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Fundamentals of Accounting · Partnership and LLP Accounts

Partnership Deed and Fundamentals of Partnership Accounts

Updated 11 October 2026 · Fact-checked

A partnership is a relation between persons who agree to share the profits of a business carried on by all or any of them acting for all. The partnership deed sets the terms. If it is silent, the Partnership Act applies: equal profit sharing, no salary, no interest on capital, and 6% p.a. interest on a partner's loan.

Understand Partnership Deed and Fundamentals

A partnership is a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Four elements must be present: an agreement, a business, profit sharing, and mutual agency. Each partner is an agent of the firm and of the other partners.

The main features are: two or more persons; an agreement (written or oral); a lawful business; profit sharing; mutual agency; and unlimited liability of partners, who are liable jointly and severally for the firm's debts. The firm is not a separate legal person under the Indian Partnership Act. Contract law applies to firms except where the Act expressly says otherwise (Section 3).

The partnership deed is the written agreement among the partners. A written deed is not compulsory, but it avoids disputes. It should be stamped as per the law of the State. Registration of the firm is also not compulsory, but an unregistered firm suffers the disabilities of Section 69, which bar certain suits.

Under Section 69(1), a person suing as a partner cannot sue the firm or any person alleged to be a partner to enforce a right arising from a contract or conferred by the Act, unless the firm is registered and he is shown in the Register of Firms as a partner. Under Section 69(2), a firm cannot sue a third party to enforce a right arising from a contract, unless the firm is registered and the persons suing are shown in the Register as partners.

The bar has limits. It does not stop a suit for dissolution of the firm or for accounts of a dissolved firm, or the realisation of the property of a dissolved firm. It does not apply to small claims not exceeding ₹100 in value of the kind described in the section. It also does not apply to firms with no place of business in the territories to which the Act extends, or to areas exempted by the State Government under Section 56.

The deed normally covers: name and address of the firm, nature and place of business, names of partners, duration, capital contributed by each, profit-sharing ratio, interest on capital and drawings, interest on partners' loans, salary or commission, drawings limits, accounts and audit, admission, retirement and death, goodwill valuation, and settlement of disputes. These terms decide how you prepare the Profit and Loss Appropriation Account.

If the deed is silent on a point, the Partnership Act rules fill the gap. Always read the question for the words 'deed is silent' or 'no agreement'. Also note that an LLP is different. Under Section 4 of the LLP Act, 2008, the Indian Partnership Act does not apply to an LLP, save as otherwise provided.

Key rules to remember

Definition of partnership
Agreement + Business + Profit sharing + Mutual agency
All four must be present. Mere sharing of profits is not enough.
Profit sharing when deed is silent
Profit is shared equally by all partners
Capital contributed does not matter. Equal shares even if capitals differ.
Salary or commission when deed is silent
No salary or commission to any partner
A partner is not entitled to remuneration for taking part in the business unless agreed.
Interest on capital when deed is silent
No interest on capital
If the deed allows it, it is paid only out of profits.
Interest on partner's loan or advance
Interest = Loan × 6 ÷ 100 × Time (in years)
Applies when a partner gives a loan or advance beyond his capital. It is a charge against profit, not an appropriation.
Interest on drawings when deed is silent
No interest charged on drawings
Charge it only if the question or the deed says so.
Loss sharing when deed is silent
Losses are shared in the same ratio as profits
So losses are also shared equally.

How to solve Partnership Deed and Fundamentals questions

Use this method for any question on partnership fundamentals, whether it is a theory answer or a short calculation.

  1. 1Read the question and find out what the deed says. Mark each item (profit ratio, salary, interest on capital, interest on drawings, loan interest) as 'given' or 'silent'.
  2. 2For every item marked silent, apply the Partnership Act rule: equal profit and loss sharing, no salary, no interest on capital, no interest on drawings, 6% p.a. on a partner's loan.
  3. 3Separate a partner's capital from his loan. Capital gets no interest unless agreed. A loan gets 6% p.a. by default.
  4. 4Treat loan interest as a charge on profit. Deduct it before arriving at the profit to be divided.
  5. 5Divide the remaining profit in the ratio decided in step 2. Where asked, show the working in a clear table of partners.
  6. 6For theory answers, state the rule first, then the condition, then a one-line example with rupee figures.
  7. 7Check your answer: the shares must add up to the profit divided, and no item should be left out.

Quickest way: Silent deed shortcut: 'Equal, Nil, Nil, 6%'

When to use it: Use it for MCQs and short numerical questions where the deed is silent or no agreement is stated.

  1. Remember four words: Equal (profit and loss), Nil (salary), Nil (interest on capital), 6% (interest on partner's loan).
  2. Subtract loan interest from profit first, if a loan exists.
  3. Divide the balance by the number of partners.
  4. In an MCQ, eliminate options that give salary, interest on capital or sharing in capital ratio unless the question states them.

