What is Partnership in Accounting?
According to Section 4 of Indian Partnership Act, 1932, Partnership in accounting 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.”
Persons who have entered into a partnership with another individually are called partners. Collectively these partners refers to a partnership firm. The name under which the business of the firms carries is known as firm name.
Nature of Partnership
Just like company, in accounting point of view, partnership is completely a separate legal entity. But from legal point of view partnership firm does not have any separate legal entity from its partners.
Features of Partnership
The main features of partnership in accounting are as follows –
- Association of Two or More Persons – Partnership is an association of two or more persons agreeing to carry on business and share profits or losses. The Companies Act 2013 prescribes the maximum numbers of partners in case of partnership firm should not be more than 100. Earlier, according to Companies Act 1956, the maximum limit in case of partnership was 10 and for banking business it was 20. In simple and short words, if the firm exceeds the prescribed limit, the partnership becomes illegal.
- Carrying on a Business – Agreement should be for carrying on the business.
- Agreement – Partnership comes into existence with an agreement. The agreement could either be written or implied. The agreement is done on the basis of the relationship between or among the partners. This agreement is known as Partnership Deed.
- Lawful Business – The business for which partner has come together to form a partnership should be legal.
- Profit Sharing – The agreement between or among the partners should be such that they share profits as well losses. However, it is not mandatory for all the partners to share the losses. But for that, there must be specific provisions available in the partnership deed.
- Business can be carried on by all or any of the partner acting for all – The business of the firm can be either carried by all or any one of them acting for all. In simple words, partners both act as agents as well as principals.
Rights of Partners
- Every partner has the right to take part in the management of the business.
- Every partner is entitle to consult about the business affairs of the partnership firm.
- Each and every partner has the right to inspect the books of accounts and have a copy of the same.
- If a partner has contributed a sum by way of loans, he has the right to receive the interest on such amount at an agreed rate of interest. If the partnership deed is silent about the interest, it is 6% p.a.
- Every partner is entitle to share profits or losses with others in the agreed rate.
- In case of emergency, partner has the right to act according to his best judgement.
- A partner has to disagree with the introduction of new partner in the business.
- After giving a notice, a partner has the right to retire from the firm.
- If the partner incurs expenses on the business or pays some money on behalf of the firm, that partner may get indemnified against these payments from the firm.