BCOM 1st Year Partnership Account Long Question Answer Notes

BCOM 1st Year Partnership Account Long Question Answer Notes :- BCOM 1st Year Study Material Notes Sample Model Papers Notes examination papers unit wise Chapter wise Syllabus of the content chapter wise notes. available in over site parultech.com

Section B


Q.1. Define partnership. What are the essential elements of a partnership?

Ans. The law of partnership is contained in the Indian partnership Act, 1932 which came into force on 1st October, 1932, except Section 69 (dealing with the effect

 Of non-registration of firms),  which came into force on 1st October, 1933. Since partnership comes into existence only by a contract between the parties for the purpose, the provisions of the Indian contract Act, continue to apply to partnership firms.

‘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!

Essential Elements: This definition contains five elements which constitute a partnership namely.

1. There must be a contract. 

2. Between two or more persons. 

3. Who agree to carry on a business. 

4. With the object of sharing profits. 

5. The business must be carried on by all or any of them acting for all (i.e. there must be mutual


All the above elements must co-exist in order to constitute a partnership. If any of these is not present, there cannot be a partnership. We now discuss these elements one by one.

1. Contract: Partnership is the result of a contract. It does not arise from status, operation of law or inheritance. Thus at the death of father who was a partner in a firm, the son can claim share in the partnership property but cannot become a partner unless he enters into a contract for the same with other persons concerned. Similarly, the members of Joint Hindu family carrying on a family business cannot be called partners for their relation arises not from any contract but from status. To emphasise the element of contract, Sec. 5 expressly provides that “The relation of partnership arises from contract and not from status.’

2. Association of Two or More Persons: Since partnership is the result of a contract, at least two persons are necessary to constitute a partnership. The partnership act does not mention any thing about the maximum number of persons who can be partners in a partnership firm but Sec. 11 of the Companies Act, 1956, lays down that a partnership consisting of more than 10 persons for banking business and 20 persons for any other business would be illegal. Hence, there should be regarded as the maximum limits to the number of partners in a partnership firm.

3. Carrying on Business: The third essential element of a partnership is that the parties must have agreed to carry on a business. The term ‘Business’ is used in its widest sense and includes every trade, occupation or profession [Sec. 2(6)]. If the purpose is to carry on some charitable work, it will not be a partnership. Similarly if a number of persons agree to share the income of a certain property or to divide the goods purchased in bulk amongst themselves, there is no partnership and such persons cannot be called partners because in neither case they are carrying on a business. Thus, where A and B jointly purchased a tea shop and incurred additional expenses for purchasing pottery and utensils for the job, contributing the necessary money half and half and then leased out the shop on rent which was shared equally by them, it was held that they are only co-owners and not partners as they never carried on any business.

4. Sharing of Profits: This essential element provides that the agreement to carry on business must be with the object of sharing profits amongst all the partners. Impliedly the partnership must aim to make profits because then only profits may be divided amongst the partners. Thus, there would be no partnership where the business is carried on with a philanthropic motive and not for making a profit or where only one of the partners is entitled to the whole of the profits of the business. The partners may however, agree to share profits in any ratio they like.

5. Mutual Agency: The fifth element in the definition of a partnership provides that the business must be carried on by all the partners or any one or more of them acting for all, that is, there must be mutual agency. Thus every partner is both an agent and principal for himself and other partners, l.e. can bind by his acts the other partners and can be bound by the acts of other partners in the ordin course of business. To test whether a person is a partner or not, it should be seen, among other th whether or not the element of agency exists, i.e. whether the business is conducted on his beha on the basis of this test that a widow of a deceased partner or a manager having a share in the pro not a partner because business is not carried on. On her or his behalf. If she or he does something firm is

The importance of the element of mutual agency lies in the fact that it enables every partner to carry on the business on behalf of others. Partners may agree among themselves that some one of them shall not enter into any contract on behalf of the firm, but by virtue of the principle of mutual agency, such partner can bind the firm vis-a-vis third parties without notice in contracts made according to the ordinary usage of trade. Of course he can be made liable by other partners inter-se for exceeding his authority. In fact, the law of partnership governing relations of the partners inter-se and with the outside world is an extension of the law of agency.

The law as to partnership is undoubtedly a branch of the law of the principal and agent. The liability of one partner for the acts of his co-partner is in reality the liability of a principal for the acts of his agent. Where two or more persons are engaged as partners in an ordinary trade, each of them has an implied authority from the others to bind all by contracts entered into acording to usual course of business in that trade. Every partner in trade is for the ordinary purposes of the trade, the agent of his co-partners, all are therfore liable for the ordinary trade contract of the other. The public has a right assume that every partner has authority from his co-partners to bind the whole firm in contacts made according to the ordinary usage of trade.

Q.2. Discuss the mutual rights and duties as between the partners in the absence of any express contracts between them.

Ans. Mutual Rights and Duties: ‘Subject to the provisions of this Act, the mutual rights and duties of the partners of a firm may be determined by contract between the partners and such contract may be express or may be implied by a course of dealing. Such contract may be varied by consent of all the partners and such consent may be express or may be implied by a course of dealing’ [Sec. 11(1)]. Thus, except in cases where the Partnership Act makes a mandatory provision, the partners are entitled to agree to any terms and provide for their mutual rights and duties.

Rights of Partners: Subject to contract between the partners, the Partnership Act confers the following rights upon the partners of a firm:

1. Right to Take Part in the Conduct of the Business (Sec. 12 (a)]: Every partner, irrespective of the amount of capital contribution, has an inherent right to take part in the conduct of the business of the firm. Although one may agree not to participate in the management of the business but the right of participation should be available to each partner.

2. Right to be Consulted [Sec. 12 (C)]: Every partner has a right to be consulted and heard before any matter is decided. Any difference arising as to ordinary matters connected with the business may be decided by a majority of the partners. But no change may be made in the nature of the business or the constitution of the partnership, e.g. admission of a new partner, without the consent of all the partners. The partnership deed may, however, provide that in all matters consent of all the partners is necessary or that all matters shall be decided by majority opinion. It may be noted that maiority nowers should be exercised in good faith for the benefit of the firm. If the majority of the partners decide to expel a partner without sufficient cause, the expulsion would be set aside.

3. Right of Access to Books [Sec. 12 (d)]: Every partner has a right to have access to and to inspect and copy any of the books of the firm.

4. Right to Share the Profits [Sec. 13 (b)]: Every partner, irrespective of the amount of canital contribution or business expertise, has a right to share equally in the profits earned by the firm

5. Right to Interest on Capital (Sec. 13 (C)]: Where a partner is entitled to interest on capital subscribed by him, such interest shall be payable only out of profits.

6. Right to Interest on advances [Sec. 13 (d)]: Where a partner makes for the purpose of the business, any payment or advance beyond the amount of capital he has agreed to subscribe, he is entitled to interest thereon at the rate of 6 per cent per annum.

7. Right to Indemnity [Sec. 13(e)]: Every partner has a right to claim indemnity from the firm in respect of payments made or liabilities incurred by him:

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