Accounting of Limited Liability Partnership
Table of contents
In the recent times, a new form of business organisation, namely the Limited Liability Partnership has been formed which combines the features of two common forms of business – the partnership and the company.
Meaning of Limited Liability Partnership (LLP)
Limited Liability Partnership is a specific form of business organisation consisting of partners whose liability is limited to the capital contribution made by them. It is a combination of both partnership and company and has the characteristics of both these forms of organisations. Unlike a partnership, the partners of a limited liability partnership have limited liability (similar to that in the company) which implies that personal assets of the partners will not be not used for paying off the debts of the organisation.
In India, all limited liability partnerships are governed by the Limited Liability Partnership Act, 2008 which came into effect from April 1, 2009.
NB: the provisions of Indian Partnership Act, 1932 shall not apply to a limited liability partnership.
Nature of Limited Liability Partnership
The nature of a limited liability partnership can be understood from the following:
● A limited liability partnership is a body corporate formed and incorporated under a statute.
● It has a legal entity separate from that of its partners.
● Any change in the partners of a limited liability partnership would not affect the existence, rights or liabilities of the limited liability partnership.
Features of Limited Liability Partnership
Some of the important features of a limited liability partnership registered in India are:
Books of Accounts of Limited Liability Partnership
As per Sec. 34 of Limited Liability Partnership Act, 2008, a limited liability partnership shall maintain such proper books of accounts as may be prescribed relating to its affairs for each year of its existence on cash or accrual basis and according to double entry system of accounting and shall maintain the same at its registered office for such period as may be prescribed.
As per Rule 24(1) of the Limited Liability Partnership Rules, 2009 every limited liability partnership shall keep books of accounts which are sufficient to show and explain the limited liability partnership’s transactions, and are such as to:
The books of account shall contain:
Rule 24(3) of the Limited Liability Partnership Rules, 2009 specifies that the books of accounts which a limited liability partnership is required to keep shall be preserved for eight years from the date on which they are made.
Statement of Account and Insolvency
Every limited liability partnership shall, within a period of six months from the end of each financial year, prepare a Statement of Account and Solvency for the said financial year as at the last day of the said financial year in such form as may be prescribed, and such statement shall be signed by the designated partners of the limited liability partnership. As per Sec. 36 of the said Act, such Statement of Account and Insolvency filed by a limited liability partnership with the Registrar shall be available for inspection by any person in such manner and on payment of such fees as may be prescribed. Every limited liability partnership shall file within the prescribed time, the Statement of Account and Solvency with the Registrar every year in such form and manner, and accompanied by such fees as may be prescribed.
Rule 24(3) of the Limited Liability Partnership Rules, 2009 specifies that every limited liability partnership shall file the Statement of Account and Solvency in Form 8 with the Registrar, within a period of thirty days from the end of the six months of the financial year to which the Statement of Account and Solvency relates. Such Statement of Account and Solvency has to be signed on behalf of the limited liability partnership by its designated partners.
Every limited liability partnership has to prepare the following statement of account as prescribed in Part B of LLP Form 8 pursuant to Rule 24 of Limited Liability Partnership Rules, 2009:
The format of the Statement of Assets and Liabilities is as follows:
| Particulars | Figures as at the end of the current reporting period (in ₹ ) | Figures as at the end of the previous reporting period (in ₹ ) |
| (I) CONTRIBUTION AND LIABILITIES | ||
| (1) Partner’s funds | ||
| Contribution received | ||
| Reserves and surplus (including surplus being the profit/loss made during year) | ||
| (2) Liabilities | ||
| Secured loans | ||
| Unsecured loans | ||
| Short term borrowings | ||
| Creditors/Trade payables - Advance from customers | ||
| Amount of other liabilities | ||
| Other liabilities (to specify) | ||
| Provisions | ||
| For taxation | ||
| For contingencies | ||
| For insurance | ||
| Other provisions (if any) | ||
| Total | ||
| (II) ASSETS | ||
| Gross Fixed assets (including intangible assets) | ||
| Less: depreciation and amortization | ||
| Net fixed assets | ||
| Investments | ||
| Loans and advances | ||
| Inventories | ||
| Debtors/trade receivables | ||
| Cash and cash equivalents | ||
