Features of Partnership Class 12 Accountancy CBSE Board

Here we would discuss the Essential Features of a Partnership

Essential Features/Characteristics/Elements of Partnership (Class 12 Accounts)

The following are the Essential Features of Partnership. Without them, Partnership is not possible.

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Two or More Persons:-

There must be at least two persons to form a partnership and all such persons must be competent to contract.

According to Indian Contract Act 1872, except for the following, all persons are eligible to enter into a partnership agreement.

Persons of Unsound Mind:- Person with mental instability is not eligible to be a partner.
Minor:- The person below 18 is not eligible to enter into a partnership agreement. However, he is allowed to participate in the firm’s profits if it benefits the firm.
Persons disqualified by law:- The person who is disqualified by law can not enter into a partnership agreement.

Number of Maximum Partners:-

Partnership Act does not specify the maximum number of partners.

But the Companies Act, 2013 (section 464) empowers the central government to prescribe the maximum number of partners in a firm subject to a maximum of 100 partners.

But in 2014, the Central government practiced its rights and prescribed a maximum number of partners in a firm to be 50, vide rule 10 of the Companies (Miscellaneous) Rules, 2014.

Hence, a partnership firm can have a maximum of 50 partners.

Agreement:-

The Partnership should have an agreement, written or oral.

The partnership comes into existence through an agreement, either written or oral, and not by the operation of law.

The agreement forms the basis of the mutual rights and duties of partners.

The written agreement is preferred and such agreement is called a partnership deed.

If any disputes arise among partners partnership deed is furnished as evidence in court.

Existence of Business and Profit Motive:-

The Partnership can be formed only to run a such Business that has a profit motive.

Business includes:

Trade
Vocation
Profession

The Business that does not have any profit motive is not the Business.

For example:

A clinic setup as charitable
Joint ownership in property not for sale
Charitable old age house, School, Hospital

Lawful Business:-

The partnership firm can be formed only for lawful Business. The business that is unlawful in the eye of law, can not be run under partnership firm.

For example:-

selling illegal things
Smuggling

Sharing of Profits:-

The partnership firm so formed among partners must be to share profits and losses among partners.

If a member of a partnership does not share the profits of the business, he/she can not be said as a partner.

But it is possible, a partner does not share the losses of the firm.

A business carried on by all or any of them acting for all:-

It means that each partner can participate in the conduct of business and each partner is bound by the acts of other partners with respect to the business of the firm.

Relationship of Principal and Agent:-

Each partner is an agent as well as a principal of the firm.

An agent, because he can bind the other partners by his acts, and a principal because he himself can be bound by the acts of the other partners.

Liability:-

The liability of partners is unlimited, i.e., the firm’s liabilities can be paid from their personal assets.

It means that partners are liable for the firm’s debts individually and jointly with other partners.

Net Private Assets of a partner (i.e., Private Assets – Private Debts) can be used to pay a firm’s debts if the firm’s assets are less than the firm’s debts.

No Separate Existence:-

A partnership firm has no separate existence from its members.

It means that all agreements entered with the firm will be enforceable against each partner separately and jointly.

Practice Questions

The following are essential elements of a partnership firm, except:

A) At least two persons

B) There is an agreement between all partners

C) Equal share of profits and losses

D) Partnership agreement is for some business

Ans:- c)
The equal share in the profit and losses is not an essential elements of a partnership firm.

In the case of a partnership, the act of any partner is:

a) Binding on all partners

b) Binding on that partner only

c) Binding on all partners except that particular partner

d) None of the above

Ans:- a)
The partners has principal and agent relationship in the partnership firm.

Which of the following statement is true?

A) A minor can not be admitted as a partner

B) a minor can be admitted as a partner, only into the benefits of the partnership

C) a minor can be admitted as a partner but his rights and liabilities are the same as of an adult partner

D) None of the above

Ans:- b)
A minor can be admitted as a partner but he is only allowed to share the profits of the firm.

The relation of the partner with the firm is that of:

a) An Owner

b) An Agent

c) An Owner and an Agent

d) Manager

Ans:- c)
The partners in the firm are principla and an agent as well.

What should be the minimum number of persons to form a Partnership:

a) 2

b) 7

c) 10

d) 20

Ans:- a)
At least two persons are required to form a partnrship.

The number of partners in a partnership Firm may be:

a) Maximum Two

b) Maximum Ten

c) Maximum One Hundred

d) Maximum Fifty

Ans:- d)
The maximum 50 partners are allowed in a partnership firm as per rule 10 companies (minscellenous) rules 2014.

A, B, C and D are partners in a firm. They want to expand their business for which additional capital and more managerial experts are required. For this they want to admit more members in their firm. What is the maximum number of additional members that can be admitted by them in the firm:

a) 02

b) 50

c) 20

d) 46

Ans:- d)
The maximum 50 partners are allowed in a partnership firm as per rule 10 companies (minscellenous) rules 2014. Thus further 46 partners can be admitted.

