1 Partnership
Tutor: Marie O’Callaghan
Sole Trader
Unlimited
Liability
Company
Partnership
Limited
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 Provisions
1.
2.
3.
4.
5.
6.
7.
8.
P&L must be shared equally
No interest paid on capital
No remuneration
Differences settled by majority
Change of business requires consent of all
No right to expell a partner
No right to retire
All Partners have the right:
1.
2.
3.
4.
5.
Take part
Prevent entry of another partner
Examine the books
Receive interest 5%PA on loans/advances ex capital
Dissolve the partnership
9. does not prevent a former partner from competing after leaving
10. Partnership dissolves automatically on
1.
2.
3.
death of partner
bankruptcy of partner
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 balances
2 B introduces additional capital
3 C withdraws capital
4 ABC Capital upward adjustment for recognition of goodwill and positive re-valuation of assets
Capital Account
DATE
DETAILS
PARTNERS
A
3/3/..
31/12
B
Bank
Balance
c/d
DATE
DETAILS
C
X
X
X
X
X
X
X
PARTNERS
A
B
C
X
X
X
1/1/..
Balance b/d
2/2/..
Bank
31/12
Goodwill
X
X
X
31/12
Revaluation
X
X
X
X
X
X
X
X
X
1/1/..
Balance b/d
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
31/12/..
31/12/..
31/12/..
DATE
DETAILS
Drawings
1/1/..
Balance b/d
Interest on Draw
31/12/..
Interest on Cr bal
31/12/..
Interest on Cap
31/12/..
Loan Interest
31/12/..
Share of Profits
1/1/..
Balance b/d
Balance c/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
1/1/..
€
DATE
DETAILS
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
31/12/..
31/12/..
31/12/..
DATE
DETAILS
Drawings
1/1/..
Balance b/d
Interest on Draw
31/12/..
Interest on Cr bal
31/12/..
Interest on Cap
31/12/..
Salary
31/12/..
Share of Profits
1/1/..
Balance b/d
Balance c/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)
Interest on capital Accounts: A
(X)
B
(X)
C
(X)
Interest on Current Accounts:
X
C
(X)
A
(X)
(X)
B
Interest on Drawings:
Balance of Net Profit
A
(X)
(X)
X
B
X
C
X
X
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
Current Account
A
X
B
X
C
X
A
X
B
(X)
C
X
€
X
X
XX