ACCOUNTING FOR PARTNERSHIP FIRMS
LESSON - 9
PREPARATION OF NEW PARTNERSHIP DEED
Partnership firm operates according to the agreement (partnership deed) the partners have made when the partnership firm was formed, all the terms and conditions that the partners have agreed has been mentioned in the agreement and they work accordingly. When ever there is any change or alteration upon their agreements then the partners have to modify the partnership deed accordingly. In this situation the old partnership deed comes to an end and a new partnership deed begins.
The major reason for a change in the partnership deed is :
1) Change in the profit sharing ratio among the partners
2) A new partner is admitted to the firm
3) Retirement of a partner from the firm
4) Death of a partner from the firm
5) Joining of two or more partnership firms
1) CHANGE IN THE PROFIT SHARING RATIO AMONG THE PARTNERS:
When the partnership is formed the partners would have already decided about their profit or loss sharing ratio (the percentage of sharing among each partners). This ratio may be changed due to some reasons like capital contribution, increase in responsibilities etc. When the ratio among the partners is changing then there are two possibilities that may arise
a) A partner may get more percentage of profit share than his previous share or
b) He may get less percentage of profit share than his previous share.
When a partner is getting more percentage of share than his previous share then he is gaining his share of profit as his profit ratio is gaining it is called 'gaining ratio'. If the partner is getting less percentage of share than his previous share then he is sacrificing his share of profit as his profit ratio is sacrificed it is called 'sacrificing ratio'.
2) A NEW PARTNER IS ADMITTED TO THE FIRM:
When all the partners mutually agree then a new partner may be appointed to the firm. When a new partner is appointed then there are many new changes that might take place along the admission. Example: The new partner has to be given a share among the profit, he will bring his share of capital etc.
As there are changes taking place the old agreement becomes void
and a new partnership deed has to be prepared. In this situation the old agreement comes to an end and a new deed will be prepared according to the new changes that happened as new partner is admitted.3) RETIREMENT OF A PARTNER FROM THE FIRM:
A partner may voluntarily or as a reason of age may leave the partnership firm. When a partner leaves the partnership firm there happens a certain changes like the retired partner's share of profit will be taken by other partners, his settlements has to be made etc.
As there are changes taking place a new partnership deed has to be prepared accordingly. In this situation the old agreement comes to an end and a new deed will be prepared according to the new changes that happened as a the partner retires.
4) DEATH OF A PARTNER FROM THE FIRM:
A partner may die suddenly, in that situation the terms and agreements will have a change.
Example: The dead partner's share of profit will be taken by other partners, his accounts will come to an end etc. As there are changes taking place in their agreement a new partnership deed has to be prepared. In this situation the old agreement comes to an end and a new partnership deed will be prepared according to the changes occur after the death of the partner.The process of accounting terms for both retirement of a partner and death is same but the only difference between them is a retirement can be pre planned so the accounting process can be arranged accordingly but in case of death it happens suddenly so accounting process has to be prepared according to the incident of the death of a partner.
5) JOINING OF TWO OR MORE PARTNERSHIP FIRMS:
A partnership firm having an intention of expanding or to increase their performance may join with other partnership firms. Joining of two or more partnership firms is called Amalgamation. When more than a firm joins together then their terms and conditions has to be refreshed. As the firms mutually agree to their new terms and conditions. A new partnership deed among the firms has to be prepared accordingly.
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