Partnership Act

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The law governing partnership is contained in the Partnership Act, 1932. Given below are the certain sections of the partnership act, which are relevant from the point of the view of partnership firms:

1. Definition of Partnership

‘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. Persons who have entered into partnership with one another are called individually ‘partners’ and collectively a ‘firm’ and name under which their business is carried on is called ‘firm name’.


2. Business Conduct and Books of Accounts

Subject to contract between the partners:

(a) Every partner has a right to take part in the conduct ot the business; and

(b) Every partner has a right to have access to and to inspect and copy any of the books of the firm.


3. Allocation of Profit and interest on Advances

Subject to contract between partners:

(a) A partner is not entitled to receive remuneration for taking part in the conduct of business;

(b) The partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm;

(c) Where a partner is entitled to interest on the capital subscribed by him, such interest shall be payable only out of profits, (no interest on capital in case of net loss unless otherwise agreed upon).

(d) A partner making, for the purposes of the business, any payment or advance beyond the account of capital, he has agreed to subscribe, is entitled to interest thereon at the rate of six per cent per annum.


4. The Property of the Firm

Subject to contract between the partners- the property of the firm includes all property and rights and interest in property originally brought into the stock of the firm, or acquired by purchase or otherwise, by or the firm, or for the purpose and in the course of the business of the firm, and includes also the goodwill of the business.


5. Personal Profit Earned by Partners

Subject to contract between parties:

(a) If a partner derives any profit for himself from any transaction of the firm, or from e use of the property or business connection of the firm or the firm name, he shall account for that profit and pay it to the firm.

(b) If a partner carries on any business of the same nature and competing with that of the firm, he shall account for and pay to the firm, all profits made by him in that business.

6. Liability of a Partner

Every partner is liable, jointly with all the other partners and also severally, for all the acts of the firm done while he is a partner.


7. Admission of a Partner

Subject to contract between the partners, no person shall be introduced as a partner into firm, without the consent of all the existing partners.


8. Retirement of a Partner

A partner may retire:

(a) With the consent of all other partners,

(b) In accordance with an express agreement by the partner, or

(c) Where the partnership is at Will, by the giving notice in writing to all the other partners of his intention to retire.


9. Insolvency of Partner

Where a partner in a firm is adjudicated an insolvent, he ceases to be a partner, on the date on which the order of adjudication is made, whether or not the firm is thereby dissolved.


10. Liability of Estate of Deceased Partner

Where under a contract between the partners the firm is not dissolved by the death of a partner, the estate of a deceased partner is not liable for any act of the firm done after his death.


11. Right of outgoing Partner

Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with the property of the firm without any final settlement of accounts as between them and the outgoing partner, then, in the absence of a contract to the contrary, the outgoing partner is entitled, at the option of himself or his representatives, to such share of the profits made, since he ceased to be a partner as may be attributable to the use his share of the property of the firm or to interest at the rate of six per cent per annum on the amount of his share in the property of the firm.


12. Dissolution of a Firm

The dissolution of partnership between all the partners of a firm is called the “dissolution of the firm”.


13. Mode of Settlement of Accounts

In setting the account of a firm after dissolution, the following rules shall, subject to agreement by the partner, be observed:

(a) Losses, including deficiencies of capital, shall be paid first out of the profits, next out of the capital, and lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits.

(b) The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order:

(c) In paying the debts of the firm to the third parties;

(d) In paying to each partner ratably, what is due to him from the firm for advances as distinguished from capital;

(e) In paying to each partner ratably, what is due to him on account of capital;

(f) The residual, if any shall be divided among the partners in the proportions in which they were entitled to share profits.


14. Payment of Firm’s Debts

Where there are joint dents due from the firms, and also separate debts due from any partner, the property of the firm shall be applied in the first instance in payment of the dents of the firm and, if there is any surplus, then the share of each partner shall be applied in payment of is separate debts or paid to him. The separate property of any partner shall be applied first in the payment of his separate dents and the surplus (if any) in the payment of the debts of the firm.


15. Return of Premium on Premature Dissolution

Where a partner has paid a premium on entering into a partnership for a fixed term, and the firm is dissolved before the expiration of that term otherwise than by the death of a partner, he shall be entitled to payment of the premium or of such part thereof as may be reasonable, regard being had to the length of the time during which he was a partner unless:

(a) The dissolution is mainly due to his own misconduct; or

(b) The dissolution is in pursuance of an agreement containing no provision for the return of the premium or any part of it.


Mukharji, A., & Hanif, M. (2003). Financial Accounting (Vol. 1). New Delhi: Tata McGraw-Hill Publishing Co.

Narayanswami, R. (2008). Financial Accounting: A Managerial Perspective. (3rd, Ed.) New Delhi: Prentice Hall of India.

Ramchandran, N., & Kakani, R. K. (2007). Financial Accounting for Management. (2nd, Ed.) New Delhi: Tata McGraw Hill.


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