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Ch 1 · Partnership · T.S. Grewal — Double Entry Book Keeping

Partnership Firms
Fundamentals

75 MCQs 50 Flashcards 5 Practice Ledger problems · NEW T.S. Grewal Class 12 Updated May 2026
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Chapter Overview

Chapter 1 lays the foundation for all of Class 12 Partnership Accounting. It begins with the legal definition of a partnership under the Indian Partnership Act, 1932 — an agreement between two or more persons to share the profits of a business carried on by all or any of them acting for all. The chapter sets out the five essential features (agreement, two or more persons, lawful business, profit-sharing intent, and mutual agency) and explains the role of the Partnership Deed in fixing the terms.

The bulk of the chapter is procedural: how to prepare the Profit and Loss Appropriation Account, how to maintain partners' capital accounts under both the Fixed Capital Method (with a separate Current A/c) and the Fluctuating Capital Method, and how to compute and post the standard appropriations — interest on capital, interest on drawings, partner's salary, partner's commission, and transfer to reserves before the final profit distribution.

Special situations covered include guarantee of profit to a partner (where the deficiency is borne by the others in an agreed ratio), past adjustments when the partnership deed is silent or omissions are discovered after closing the books, and the rules that apply in the absence of a partnership deed (equal profit-sharing, no interest on capital, 6% on partner's loan, etc.). Numerical practice on these scenarios drives a large part of the 6-mark and 8-mark questions on the board paper.

What You'll Learn
Key Concepts
Definition
Partnership
Agreement between 2+ persons to share profits of a lawful business carried on by all or any of them acting for all. Indian Partnership Act 1932, Section 4.
Document
Partnership Deed
Written agreement covering capital, ratio, interest on capital/drawings, salary, dispute settlement. Optional in law but standard in practice.
No Deed
Default Rules
Equal profit-sharing · No interest on capital · No interest on drawings · No salary/commission · 6% interest on partner's loan to firm.
Account
P&L Appropriation A/c
Distinct from P&L A/c. Shows how net profit is appropriated: interest on capital, salary, commission, reserve transfer, then profit-share.
Capital — Method 1
Fixed Capital
Capital balance never changes. All adjustments go to a separate Current A/c (which can have Dr or Cr balance).
Capital — Method 2
Fluctuating Capital
One Capital A/c per partner. All adjustments — interest, salary, drawings, profit-share — go directly to it.
Appropriation
Interest on Capital
Allowed only if deed permits. Calculated on opening capital + additions/withdrawals × rate × time. Treated as a charge or appropriation per deed.
Charge
Interest on Drawings
Charged from partner's capital. Average Period method: ½ way for equal monthly drawings — 6.5/5.5/6 mo for beginning/end/middle.
Special Case
Guarantee of Profit
Minimum profit guaranteed to a partner. Deficiency borne by remaining partners in agreed ratio (often their PSR).
Correction
Past Adjustments
When errors are found after closing books — net effect is computed and a single adjustment journal entry passed via partners' Capital A/cs.
📒 Practice Ledger NEW
Pass real journal entries — auto-balanced, auto-checked
Type each line into a live grid that auto-totals Dr and Cr, then check your work against the textbook solution. 5 problems live for Ch 1: Interest on Capital · Interest on Drawings · Salary to Partner · Distribution of Profit · Guarantee of Profit.
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Sample MCQs
Q1. In the absence of a partnership deed, the rate of interest payable on a loan advanced by a partner to the firm is:
A. 8% p.a.
B. 6% p.a.
C. 10% p.a.
D. No interest is payable
Section 13(d) of the Indian Partnership Act 1932 fixes interest on a partner's loan to the firm at 6% p.a. when the deed is silent. This is a charge against profit, not an appropriation, so it must be paid even when there are losses.
Q2. Under the Fluctuating Capital Method:
A. Two accounts are maintained for each partner — Capital A/c and Current A/c
B. Only one Capital A/c is maintained per partner and all adjustments are posted to it
C. The capital balance is fixed for the duration of the partnership
D. Drawings are not recorded in any partner's account
In Fluctuating Capital, all entries — interest, salary, drawings, profit-share — go directly to the partner's single Capital A/c, so its balance fluctuates each year. The Fixed Method instead uses two accounts: Capital A/c (unchanged) and a separate Current A/c.
Q3. A partner withdraws ₹3,000 at the beginning of every month for personal use. If the partnership deed charges interest on drawings at 12% p.a., the interest on drawings for the year will be:
A. ₹2,160
B. ₹2,340
C. ₹3,600
D. ₹1,980
Total drawings = 3,000 × 12 = 36,000. Beginning-of-month average period = (12+1)/2 = 6.5 months. Interest = 36,000 × 12% × 6.5/12 = ₹2,340.
Frequently Asked Questions
What is a partnership firm under the Indian Partnership Act, 1932?
A 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 (Section 4). It requires at least 2 persons, a lawful business, an agreement to share profits, and the principle of mutual agency — every partner is both an agent and a principal of the others.
What happens when there is no partnership deed?
The Indian Partnership Act 1932 supplies default rules: profits and losses are shared equally regardless of capital contribution; no interest on capital is allowed; no interest on drawings is charged; no salary or commission is payable to any partner; and interest on partner's loan to the firm is paid at 6% p.a.
What is the difference between Fixed and Fluctuating Capital methods?
Under Fixed Capital, the Capital A/c balance never changes — only contributions and withdrawals of capital affect it. All other adjustments (interest, salary, drawings, profit-share) are posted to a separate Current A/c, which can have a debit or credit balance. Under Fluctuating Capital, only one Capital A/c is maintained, and every adjustment goes to it, so the balance changes each year. Indian textbooks (T.S. Grewal) treat Fluctuating as the default unless otherwise stated.
Why do we prepare a Profit and Loss Appropriation A/c?
The P&L A/c gives the operating profit of the firm. The P&L Appropriation A/c then shows how that profit is shared between the partners — interest on capital, partner's salary or commission, transfer to general reserve, and finally the divisible profit in the agreed ratio. Keeping appropriation separate prevents partner-related items from being treated as business expenses.
How do you compute interest on drawings when a fixed amount is drawn at regular intervals?
Use the Average Period Method: Beginning of every month → average period = (12+1)/2 = 6.5 months. End of every month → (11+0)/2 = 5.5 months. Middle of every month → 6 months. Apply: Interest = Total Drawings × Rate × Avg Period ÷ 12. For irregular amounts, use the Product Method: Σ(Drawings × months remaining) × Rate ÷ 12.
What is a guarantee of profit and how is the deficiency adjusted?
A guarantee of profit means a partner is assured a minimum share regardless of the firm's actual profit. Step 1: distribute profits in the agreed PSR. Step 2: if the guaranteed partner's share falls short, calculate the deficiency. Step 3: deduct the deficiency from the other partners in the ratio specified by the deed (often their own PSR), and add it to the guaranteed partner. The journal entry transfers the final adjusted shares from P&L Appropriation A/c.