| Amount of other assets | ||
| Other assets (to specify) | ||
| Total |
The details of contingent liabilities are required to disclosed separately as under:
(a) Whether there are any contingent liabilities to report? Yes/ No
| (b) | (c) | (d) |
| S. No. | Description of contingent liability | Amount |
The format of the Statement of Income and Expenditure is as follows:
| Particulars | Figures for the period (Current reporting period) From (DD/MM/YYYY) To (DD/MM/YYYY (in ₹ ) | Figures for the period (Previous reporting period) From (DD/MM/YYYY) To (DD/MM/YYYY (in ₹ ) |
| Income | ||
| Gross turnover | ||
| Less: Excise duty or service tax | ||
| Net Turnover Details | ||
| (I) Domestic turnover | ||
| (a) Sale of goods manufactured | ||
| (b) Sale of goods traded | ||
| (c) Sale or supply of services | ||
| (II) Export turnover | ||
| (a) Sale of goods manufactured | ||
| (b) Sale of goods traded | ||
| (c) Sale or supply of services | ||
| Other income | ||
| Increase/ (decrease) in stocks including for raw materials, work in progress and finished goods | ||
| Total Income | ||
| Expenses | ||
| Raw material consumed | ||
| Purchases made for re-sale | ||
| Consumption of stores and spare parts | ||
| Power and fuel | ||
| Personnel Expenses | ||
| Administrative expenses | ||
| Payment to auditors | ||
| Selling expenses | ||
| Insurance expenses | ||
| Depreciation and amortization | ||
| Interest | ||
| Other expenses | ||
| Total expenditure | ||
| Net Profit or Net Loss (before taxes) | ||
| Provision for Tax | ||
| Profit after Tax | ||
| Profit transferred to Partners’ account | ||
| Profit transferred to Reserves and Surplus |
Failure to maintain books of accounts, prepare Statement of Account and Solvency etc.
Any limited liability partnership which fails to comply with the provisions as set out u/s 34 shall be punishable with fine which shall not be less than ₹ 25,000 but which may extend to ₹ 5,00,000, and every designated partner of such limited liability partnership shall be punishable with fine which shall not be less than ₹ 10,000 but which may extend to ₹ 1,00,000.
Annual Return
As per Sec. 35 of Limited Liability Act, 2008, every limited liability partnership shall file an Annual Return duly authenticated with the Registrar within sixty days of closure of its financial year in such form and manner, and accompanied by such fees as may be prescribed. Any limited liability partnership which fails to comply with the provision as set out u/s 35 shall be punishable with fine which shall not be less than ₹ 25,000 but which may extend to ₹ 5,00,000. If a limited liability partnership contravenes the provisions of this section, the designated partner of such limited liability partnership shall be punishable with fine which shall not be less than ₹ 10,000 but which may extend to ₹ 1,00,000. As per Sec. 36 of the said Act, the Annual return filed by a limited liability partnership with the Registrar shall be available for inspection by any person in such manner and on payment of such fees as may be prescribed. If in any return, any person makes any statement which is false in any material particular knowing it to be false or, which omits any material fact knowing it to be material, he shall be punishable with imprisonment which may extend to two years, and also be liable to fine which may extend to ₹ 5,00,000 but which shall not be less than ₹ 1,00,000.
Audit of books of accounts
The accounts of the limited liability partnership shall be audited in accordance with the prescribed rules. An auditor or auditors of a limited liability partnership shall be appointed for each financial year of the LLP for auditing its accounts. A person shall be qualified for appointment as an auditor of a limited liability partnership unless he is a Chartered Accountant in practice.
Illustration 46
P and Q are the partners of a limited liability partnership - M/s P&Q LLP dealing in electrical goods. The following is their trial balance as on March 31, 2022:
| Name of Accounts | Dr. (₹) | Cr. (₹) |
| Inventories on April 1, 2021 | 4,50,000 | |
| Equipment | 5,50,000 | |
| Premises | 8,00,000 | |
| Bank | 9,46,500 | |
| Sundry Debtors | 3,60,000 | |
| Sundry creditors | 1,65,000 | |
| Secured loan | 1,80,000 | |
| Unsecured loan | 1,35,000 | |
| Returns outward | 67,500 | |
| Outstanding expenses | 24,000 | |
| Sales revenue from goods traded | 53,00,000 | |
| Revenue from services rendered | 2,35,000 | |
| Indirect Tax on turnover | 1,35,000 | |
| Interest received on investment | 67,500 | |
| Purchases | 29,47,500 | |
| Salaries | 8,45,000 | |
| Rent & Rates | 3,12,000 | |
| Stationery charges | 13,200 | |
| Communication charges | 27,300 | |
| Insurance | 54,800 | |
| Advertisement | 44,200 | |
| Delivery charges | 48,000 | |
| Interest on debt | 95,500 | |
| Furniture & Fixture | 5,40,000 | |
| Long-term investments | 3,15,000 | |
| Cash | 2,10,000 | |
| General Reserve | 270,000 | |
| P’s contribution | 1,300,000 | |
| Q’s contribution | 950,000 | |
| 8,694,000 | 8,694,000 |
Additional information:
(a) Unsold inventories on 31.03.2022 worth ₹ 5,62,500.
