Partnership Accounts Question Bank

• Partnership deed - Written agreement containing the terms and conditions of partnership.

Active Recall

• Partnership -

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• Partner -

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• Firm -

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• Mutual agency -

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• Unlimited liability -

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Worked Examples

Example 1: Sharing income

Riya and Meera sell old textbooks occasionally and divide the proceeds equally.

• There is no continuing business arrangement.

• The activity is a casual sale of personal goods.

• There is no evidence of mutual agency.

• Therefore, sharing the proceeds does not create a partnership.

Now you try: Two friends jointly sell used furniture once and divide the amount received. Is this a partnership?

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Example 2: Mutual agency

A partner buys raw materials from a supplier without consulting the other partners.

• Buying raw materials is an act in the usual course of the firm’s business.

• Every partner is an agent of the firm.

• A restriction unknown to the supplier cannot normally affect the supplier’s rights.

• The contract binds the firm and all partners.

Now you try: A partner purchases ordinary office supplies without prior permission. Explain whether the firm is bound.

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Example 3: Joint ownership

Rohan and Suresh jointly own a building and share rent.

• Joint ownership exists, but an agreement to carry on business may not exist.

• Renting jointly owned property is not automatically a business partnership.

• Mutual agency must also be established.

• Therefore, sharing rent alone does not prove partnership.

Now you try: Two persons jointly own land and divide lease income. State whether they are partners and give one reason.

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Practice Questions

• (Easy) State any four essential elements of partnership.

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• (Easy) Distinguish between a partner and a firm.

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• (Medium) Explain why mutual agency is called the acid test of partnership.

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• (Medium) A and B share rent from jointly owned property. Does this automatically make them partners? Give reasons.

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• (Hard) A firm owes ₹15,00,000, while its business assets are worth ₹8,00,000. Explain the liability of a partner whose personal assets are ₹4,00,000.

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Answer Key

• Agreement, business, profit sharing, and mutual agency; at least two persons are required.

• A partner is an individual member; the firm is the collective name of all partners.

• It proves that persons carry on business through one another’s authority.

• No. Joint ownership and sharing rent do not establish business and mutual agency.

• The partner has unlimited liability and may be required to contribute personal assets, subject to legal recovery.

Exam Tips & Common Mistakes

• Do not write that profit sharing alone creates partnership. Always mention agreement, business, and mutual agency.

• Do not confuse joint ownership with partnership. Joint owners may share income without carrying on business.

• State the definition accurately and use the phrase “carried on by all or any one of them acting for all.”

• In agency questions, identify whether the act is in the usual course of the firm’s business.

• For numerical liability answers, explain that business assets are used first and personal assets may then be used.

Quick Reference

Key rules

• Partnership = Agreement + Business + Profit sharing + Mutual agency.

• Minimum partners: 2.

• Maximum partners: generally 50.

• Sharing income alone ≠ partnership.

• Every partner is an agent and principal.

Mnemonic: ABPM

• A - Agreement

• B - Business

• P - Profit sharing

• M - Mutual agency

Remember

• Partnership is created by agreement under the Indian Partnership Act,

• - A partner’s act in the usual course of business can bind all partners.

• Unlimited liability may extend to a partner’s personal assets.

• Sharing rent or income does not by itself prove partnership.

• Mutual agency is the decisive test: each partner can act as both principal and agent.

Exam Practice

• Define partnership under the Indian Partnership Act, 1932.

• Explain any four essential elements of partnership.

• Distinguish partnership from co-ownership.

• Explain the importance of mutual agency.

• State whether sharing income alone creates partnership, with reasons.

Exam Tips

• Mention the Act and quote the essential words of the definition.

• Use separate points for agreement, business, profit sharing, and mutual agency.

• In case-based answers, apply each fact to the legal requirement.

• Remember: profit sharing is evidence, but mutual agency is the conclusive test.

End of chapter one. 4 more chapters in the full book.