An Introduction

Formed to make profit Comply with the Partnership Act Minimum of two partners Each partner must pay their share of

liabilities that the partnership could not pay. Unlimited liability.

• Partnership Accounting  

What is a Partnership?• A partnership is defined as the relationship that exists between persons carrying on a business. These

persons agree to combine some or all of their property, labour, and skills. This relationship is based on a contract.

 

What are the Advantages and Disadvantages of Partnerships?Advantages:a) Partnerships allow for a greater amount of money, skill, and other resources to be pooled. b) They are relatively easy to organize. c) They are subject to limited government regulations and do not face high tax rates.

Disadvantages:a) Partnerships have a limited life.

b) Each partner is subject to unlimited liability. This means that if the company fails, creditors can take action against both the partnership and the persons who are in it.

c) Partners have mutual agency. This means that one partner can make decisions without consulting the other(s).

 

“You will never change your life until you change your belief about what you are capable of.”

Robin Cow

Capital to be contributed Ratio of Profit/loss sharing Rate of Interest to be paid on capital

before profits are shared Rate of Interest to be charged on

drawings. Salaries to be paid to partners Arrangement to the admission of new

partners Procedures to be carried out when

partners retire or die.

Partners contribute an agreed amount. Partners need not contribute the equal amounts.

Partners can increase/decrease their capital contribution any time during the partnership depending on what has been agreed.

The purpose of a partnership is to make profit.

Profits/losses of a partnership are shared in any ratio they wish.

The profit sharing may not be based on capital

contributed, especially where partners ‘s duties are the same.

Interest on capital contributed is used to compensate partners who contribute more capital.

Interest on Capital is deducted before sharing of Profit

The two basic business principle are that cash withdrawn must be;◦ As little as possible◦ As late as possible.

Liquidity/cash is the blood of the business To deter partners from taking cash out of the business,

partners are charged interest on withdrawals. Interest charged must be sufficient to deter partners.

The charge is computed as Rate X Amount Withdrawn X Period in a year the partnership will forgo the use of the money.

Used to increase profits Treatment- add before sharing of Profit.

Partnership Salaries will be paid according to responsibility.

This salary is deducted before sharing of profit

Salaries and Performance based pay are treated the same.

• Accounting for PartnershipsEach partner must use a Capital and a Withdrawals account to record changes in their financial positions. They must allocate for division of profits and/or losses amongst themselves.  Allocation of EarningsThere are three methods of dividing earnings. 1.0 Stated fractional basis2.0 Ratio of capital investment,3.0 Use of salary and interest allowances.

 

• Net Profit (P/L Account) xxxAdd Interest on drawings xxLess partners’ salary bonus or (xx)

commissionless Interest on Capital (xx)

Balance of profit shared xxx Partner A xx

Partner B xx xxx

Two methods available for accounting for partnership Capital◦ Fixed Capital plus Current Account◦ Fluctuating Capital Accounts

Two Accounts are opened; Capital Account- This account records the capital

injected by the partner. This account remains the same year on year unless new capital is injected.

Current Account- This account records all transactions that affect the capital account these are Profits/Loss – which increases or decreases the capital Interest on Capital earned Interest on Drawings Charged Partners salaries

The balance in the Current represent the amount profit/loss that should be added to capital.

- A debit means the partners has overdrawn profits and he

can be warned.- A credit means there is

remaining profit

This is mix of Capital and Current accounts. The method is discouraged.

Frame and French are in partnership sharing profits and losses at a ratio of 3/5 and 2/5.The following is their Trial Balance;

Example 1DR CR

Buildings(cost 210 000) 160,000 Fixture at Cost 8,200 Provision for Depreciation Fixtures 4,200 Debtors 61,400 Creditors 26,590 Cash at Bank 6,130 Stocks at 30 Set 2004 62,740 Sales 363,111 Purchases 210,000 Carriage Outwards 3,410 Discount allowed 620 Loan Interest: P Prince 3,900 Offi ce Expenses 4,760

Salaries and Wages 57,809 Bad Debts 1,632 Provision for Doubtful debts 1,400 Loan from : P Prince 65,000 Capital: Frame 100,000 French 75,000 Current Accounts Frame 4,100 French 1,200 Drawings Frame 31,800 French 28,200

640,601 640,601

Stock, 30th June 2009, 74 210Expenses Accrued Offi ce 215,Wages 720Depreciation fixtures 15% on reducing balance method, Building 5000.Reduce provision of DB to 1250Partner ship Salary 30 000 to Frame not yet enteredInterest on Drawings Frame 900,French 600Interest on Capital at 5%.Require:Prepare Trading and Profit and Loss Appropriation AccountBalance Sheet

Trading and Profit and Loss Account for the year ended 30 September

Sales 363,111

Less Cost of Goods sold Opening Sock 62,740 Purchases 210,000 Closing Stock 74,210-

198,530 Gross Profit 164,581 Reduction in Provision for DB 150 Less 164,731 Salaries (57 809+720) 58,529 Offi ce Expenses (4760+215) 4,975 Carriage Outwards 3,410 Discount Allowed 620 Bad Debts 1,632 Loan Interest 3,900 Depreciation-Fixtures 600 - Buildings 5,000

78,666 Net Profit 86,065

Frame amd Franch Partnership

Add Interest on drawings: Frame 900 French 600 1,500 Less Interest on Capital : Frame 5,000 French 3,750 8,750

Salaries Frame 30,000

Balance of Profits 48,815

Frame 29,289 French 19,526

48,815