Accounting · Partnership and LLP Accounts
Partnership Deed and Basics of Partnership Accounts
Updated 1 October 2026
A partnership deed is the written agreement that sets out how partners share profits, interest, salary and capital. If it is silent, the Indian Partnership Act rules apply: equal profit sharing, no salary, no interest on capital, 6% interest on loans. Capital is kept either fixed or fluctuating.
Understand Partnership Deed and Basics of Partnership Accounts
A partnership is a relationship between persons who agree to share the profits of a business carried on by all of them or by any of them acting for all. The agreement can be oral, but a written agreement called the partnership deed avoids disputes and is what examiners expect you to follow.
The deed decides how the firm runs. Typical clauses cover the firm's name and business, the partners' names, the capital each brings, the profit-sharing ratio, interest on capital and drawings, salary or commission to partners, interest on partners' loans, the rules for admission, retirement and death, and how disputes are settled. Whatever the deed says is binding on the partners.
If the deed is silent on a point, the Indian Partnership Act, 1932 fills the gap. In exam questions this is the classic trap: the question gives some facts and says nothing about others. For each missing item, use the default rule. Profits are shared equally, whatever the capital ratio. No partner gets salary. No interest on capital is allowed. No interest is charged on drawings. A loan from a partner earns interest at 6% per annum.
Capital can be kept in two ways. Under the fixed capital method, the capital account stays constant except for new capital brought in or withdrawn by agreement. Interest, salary, drawings and profit share go through a separate current account. Under the fluctuating capital method, there is only one capital account, and all these items are posted straight into it, so its balance changes every year.
Key rules to remember
- Profit sharing when deed is silent
- Profit share of each partner = Net profit ÷ Number of partners
- Equal sharing applies even if capitals are unequal. Losses are also shared equally.
- Interest on capital when deed is silent
- Interest on capital = Nil
- If the deed provides for it, it is payable only out of profits, and only if there are profits.
- Salary or commission to partner when deed is silent
- Salary = Nil
- A partner is not entitled to remuneration for taking part in the business unless the deed says so.
- Interest on partner's loan
- Interest = Loan × 6% × Time
- Applies when a partner lends to the firm beyond his capital and the deed does not fix a rate. It is a charge against profit, not an appropriation.
- Interest on drawings when deed is silent
- Interest on drawings = Nil
- Charged only if the deed provides for it.
- Closing capital, fluctuating method
- Closing capital = Opening capital + Additional capital + Interest on capital + Salary + Share of profit − Drawings − Interest on drawings − Share of loss
- All items are posted in the single capital account.
- Closing current account, fixed method
- Closing current account = Opening balance (Cr +, Dr −) + Interest on capital + Salary + Share of profit − Share of loss − Drawings − Interest on drawings
- A negative result is a debit balance (partner owes the firm). Capital account does not change. In a loss year, the share of loss is deducted instead of adding a share of profit.
How to solve Partnership Deed and Basics of Partnership Accounts questions
Use this order for any question on the deed, default rules or capital accounts.
- 1Read the question and list every term the deed gives: ratio, interest rate, salary, drawings, capital method.
- 2Mark every item the question does not mention. For each one, apply the Partnership Act default rule.
- 3Identify the capital method. If capitals are fixed, plan a current account too. If fluctuating, plan only a capital account.
- 4Prepare the Profit and Loss Appropriation Account if needed: start from net profit, deduct interest on capital and salary, add interest on drawings, then divide the balance in the ratio.
- 5Check that interest on loan is charged to the Profit and Loss Account, not in appropriation.
- 6Post each partner's figures in the capital or current accounts, with narrations, and balance them.
- 7Cross-check: the total of partners' shares plus appropriations must equal the profit you started with.
Quickest way: Default-rule checklist and one-table working
When to use it: Use it when a question mixes given terms with silent ones and you have limited time.
- Write five lines at the top of the answer: Ratio, Interest on capital, Salary, Drawings interest, Loan interest. Fill each as 'per deed' or 'default'.
- Build one working table with a column for each partner and rows for opening balance, interest, salary, profit share, drawings, closing balance.
- Fill the table row by row, then copy the closing figures into the accounts or balance sheet.
- Total the appropriation column and match it with the net profit before writing the final answer.
Common mistakes in Partnership Deed and Basics of Partnership Accounts
Sharing profit in the capital ratio when the deed is silent.
Students assume the larger investor gets more.
Fix: Silent deed means equal sharing among all partners, regardless of capital.
Allowing interest on capital when the deed says nothing.
Interest on capital feels like a standard item.
Fix: Default is nil. Allow it only if the question or deed states it, and only to the extent of available profit.
