2. 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.
3. • 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).
4. “You will never change your life until you change
your belief about what you are capable of.”
Robin Cow
5. 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.
6. 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.
7. 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
8. The two basic business principle are that cash withdrawn must be;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The charge is computed as Rate X Amount Withdrawn X Period in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.
9. 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.
10. • Accounting for Partnerships
Each 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 Earnings
There are three methods of dividing earnings.
1.0 Stated fractional basis
2.0 Ratio of capital investment,
3.0 Use of salary and interest allowances.
11. • Net Profit (P/L Account) xxx
Add Interest on drawings xx
Less partners’ salary bonus or (xx)
commission
less Interest on Capital (xx)
Balance of profit shared xxx
Partner A xx
Partner B xx xxx
12. Two methods available for accounting for
partnership Capital
◦ Fixed Capital plus Current Account
◦ Fluctuating Capital Accounts
13. 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
14. 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
15. This is mix of Capital and Current accounts. The
method is discouraged.
16. 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;
17. Example 1
DR 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
Office Expenses 4,760
18. 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
19. Stock, 30th June 2009, 74 210
Expenses Accrued Office 215,Wages 720
Depreciation fixtures 15% on reducing balance method, Building 5000.
Reduce provision of DB to 1250
Partner ship Salary 30 000 to Frame not yet entered
Interest on Drawings Frame 900,French 600
Interest on Capital at 5%.
Require:
Prepare Trading and Profit and Loss Appropriation Account
Balance Sheet
20. 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
Office 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
21. 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