Common mistakes in Partnership Deed and Fundamentals

  • Sharing profit in the ratio of capital when the deed is silent

    Students feel that more capital should earn more profit.

    Fix: Without an agreement, profit is shared equally. Use the capital ratio only if the deed or question says so.

  • Allowing interest on capital by default

    Students mix up company accounting or past examples where interest was given.

    Fix: Allow it only if agreed. Even then it is paid only out of profits.

  • Treating interest on a partner's loan as an appropriation of profit

    It is paid to a partner, so it looks like a share of profit.

    Fix: It is a charge. Deduct it before profit is divided, and use 6% p.a. if no rate is given.

  • Charging 6% interest on capital instead of on loan

    The 6% figure is remembered, but not what it applies to.

    Fix: 6% p.a. applies only to a partner's loan or advance beyond his capital.

  • Saying a partnership deed must be written and registered

    Students confuse partnership with company incorporation.

    Fix: A deed may be oral, though writing is advisable. Registration is optional, but an unregistered firm faces the bar on suits in Section 69.

  • Applying the Indian Partnership Act to an LLP

    Both have 'partners' in the name.

    Fix: Section 4 of the LLP Act says the Indian Partnership Act does not apply to an LLP, save as otherwise provided.

Worked examples

Example 1

Anil and Bharat run a firm. Their capitals are ₹3,00,000 and ₹2,00,000. The partnership deed is silent. Anil also gave the firm a loan of ₹50,000 at the start of the year. The profit for the year before interest on the loan is ₹1,00,000. Show how the profit is dealt with.

Show the solution
  1. The deed is silent, so there is no interest on capital and no salary.
  2. Interest on Anil's loan = 50,000 × 6 ÷ 100 × 1 = ₹3,000.
  3. Loan interest is a charge. Profit available to divide = 1,00,000 − 3,000 = ₹97,000.
  4. Profit is shared equally: 97,000 ÷ 2 = ₹48,500 each.
  5. Anil receives ₹3,000 as loan interest and ₹48,500 as profit share.

Answer: Loan interest of ₹3,000 is charged to profit. The remaining ₹97,000 is shared equally: ₹48,500 to Anil and ₹48,500 to Bharat. There is no interest on capital.

Example 2

Xavier, Yash and Zoya are partners with capitals of ₹5,00,000, ₹3,00,000 and ₹2,00,000. There is no written deed. The firm earned a profit of ₹1,20,000. Yash claims a salary of ₹10,000 a month and Zoya says profit should be shared by capital. Decide the correct position and divide the profit.

Show the solution
  1. No agreement exists, so the Partnership Act rules apply.
  2. A partner is not entitled to a salary unless agreed. So Yash's claim fails.
  3. Profit is shared equally, not by capital. So Zoya's claim fails.
  4. Equal share = 1,20,000 ÷ 3 = ₹40,000 each.

Answer: No salary is payable to Yash. The profit of ₹1,20,000 is shared equally: ₹40,000 each to Xavier, Yash and Zoya.

Exam tips

  • Know the provisions that apply when the deed is silent, because they are needed for appropriation account questions. Write the points as a list: profit sharing, salary, interest on capital, interest on loan, drawings.
  • Quote the 6% rate and say clearly that it applies to loans, not capital.
  • In theory answers, name Section 69 for the effect of non-registration and Section 4 of the LLP Act for non-applicability. Do not quote other section numbers unless you are sure.
  • Show every adjustment line by line. Marks are given for the method even if you slip on the arithmetic.
  • Use the 15 minutes of reading time to mark 'silent' items in each question.

Practice questions from Partnership and LLP Accounts

Partnership Deed and Fundamentals: frequently asked questions

Is a partnership deed compulsory?

No. A partnership can be formed by an oral agreement. A written and stamped deed is advisable because it records the terms and reduces disputes.

What are the contents of a partnership deed?

It usually states the firm's name, business, partners, duration, capital, profit-sharing ratio, interest on capital and drawings, salary, loan terms, accounts, admission, retirement, goodwill and dispute settlement.

What happens if the partnership deed is silent?

The Partnership Act rules apply. Profits and losses are shared equally, no salary is paid, no interest on capital is allowed, and a partner's loan earns interest at 6% per annum.

Is registration of a partnership firm compulsory?

No. But under Section 69(1), a partner cannot sue the firm or the other partners to enforce a contractual right or a right under the Act unless the firm is registered and he is shown in the Register of Firms. Under Section 69(2), the firm cannot sue a third party on a contractual right unless it is registered and the suing partners are shown in the Register. Suits for dissolution or accounts of a dissolved firm, claims up to ₹100, and firms in exempt areas are outside this bar.