Treating a partner's loan interest as an appropriation.
Students mix it up with interest on capital.
Fix: Loan interest at 6% is a charge. Debit it in the Profit and Loss Account, before arriving at net profit.
Posting interest, salary and drawings in the capital account under the fixed method.
Students forget that fixed capital stays unchanged.
Fix: Under the fixed method, post all such items in the current account.
Giving 6% interest on a partner's capital as the default.
The 6% figure for loans is remembered but misapplied.
Fix: The 6% default is only for loans or advances beyond capital. Capital carries no default interest.
Worked examples
Example 1
A and B are partners with capitals of ₹6,00,000 and ₹2,00,000. The deed is silent on profit sharing, interest and salary. Profit for the year before charging interest on B's loan is ₹1,80,000. B had also lent ₹50,000 to the firm at the start of the year, with no rate agreed. Show the division of profit.
Show the solution
- Interest on B's loan = ₹50,000 × 6% = ₹3,000. This is a charge against profit, not a part of the profit division. It is paid to B as a lender.
- Net profit after charging the loan interest = ₹1,80,000 − ₹3,000 = ₹1,77,000.
- No interest on capital and no salary, as the deed is silent. The capitals of ₹6,00,000 and ₹2,00,000 do not affect the division.
- Profit is shared equally: ₹1,77,000 ÷ 2 = ₹88,500 each.
- B's total receipt = ₹88,500 (share of profit) + ₹3,000 (interest on loan) = ₹91,500.
- Check: ₹88,500 + ₹88,500 + ₹3,000 = ₹1,80,000, which equals the profit before interest on loan.
Answer: Net profit divisible is ₹1,77,000 after the loan interest charge. A and B each get ₹88,500 as share of profit. The ₹3,000 loan interest is a charge, not part of the division, so B's total receipt is ₹88,500 + ₹3,000 = ₹91,500, while A receives ₹88,500.
Example 2
X and Y are partners sharing profits 3:2. Fixed capitals: X ₹4,00,000, Y ₹3,00,000. The deed provides interest on capital at 10% p.a. and a salary of ₹60,000 per year to Y. Drawings: X ₹50,000, Y ₹40,000; no interest on drawings. Net profit is ₹3,00,000. Opening current accounts are nil. Prepare the current accounts.
Show the solution
- Interest on capital: X = ₹4,00,000 × 10% = ₹40,000. Y = ₹3,00,000 × 10% = ₹30,000. Total ₹70,000.
- Salary to Y = ₹60,000.
- Profit after interest and salary = ₹3,00,000 − ₹70,000 − ₹60,000 = ₹1,70,000.
- Share in 3:2: X = ₹1,02,000. Y = ₹68,000.
- X current account: credit ₹40,000 + ₹1,02,000 = ₹1,42,000; debit drawings ₹50,000; closing credit balance ₹92,000.
- Y current account: credit ₹30,000 + ₹60,000 + ₹68,000 = ₹1,58,000; debit drawings ₹40,000; closing credit balance ₹1,18,000.
- Capital accounts remain ₹4,00,000 and ₹3,00,000 because the method is fixed.
Answer: Closing current account balances: X ₹92,000 (Cr) and Y ₹1,18,000 (Cr). Capitals stay unchanged.
Exam tips
- Before solving, underline what the question says is 'agreed' and what is missing. The marks usually hinge on the missing items.
- State the rule you use in a line, such as 'Deed silent, so profit shared equally as per the Partnership Act'. This earns working marks.
- Write the capital method at the start and follow it. Mixing fixed and fluctuating treatment loses marks.
- Show the appropriation account format neatly with the net profit at the top and the balance carried to partners.
- If interest on capital is allowed, check whether profit is enough, since it is payable only out of profits.
Practice questions from Partnership and LLP Accounts
Partnership Deed and Basics of Partnership Accounts: frequently asked questions
Is a written partnership deed compulsory?
No. A partnership can exist on an oral agreement. A written deed is strongly advised because it records the terms clearly and avoids disputes. In exams, always follow the deed's terms where given.
What happens if the partnership deed is silent?
The Indian Partnership Act rules apply. Profits and losses are shared equally, there is no salary and no interest on capital or drawings, and partner loans earn 6% per annum.
What is the difference between fixed and fluctuating capital?
In the fixed method, the capital account stays constant and other items go to a current account. In the fluctuating method, there is only a capital account, and interest, salary, drawings and profit all change its balance.
Is interest on partner's loan an appropriation of profit?
No. It is a charge against profit and is debited in the Profit and Loss Account. Interest on capital, by contrast, is an appropriation of profit.