(b) Outstanding rent amounts to ₹ 36,000.
(c) Rate of depreciation on Furniture & Fixture @ 10%.
(d) Depreciate equipment by ₹ 67,500
(e) Provisions to be created: ₹ 22,500 for possible bad debts and ₹ 1,80,000 for taxation.
Considering the additional information provided above, you are required to prepare:
(i) Statement of Income and Expenditure for the year ended March 31, 2022; and
(ii) Statement of Assets and Liabilities as on that date.
Solution:
M/s P&Q LLP
Statement of Income and Expenditure for the year ended March 31, 2022
| Particulars | (₹) | (₹) |
| Income | ||
| Gross Turnover [53,00,000 + 2,35,000] | 55,35,000 | |
| Less: Excise duty | (1,35,000) | |
| Net Turnover Details | 54,00,000 | |
| Other income: Interest on investments | 67,500 | |
| Increase in inventories [Closing 5,62,500 – Opening 4,50,000] | 1,12,500 | |
| Total Income | 55,80,000 | |
| Expenses | ||
| Purchases | 29,47,500 | |
| Less: Returns outward | (67,500) | 28,80,000 |
| Salaries | 8,45,000 | |
| Rent & Rates | 3,12,000 | |
| Add: Outstanding | 36,000 | 3,48,000 |
| Stationery charges | 13,200 | |
| Communication charges | 27,300 | |
| Insurance | 54,800 | |
| Advertisement | 44,200 | |
| Delivery charges | 48,000 | |
| Interest on debt | 95,500 | |
| Depreciation: on Furniture & Fixture | 54,000 | |
| on Equipment | 67,500 | 1,21,500 |
| Provision for bad debts | 22,500 | |
| Total expenditure | 45,00,000 | |
| Net Profit or Net Loss (before taxes) (Total Income – Total Expenditure) | 10,80,000 | |
| Less: Provision for Tax | 1,80,000 | |
| Profit after Tax | 9,00,000 | |
| Profit transferred to Reserves and Surplus | 9,00,000 |
Statement of Assets and Liabilities as on March 31, 2022
| Particulars | (₹) | (₹) |
| (I) CONTRIBUTION AND LIABILITIES | ||
| (1) Partner’s funds | ||
| P’s Contribution | 13,00,000 | |
| Q’s Contribution | 9,50,000 | 22,50,000 |
| General Reserves | 2,70,000 | |
| Profit earned in 2021-22 | 9,00,000 | |
| (2) Liabilities | ||
| Secured loans | 1,80,000 | |
| Unsecured loans | 1,35,000 | |
| Sundry creditors | 1,65,000 | |
| Outstanding expenses [24,000 + 36,000] | 60,000 | |
| Provision for taxation | 1,80,000 | |
| Total | 41,40,000 | |
| (II) ASSETS | ||
| Premises | 8,00,000 | |
| Equipment | 5,50,000 | |
| Less: Depreciation | 67,500 | 4,82,500 |
| Furniture & Fixture | 5,40,000 | |
| Less: Depreciation | 54,000 | 4,86,000 |
| Net fixed assets | 17,68,500 | |
| Investments: Long-term | 3,15,000 | |
| Inventories | 5,62,500 | |
| Sundry Debtors | 3,60,000 | |
| Less: Provision for bad debts | 22,500 | 3,37,500 |
| Cash and cash equivalents | ||
| Bank | 9,46,500 | |
| Cash | 2,10,000 | 11,56,500 |
| Total | 41,40,000 |
Solved Case(s)
Amal, Bimal and Kamal were the partners in a firm which is engaged in the manufacturing of leather shoes. Their business is located in the outskirts of the city of Kanpur in Uttar Pradesh. The partners are in this business since 1997, and they share profits and losses in the ratio of 3:2:1.