Liability of partner is:

A) Limited

B) Unlimited

C) Determined by Court

D) Determined by Partnership Act

Ans:- b)
The liability of partners are unlimited as in the case of loss, partners net private assets can be used to pay off the debts.

X, Y, and Z are partners sharing profits and losses equally. Their capital balances on March 31, 2021, are ₹ 80,000, ₹ 60,000 and ₹ 40,000 respectively. Their personal assets are worth as follows: X – ₹ 20,000, Y – ₹ 15,000, and Z – ₹ 10,000. The extent of their liability in the firm would be:

a) X – ₹ 80,000 : Y – ₹ 60,000 : and Z – ₹ 40,000

b) X – ₹ 20,000 : Y – ₹ 15,000 : and Z – ₹ 10,000

c) X – ₹ 20,000 : Y – ₹ 75,000 : and Z – ₹ 50,000

d) Equal

Ans:- b)
The extent of the partners liability is limited to the net private assets of the partners.

The Partnership Act does not specify a maximum number of partners in a firm. Which legislation grants the central government the authority to prescribe this limit?

A) Indian Partnership Act, 1932
B) Companies Act, 2013
C) Limited Liability Partnership Act, 2008
D) Insolvency and Bankruptcy Code, 2016

Ans:- b)
Companies Act, 2013.

As per Section 464 of the Companies Act, 2013, what is the maximum number of partners a firm can have, subject to the central government’s prescription?

A) 50
B) 75
C) 100
D) 125

Ans:- c)
100 Partners.

In 2014, the central government exercised its authority under Section 464 and prescribed a maximum number of partners for a firm. Under which rule was this limit set?

A) Rule 5 of the Companies (Miscellaneous) Rules, 2014
B) Rule 10 of the Companies (Miscellaneous) Rules, 2014
C) Rule 15 of the Companies (Miscellaneous) Rules, 2014
D) Rule 20 of the Companies (Miscellaneous) Rules, 2014

Ans:- b)
Rule 10 of the Companies (Miscellaneous) Rules, 2014

What is the currently prescribed maximum number of partners in a firm as per the Companies (Miscellaneous) Rules, 2014?

A) 100
B) 75
C) 50
D) 25

Ans:- c)
50 Partners

If a partnership firm has more than the prescribed number of partners as per the Companies (Miscellaneous) Rules, 2014, what consequence might it face?

A) It must be converted into a private limited company
B) It must dissolve immediately
C) It must obtain special approval from the Ministry of Corporate Affairs
D) It must operate as an unregistered entity

Ans:- a)
It must be converted into a private limited company

Assertion (A): A Partnership firm is a separate and distinct entity from partners from the viewpoint of accounting.

Reason (R): As per the Business Entity Concept, business transactions are recorded from the viewpoint of the firm. Hence, it is a separate and distinct entity from partners from the viewpoint of accounting.

In the context of the above two statements, which of the following is correct?

a) Assertion (A) and Reason (R) are correct and Reason Correctly explains Assertion

b) Both Assertion and Reason (R) are correct but Reason (R) does not correctly explain (A)

c) Both Assertion (A) and Reason (R) are incorrect.

d) Assertion (A) is correct but Reason (R) is incorrect.

Ans:- a)
As per the business entity concept. All transactions are recorded with business point of view not the partners point of view. Thus partner and firm are two seperate entity.

Assertion (A): A partnership firm can have maximum 50 partners.

Reason (R): Maximum limit of partners is prescribed in the Partnership Act, of 1932.

In the context of the above two statements, which of the following is correct?

a) Both (A) and (R) are correct and (R) is the correct explanation of (A)

b) Both (A) and (R) are correct but (R) is not the correct explanation of (A)

c) Only (A) is correct

d) Both (A) and (R) are wrong.

Ans:- c)
The maximum 50 partners are allowed in a partnership firm as per rule 10 companies (minscellenous) rules 2014.

Assertion (A): Partners are principals but not the agents of other partners.

Reason (R): Partners are principals as well as agents of other partners.

In the context of the above two statements, which of the following is correct:

a) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).

b) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).

c) Both Assertion (A) and Reason (R) are false

d) Assertion (A) is false, but Reason (R) is true.

Ans:- d)
Partners are principals as well as agents of other partners.

Assertion (A): A minor can not be admitted in a firm as a partner.

Reason (R): A minor can participate in the profits of a firm.

In the context of the above two statements, which of the following is correct?

a) Assertion (A) is correct, but Reason (R) is wrong.

b) Both Assertion (A) and Reason (R) are correct.

c) Assertion (A) is wrong, but Reason (R) is correct.

d) Both Assertion (A) and Reason (R) are wrong.

Ans:- b)
However a minor can not be admitted as a partner in the firm. but he can participate only in the profits of the firm if its beneficial for the business.

Assertion (A): The Companies Act, 2013 does not specify the maximum number of partners in a firm.

Reason (R): The Indian Partnership Act, 1932 governs the maximum limit for partners in a firm.