1 Partnership

Tutor: Marie O’Callaghan

Sole TraderUnlimited Liability

PartnershipCompanyLimited Liability

Partnerships

• Professionals such as doctors, lawyers ,dentists, vets, accountants are not allowed to form companies.

• There are advantages to partnerships over forming a company from the point of view of tax, accounting and disclosure requirements.

• Partnerships do not go through a registration process to form.• Partnership is not a separate legal identity = partners have

unlimited liability, unlike directors or shareholders in companies.

• The downside is that each partner is liable for the losses of his co-partner in carrying on the partnership business, even where the other partner has defrauded clients of the business.

Partnership Act 1890 - Amended 1907

• Partnership Act 1890 defines a partnership and essentially states that where 2 or more people carry on business with a common view of profit, then a partnership exists.

• A written partnership agreement is not necessary.

• The act applies where no partnership agreement is in place.

The Main Provisions1. P&L must be shared equally2. No interest paid on capital3. No remuneration4. Differences settled by majority5. Change of business requires consent of all6. No right to expell a partner7. No right to retire8. All Partners have the right:

1. Take part2. Prevent entry of another partner3. Examine the books4. Receive interest 5%PA on loans/advances ex capital5. Dissolve the partnership

9. does not prevent a former partner from competing after leaving10. Partnership dissolves automatically on

1. death of partner2. bankruptcy of partner 3. Illegal activity of partnership

Written Agreement

Written partnership agreement is crucial to set out:• Function of the partnership• Capital each partner will invest• The profit sharing ratio• The role of each partner• Drawings – remuneration• Expulsion• New partners• non compete agreement• Dissolution• etc.Written Partnership agreement overrides the terms of the act

Partnership

Accounting

Capital A/C

• Records the original monies invested• Usually remains fixed unless– More capital introduced– Non-current assets re-valued– Goodwill crystallised and recognised

• Credit balance– Credit the giving: partners giving capital to the

business

1 ABC Opening credit balances2 B introduces additional capital3 C withdraws capital4 ABC Capital upward adjustment for recognition of goodwill and positive re-valuation of assets

Capital Account

DATE DETAILS PARTNERS DATE DETAILS PARTNERS

A B C A B C

3/3/.. Bank X 1/1/.. Balance b/d X X X

2/2/.. Bank X

31/12 Goodwill X X X

31/12 Balance c/d

X X X 31/12 Revaluation X X X

X X X X X X

1/1/.. Balance b/d X X X

Current A/C

• Short term element of each partners capital• Record for each partner– Share of profit/loss– Drawings– Interest on loans given to partnership– Interest on credit capital

• Corresponding entry in appropriation

Current A/C - Partner A

DATE DETAILS € DATE DETAILS €

31/12/.. Drawings 1/1/.. Balance b/d

31/12/.. Interest on Draw 31/12/.. Interest on Cr bal

31/12/.. Interest on Cap

31/12/.. Loan Interest

31/12/.. Balance c/d 31/12/.. Share of Profits

1/1/.. Balance b/d

Partner A

Debit• Drawings – withdraw from

cash instead of salary• Interest on drawings –

charge for overdraw

Credit• Interest on Credit balance –

interest on investment held in the current account

• Interest on Capital – interest earned on original investment

• Loan Interest – interest due (not yet paid) for a loan given to the partnership

• Share Profits – divide of profit

Current A/C - Partner B

DATE DETAILS € DATE DETAILS €

1/1/.. Balance b/d 31/12/.. Interest on Cap

31/12/.. Drawings 31/12/.. Share of Profits

31/12/.. Interest on Drawings

31/12/.. Salary

31/12/.. Interest on Debit bal

31/12/.. Balance c/d

1/1/.. Balance b/d

Partner B

Debit• Interest on Debit balance –

money take out of the partnership/loan from business – interest charged

Credit

• Salary – reward for taking extra responsibility or work

Current A/C - Partner C

DATE DETAILS € DATE DETAILS €

31/12/.. Drawings 1/1/.. Balance b/d

31/12/.. Interest on Draw 31/12/.. Interest on Cr bal

31/12/.. Interest on Cap

31/12/.. Salary

31/12/.. Balance c/d 31/12/.. Share of Profits

1/1/.. Balance b/d

Partner C

Debit Credit• Capital – partner introduced

more capital to the business.

Appropriation A/C

• In a partnership, the profits earned are due to the various partners in their profit sharing ration and are apportioned to them in the appropriation section on the Statement of Comprehensive Income

• 3 Sections– Distributable income (Profit for year)– Balance of Net Profit– Share of Profit (as per PSR)

Appropriation Account for year ended 31/12/..

€ €

Gross Profit X

Other Partnership Expenses (X)

Interest on Loan by partners to business (X)

Profit for Year XX

*Other Comprehensive income for the year X

Total Comprehensive income for the year X

*Distributable income (Profit for year) XX

Appropriation Account for year ended 31/12/..

Salaries: A (X)

B (X)

C (X) (X)

Interest on capital Accounts: A (X)

B (X)

C (X) (X)

Interest on Current Accounts: A (X)

B X

C (X) (X)

Interest on Drawings: A X

B X

C X X

Balance of Net Profit XXX

Appropriation Account for year ended 31/12/..

€ €

Share of Profit (as per PSR)

A X

B X

C X XXX

Statement of Financial Position

• Equity Section– List of the closing balances from the partners

capital and current accounts.

Statement of Financial Position as at 31/12/..

€ €

Capital Account A X

B X

C X X

Current Account A X

B (X)

C X X

XX