On November 5, 2021, Kamal met with a serious road accident while travelling from Lucknow to Kanpur after attending a meeting with one of their customers. After being hospitalized for three long months, he was released in the first week of February 2022. During this time, he realised that it would not be possible for him to continue as a partner in this business and so he decided to retire from the firm. He communicated his decision to the other partners and it was mutually agreed upon that Kamal will continue till the end of this financial year and thereafter retire from the business, while the other partners will continue. The Balance Sheet of the firm as on 31.03.2022 was as follows:
| Liabilities | (₹) | Assets | (₹) | |
| Capital Accounts: | Plant | 40,000 | ||
| Amal | 45,000 | Building | 50,000 | |
| Bimal | 35,000 | Furniture | 4,000 | |
| Kamal | 25,000 | 1,05,000 | Debtors | 30,000 |
| Profit & Loss A/c | 12,000 | Stock | 25,000 | |
| Reserve fund | 15,000 | Bank | 3,500 | |
| Creditors | 20,500 | |||
| 1,52,500 | 1,52,500 |
Kamal retired on that date subject to the following conditions:
(i) Goodwill of the firm to be valued at Rs. 36,000;
(ii) Building is to be appreciated by 20%;
(iii) Plant and Furniture are to be depreciated by 10% and 15% respectively;
(iv) Provision to be made for doubtful debts @ 5%.
Amal and Bimal are to bring in cash, if necessary, in their profit sharing ratio to pay off Kamal’s dues on retirement and leave a sum of Rs. 10,000 as working capital.
1. Ascertain the amount of profit or loss arising to the firm out of revaluation. Also state the share of individual partner therein.
2. Determine the amount of cash to be brought in by Amal and Bimal to pay off Kamal’s dues.
3. Draft the post-retirement Balance Sheet of the partnership firm.
Solution:
1. The amount of profit or loss arising to the firm out of revaluation is - ₹39,900 share of individual partner therein are ₹19,950, ₹13,300 and ₹6,650 respectively.
Revaluation Account
| Particulars | (₹) | Particulars | (₹) | |
| To, Provision for Doubtful Debts A/c | 1,500 | By, Goodwill A/c | 36,000 | |
| To, Depreciation on Plant A/c | 4,000 | By, Building A/c | 10,000 | |
| To, Depreciation on Furniture A/c | 600 | |||
| To, Partner’s Capital A/c | ||||
| Amal’s Capital (3/6) | 19,950 | |||
| Bimal’s Capital (2/6) | 13,300 | |||
| Kamal’s Capital (1/6) | 6,650 | 39,900 | ||
| 46,000 | 46,000 |
2. Additional amount to be brought in by Amal and Bimal:
| (₹) | |
| Amount paid to Kamal | 36,150 |
| Add: required working capital to be maintained | 10,000 |
| 46,150 | |
| Less: Cash at Bank as per existing balance Sheet | 3,500 |
| Amount to be brought in | 42,650 |
So, Amount to be brought in by Amal = 42,650 × 3/5 = 25,590
Amount to be brought in by Bimal = 42,650 × 2/5 = 17,060
Balance Sheet as at 31.03.2022
| Liabilities | (₹) | Assets | (₹) | ||
| Capital A/C | Goodwill | 36,000 | |||
| Amal | 1,04,040 | Buildings | 60,000 | ||
| Bimal | 74,360 | 1,78,400 | Plant | 36,000 | |
| Furniture | 3,400 | ||||
| Creditors | 20,000 | Debtors | 30,000 | ||
| Less: Provision | 1,500 | 28,500 | |||
| Stock | 25,000 | ||||
| Bank [Note 1] | 10,000 | ||||
| 1,98,900 | 1,98,900 |
Working Notes:
Partners’ Capital Account
| Particulars | Amal (₹) | Bimal (₹) | Kamal (₹) | Particulars | Amal (₹) | Bimal (₹) | Kamal (₹) |
| To, Bank A/c | - | - | 36,150 | By, Balance b/d | 45,000 | 35,000 | 25,000 |
| Dues paid off (Bal.fig.) | By, Reserve Fund A/c | 7,500 | 5,000 | 2,500 | |||
| By, Revaluation A/c - Profit | 19,950 | 13,300 | 6,650 | ||||
| By, Profit & Loss A/c | 6,000 | 4,000 | 2,000 | ||||
| By, Bank A/c (Def.) | 25,590 | 17,060 | - | ||||
| To, Balance c/d (Bal. fig.) | 1,04,040 | 74,360 | - | ||||
| 1,04,040 | 74,360 | 36,150 | 1,04,040 | 74,360 | 36,150 | ||
| By Balance b/d | 1,04,040 | 74,360 | - |
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