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Introduction of Partnership Accounts

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Characteristics of Partnership 2 – 20 owners Governed by the Partnership Ordinance A partnership agreement can be drawn

up to define the rights and obligations of the partners. If no agreement, the Partnership Ordinance applies

A partnership has no separate legal identity except for the limited partners

A limited partnership may also be formed, which means that at least one unlimited partner

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Partnership Agreement Not all partnership have

agreements. However, a written partnership

agreement will help prevent problems and solve dispute between the partners

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Terms of agreement Amount of capital to be contributed by

each partners Ratio in which profits and loss to be

shared between partners Rate of interest, if any to be allowed on

partners’ capital Rate of interest, if any, to be charged

on partners’ drawings Rate of interest, if any, to be allowed

on partners’ loans to firm Salaries to be paid to the partners

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In the absence of partnership agreement, the Partnership Ordinance applies which states:

1. All partners may contribute capital equally

2. Profits and losses are to be share by partners equally

3. No interest is to be paid on capital4. No interest is to be charged on

partners’ drawings5. Partners are entitled to interest of 5%

per annum on loans to the firm6. No salaries are allowed to partners

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Features of Partnership Accounts

Profit and Loss Appropriation Account It is drawn under the trading and profit

and loss account It shows the distribution of profits

among the partners Capital Accounts

These accounts record the amount of capital by each partners

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Current Accounts As the partnership makes profit/loss, and

the partners take the firm’s resources for private uses, there will be fluctuation in the partners’ capital balances. A current account is set up to maintain constant capital balances of the partners as stated in the agreement.

Current account is to record: Share of profit /loss Interest on capital Interest on drawings Interest on loans Drawings Partners’ salaries

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Accounting Treatment

Items Accounting Entries

Capital contributed in cash Dr. Cash Cr. Partners’ Capital Accounts

Share of profits Dr. Profit and Loss Appropriation Cr. Partners’ Current Accounts

Share of losses Dr. Partners’ Current Accounts Cr. Profit and Loss Appropriation

Interest on capital Dr. Profit and Loss Appropriation Cr. Partners’ Current Accounts

Partners’ salaries Dr. Profit and Loss Appropriation Cr. Partners’ Current Account

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Items Accounting entries

Interest on partners’ loan

Dr Profit and loss appropriationCr Partners’ current

Partners’ drawings Dr Partners’ current Cr Partners Drawings

Interest on drawings Dr Partners’ currentCr Profit and loss appropriation

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Profit and Loss Appropriation

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Peter and JohnProfit and Loss Appropriation Account for the year ended 31 December 1997

Partners’ Salaries

Peter XJohn X X

Net Profit b/f X

Interest on DrawingsPeter X

John X XInterest on Capital

Peter X

John X XShare of Profit

Peter X

John X X

X X

T- Form

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Peter and JohnTrading and Profit and Loss Account for the year ended 31 December 1997

Net Profit XAdd: Interest on Drawings

Peter XJohn (%*drawings) X X

Less: Partners’ SalariesPeter XJohn X X

Interest on CapitalPeter XJohn (%* capital) X X

Share of ProfitPeter (1/2) XJohn (1/2) X X

Sales XLess: Cost of goods sold

Opening stock XAdd: Purchases XLess: Closing stock X X

Gross profit XLess: Expenses

Rent XLighting X X

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Capital accountPeter John Peter John

Bal b/f X X

Current account

Peter John Peter JohnBal b/f XShare of profit X XInterest on capital X XPartners’ salaries X XBal c/f X X X

Bal b/f XInterest on drawings X XDrawings X XBal c/f X

X X

Debit balance

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Peter and John Balance Sheet as at 31 Dec 1997Fixed assets Cost Dep. NetBuildings X X XFurniture X X X X X XCurrent assets

Stock XDebtors XBank X

XLess: Current liabilities

Creditors XWorking capital X XFinanced by:Capital – Peter X

- John X X

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Current account Peter John TotalOpening balance X (X)add: Share of profit X X Partners’ salaries X X Interest on capital X X

X XLess: Drawings X X Interest on drawings X X

X X XX

Long term liabilities15% Loan X

X

Debit balance

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Example 1

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Tom and David are in partnership, sharing profits and losses equally. TheFollowing is their trial balance as at 31 December 1997.

