1. ACCOUNTING FOR PARTNERSHIPS
TM 315 Financial Accounting
1. ACCOUNTS FOR COMMON BUSINESS ENTITIES
1.1 ACCOUNTING FOR PARTNERSHIPS.
1.2 Introduction to Partnership Accounts
Partnership form of business organization came into existence on account of limitations of sole
proprietary concerns. The major limitations of sole proprietary concern are those of shortage of
funds, uncertainty about existence, unlimited personal liability, etc. In case of partnership
business two or more persons join hands together to do a business.
A simple definition of partnership would be “The Relation, which subsists between persons
carrying on a business with a common view of profits”
Persons who have entered into partnership with on another rare called individually “Partners” and
collectively a Firm and the name under which the business is carried is called “Firm Name”.
The firm merely a commercial notion, low does not invest the firm with legal personality apart
from its partners expect for the purpose of assessment of income tax. A firm can not become a
member of another partnership firm though its partners can join any firm as partners.
Essential Characteristics of Partnership
A partnership business must satisfy all the following essential elements. They must exist together.
Absence of any of the features may lead the organization deemed not to be a partnership firm.

There must be association of two or more persons.
A person cannot become a partner with himself. Reduction in the number of partners to the one
should come about to compulsory dissolution of the firm. The term “Person” does not include
“firm” (Since it does not have a separate legal existence). And such only the partners of the firm
can enter into partnership provided the combined strength of the partners does not exceed the
statutory limit. The number of members in a partnership should not exceed 20, an association or
partnership firm having members more than this statutory limit must be registered under the
company act or pursuance of some other Sri Lankan law, other wise it will be treated as an illegal
association.

There must be agreement entered in to by all persons concern
The relation of partnership arises from contract not from status or by operation of law. Partners
must enter in to an agreement voluntarily to form a partnership. The agreement may be expressed
or implied. It may be for a fixed period or for an uncertain duration. Co-owners of property or
heirs of sole proprietors who has died will not become partners, unless there is an agreement
between them to carry on business as partners.

Business must be carried on by all or any of the persons concerned acting for all.
Partners of a firm act both the capacities of an agent as well as a principal. Active partners act as
agents and conduct the business for all the partners under an implied authority to do so by the
latter. Partners are mutual agent for each other and principals of them selves. A partner has an
authority to bind his co-partners by his act done in the ordinary course of the business firm.
Partners ability is not limited to his share in the business but it extends to his personal assets.
1
Ms. U. C. Edirisinghe
1. ACCOUNTING FOR PARTNERSHIPS
TM 315 Financial Accounting
Statutory Acts affecting to Partnerships
Various aspects of Partnership business are governed by following enactment.

The Partnership Act of 1890 (U.K.)
The partnership businesses of Sri Lanka are governed by this act in all respects.

The Limited Partnership Act of 1907 (U.K.)
A limited partnership must have at least one general partner whose liability for debts of
partnership is unlimited: and one or more limited partners whose liability for debt is limited to the
sum contributed or agreed be contributed as capital to the partnership business. However, such
partnership re not legal in Sri Lanka.

The Prevention of Frauds Ordinance of 1844.
Section 18 of this ordinance requires all partnership in Sri Lanka with an initial capital of over Rs.
1000 to have their agreements in writing and signed by partners.

The Registration of Business Names Ordinance 1918
The business name, which does not consist of the true full name of the owners, has to be
registered with the registrar of business Names giving the required particulars.
1.3 Partnership Agreement
Partnership is created by an agreement. It is not necessary that the agreement should be in written.
It may be oral but, to avoid future disputes, it is always better to have it in writing. The document
is in written containing the important terms in partnership as agreed by the partners is called the
Deed or Agreement of Partnership. It should be properly drafted stamped according to the Act.
Content of the Agreement
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.
xiii.
xiv.
Name of the Firm.
Name of the Partners
Nature and place of the business of the firm.
Date of Commencement of partnership
Duration of the firm.
Capital employed or to be employed by different parties.
Rules regarding operations of bank accounts.
Ratio in which profits and losses are to be shared.
How the business is to be managed.
Rules to be followed in case of admission, retirement, expulsion, etc. of partners.
Salaries if payable to partners.
Interest on partners capitals, loans, drawings etc to be allowed or charged.
Settlement of accounts on the dissolution of the firm.
Arbitration Clause.
It better if the deed is very elaborate and clear about all questions which may arise in the course of
partnership. In the absence of any such agreement, the right and duties of partners will be those
which have been given in the Partnership Act.
2
Ms. U. C. Edirisinghe