawings is charged from partner.
Sometimes one partner works more than others.
Example: Amit manages the shop every day, while Riya is not involved daily.
The deed may say that Amit will get salary Rs.5,000 per month.
This salary is given before profit is shared.
A partner may also get commission for special work, such as managing sales.
Simple line: Partner salary or commission is reward for extra work.
Profit and Loss Appropriation Account shows how net profit is distributed among partners.
It is prepared after Profit and Loss Account.
It may include net profit, interest on capital, partner salary, partner commission, interest on drawings, and profit shared among partners.
Simple flow: Net Profit, less interest on capital, less partner salary or commission, add interest on drawings, then share remaining profit in profit sharing ratio.
Simple line: P&L Appropriation Account shows division of profit between partners.
This lesson only introduces the idea. The detailed account is a later topic.
Under fixed capital method, a partner's capital account usually remains fixed.
Changes like salary, interest, drawings, and profit are recorded in Current Account.
Under fluctuating capital method, all changes are recorded in the partner's Capital Account itself.
So the capital balance keeps changing.
Simple line: Fixed capital keeps capital and adjustments separate. Fluctuating capital keeps them together.
Simple comparison
| Fixed Capital | Fluctuating Capital |
|---|---|
| Capital stays mostly fixed | Capital changes frequently |
| Current Account is used | Current Account usually not used |
| Capital and adjustments are separate | Capital and adjustments are together |
Memory line: fixed capital separates changes; fluctuating capital includes changes in capital itself.
Partnership basics guide
| Item | Simple meaning | Basic treatment |
|---|---|---|
| Capital | Money or assets brought by partner | Shows partner's investment |
| Drawings | Money or goods taken for personal use | Reduces partner's claim |
| Interest on Capital | Reward for capital invested | Allowed before profit sharing if deed allows |
| Interest on Drawings | Charge for personal withdrawal | Added before profit sharing if deed allows |
| Partner Salary | Reward for extra work | Allowed before profit sharing if deed allows |
| Profit Sharing Ratio | Ratio for sharing profit or loss | Used to divide remaining profit |
Always read the partnership deed first because it decides the treatment.
Visual flow
Partners start business
Bring capital
Business earns profit
Apply partnership deed
Give interest, salary, or commission if allowed
Charge interest on drawings if applicable
Share remaining profit in ratio
Update partner capital or current accounts
Solved examples
Example 1
Profit Rs.40,000 Riya's share Rs.20,000 Amit's share Rs.20,000
Equal sharing means 1:1.
Each partner gets half of the profit.
Example 2
Total parts = 3 + 2 = 5 Riya = Rs.50,000 x 3/5 = Rs.30,000 Amit = Rs.50,000 x 2/5 = Rs.20,000
Profit is divided by the profit sharing ratio.
Riya gets three parts and Amit gets two parts.
Example 3
Interest = Rs.60,000 x 10% Interest on Capital = Rs.6,000
Interest on capital is allowed on the capital invested.
It is given before sharing profit if the deed allows it.
Example 4
Interest = Rs.10,000 x 5% Interest on Drawings = Rs.500
Interest on drawings is charged from the partner.
It is charged because the partner used business money personally.
Example 5
Monthly salary Rs.5,000 Annual salary = Rs.5,000 x 12 Annual salary = Rs.60,000
Partner salary is reward for special work.
It is given before sharing remaining profit if the deed allows it.
Example 6
Net Profit Rs.80,000 Less Amit Salary Rs.20,000 Remaining Profit Rs.60,000 Riya's share Rs.30,000 Amit's profit share Rs.30,000 Amit also gets salary Rs.20,000 Total benefit to Amit Rs.50,000
Salary is given before sharing remaining profit.
The balance profit is shared equally.
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After learning partnership basics, the next step is to learn how profit is adjusted and distributed among partners.
Continue to Profit and Loss Appropriation Account