Partnership Accounts — Exam-Ready Cheatsheet
Everything you need for partnership firm accounting — from profit sharing and capital accounts to admission, retirement, death and dissolution. Covers both Fixed and Fluctuating Capital methods.
Last reviewed: 22 April 2026
Core relationship
- •A partnership is a relationship between persons who agree to share profits of a business carried on by all or any of them acting for all (Indian Partnership Act, 1932, Section 4).
- •Minimum 2 partners; maximum 50 (Companies Rules, 2014).
- •Default profit-sharing ratio (no agreement): equal.
- •Default interest on capital: nil. Interest on loan by partner: 6% p.a. if silent.
Fixed vs Fluctuating capital
- •Fixed capital: Capital A/c stays constant; drawings / interest / salary / profit go to Current A/c.
- •Fluctuating capital: Everything adjusted in one Capital A/c; balance changes each year.
- •If question is silent — assume Fluctuating (unless Fixed is specifically set up).
Profit & Loss Appropriation A/c (P&L App)
- •Above the line: Net profit b/d, Interest on drawings.
- •Below the line: Interest on capital, Partner's salary/commission, Profit share to partners.
- •Always prepare P&L App BEFORE the Capital / Current A/c.
Admission of a partner
- •Calculate new profit-sharing ratio and sacrificing ratio.
- •Revalue assets & liabilities — transfer profit/loss on revaluation to old partners in old ratio.
- •Adjust accumulated reserves/P&L to old partners in old ratio.
- •Goodwill: either raised (rarely) or adjusted via capital accounts (common).
- •Bring in capital in new ratio if premium method is silent.
Retirement / death
- •Gaining ratio = New ratio − Old ratio (for remaining partners).
- •Pay retiring/deceased partner: capital + share of reserves + revaluation + goodwill + interim profit.
- •Joint Life Policy: if received → distribute to all partners in old ratio.
- •Death: also consider share of current year's profit up to date of death.
Dissolution of firm
- •Realisation A/c collects all assets (at book value, Dr.) and liabilities (Cr.).
- •Record actual realisation and settlement on the other side.
- •Transfer loss/gain on realisation to partners in profit-sharing ratio.
- •Garner vs Murray rule: if a partner is insolvent, solvent partners share the deficiency in the ratio of their capitals just before dissolution (not PSR) — unless decided otherwise.
Formulas
- Sacrificing ratio (new partner)
- Sacrificing ratio = Old ratio − New ratio
- Gaining ratio (retirement)
- Gaining ratio = New ratio − Old ratio
- Interest on capital
- Interest on capital = Capital × Rate × (Months in firm ÷ 12)
- Interest on drawings (product method)
- Interest on drawings = ΣProducts × Rate × (1 ÷ 12)
- Goodwill (Simple average profit method)
- Goodwill = Average profit × Number of years' purchase
- Goodwill (Super profit method)
- Super profit = Actual avg profit − (Normal rate × Capital employed); Goodwill = Super profit × Years of purchase
- Goodwill (Capitalisation method)
- Goodwill = Capitalised value of average profits − Net tangible assets
Used when goodwill premium is brought in on admission.
Product of each drawing = amount × months till year-end.
Must know before the exam
- ★In fluctuating capital, closing capital can be credit OR debit. In fixed capital, Capital A/c stays constant.
- ★Always adjust accumulated reserves / fictitious losses BEFORE new partner brings capital.
- ★If goodwill is already in books on admission/retirement, write it off first to old partners in old ratio.
- ★Joint Life Policy surrender value appears on assets side until death/dissolution triggers encashment.
Common mistakes & fixes
- ✗ Using PSR instead of Gaining ratio for goodwill adjustment on retirement.
- ✓ Gain goes to remaining partners — use Gaining ratio.
- ✗ Forgetting to revalue assets before admission / retirement.
- ✓ Revaluation A/c is mandatory whenever firm structure changes.
- ✗ Treating interest on partner's loan as 'appropriation'.
- ✓ Interest on partner's loan is a CHARGE (debited to P&L, not P&L App).
Lock it in with practice
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