Dr CrFixed assets 400000Provision for depreciation 40000Stock as at 1 Jan 1997 10000Sales 290000Purchases 150000Expenses 30000Capital – Tom 197000 - David 197000Current – Tom 8000

- David 2000Drawings – Tom 5000

- David 5000Debtors 70000Bank 8000010% Loan from Tom 20000

752000 752000

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Additional information:1. Stock in hand as at 31 December has

been valued at cost at $300002. Depreciation is to be provided at 10%

per annum on the straight line bases3. Pat interest on capital at 1% and

charge interest on drawings at 5%4. Partners’ salaries are $10000 to Tom

and $5000 to David

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Tom and David

Trading and Profit and Loss Account for the year ended 31 December 1997

Opening Stock 10,000Purchases 150,000

160,000

Less: Closing Stock 30,000Cost of Goods Sold 130,000

Gross Profit 160,000290,000

Expenses 30,000Depreciation 40,000Interest on Loan (20,000 X 10%) 2,000Net Profit 88,000

Sales 290,000

Gross Profit 160,000

160,000 160,000

290,000

Example 1

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Tom and David

Trading and Profit and Loss Account for the year ended 31 December 1997

Partners’ Salaries Tom 10,000

Interest on Capital Tom 1,970

David 1,970 3,940

Net Profit 88,000

David 5,000 15,000

Share of Profit Tom (1/2) 34,780 David (1/2) 34,780 69,560

Interest on Drawings Tom 250

David 250 500

88,500 88,500

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Tom and David

1997

Current Account

Tom David 1997 Tom David

Jan 1 Bal. b/f 2,000

Dec31 P&L Appropriation-Int. on Drawings 250 250

31 Drawings 5,000 5,000 31 Bal. c/f 51,500 34,500

Jan 1 Bal. b/f 8,000

Dec 31 Profit and Loss Appropriation

- Int. on Capital 1,970 1,970- Profits 34,780 34,780- Salaries 10,000 5,000

31 Profit and Loss

- Int. on Loan 2,00056,750 41,750 56,750 41,750

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Tom and David

Fixed Assets 400,000Less: Provision for Dep. 80,000

Current AssetsStock 30,000

Debtors 70,000

Capital Accounts

Tom 197,000 David 197,000 394,000

Current Accounts

Balance Sheet as at 31 December 1997

320,000

Bank 80,000 180,000

Tom 51,500

David 34,500 86,000Long-term LiabilitiesLoan from Tom 20,000

500,000 500,000

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Net profit 88,000

Interest on Drawings 500

88,500

Partners’ salary Tom 10,000

David 5,000

Interest on capital Tom 1,970

David 1,970 18,940

69,560

Share of profit Tom 34,780

David 34,780 69,560

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Minimum Share of Profits Sometime, one of the partners is

guaranteed a minimum profit. If the amount of profits shared according to the normal profit-sharing ratio is smaller than the minimum share, that partner will get his/her minimum share first, while the balance of the profits is to be shared between the other partners

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Example 2

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Paul, Betty and Rose are in partnership sharing profits in the ratio of 5:3:2. Rose is guaranteed a minimum share of profits of $10000.

Profits for the years ended31 Dec 1996 $20000031 Dec 1997 $42000

RequiredCalculate the share of profits to each

partnerfor 1996 and 1997 are:

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Paul, Betty and Rose

Profit and Loss Appropriation Account for the year ended 31 December 1997

Share of Profit: Paul (5/10) 100,000

Net Profit 200,000

Betty (3/10) 60,000

Rose (2/10) 40,000 200,000200,000 200,000

Paul, Betty and Rose

Profit and Loss Appropriation Account for the year ended 31 December 1997

Share of Profit: Paul (5/10 X 32,000) 20,000

Net Profit 42,000

Betty (3/10 X 32,000) 12,000

Rose (guaranteed) 10,000 42,000 42,000 42,000