LEARNING OBJECTIVES
1
Explain the
formation of a
partnership
business
2
Explain the
characteristics of a
partnership
business
3
Explain the
advantages of a
partnership
business
4
5
Understand the
governance of the
partnership
business
Record transactions
pertaining to a
partnership
business
6
Prepare the final
accounts of a
partnership
business
THE NEED FOR A PARTNERSHIP
When a more permanent possibility exists, two or
more people may form themselves into a
partnership.
The people who own a partnership are called
partners.
They maintained one set of accounting records
and share the profits and losses.
FORMING A PARTNESHIP
Reasons to form a
partnership
The capital required is
more than one person
can provide
The experience or
ability required to
manage the business
cannot be found on
one person alone
Many people want to
share management
instead of doing
everything on their
own
Very often the
partners will be
members of the same
family
The level of risk is
reduced
NATURE OF A PARTNERSHIP
A partnership has
the following
characteristic:
Capital
contributions
Registration
Companies
Commission of
Malaysia
Business
Registration Act
1956 and 1957
Partnership
Agreement
Partnership Act
1961
Ownership
Minimum of 2
partners and a
maximum of 20
partners.
Management and
control
Professional
partnership
At least 2 and up
to 50 partners
Unlimited liability
Profit (or loss)
sharing ratios
Books of accounts
No legal obligation
to keep the books
and prepare
accounts
TYPES OF PARTNERS
General
partner
Sleeping
partner
Unlimited partner
Limited
partner
• Must pay his/her share of
any debts that the
partnership could not pay
Unlimited partner
Liability for the debts
of the partnership is
limited to the capital
he/she has put in
Permitted to take
part in the
management of the
partnership
No involvement in the
management of the
partnership
Not allowed to take
part in the
management of the
partnership
Not allowed to have
the power to make
the partnership take
a decision
ADVANTAGES & DISADVANTAGES OF A
PARTNERSHIP
Capital
Expertise
Additional resources brought in by an
additional owner or partners
New or specific skills of the additional
owner or partner
The business is able to increase its
product base or volume, or use them for
additional capital expenditure
The business may be able to improve on
the acquisition as well as the distribution of
products
THE GOVERNANCE OF A PARTNERSHIP
The Partnership
Agreement
The Partnership Act
1961
Capital
Interest on capital
• To state the amount to be contributed as well as any interest on capital and the rate of the
interest
• Partners will not be given any of such interest
Profit shared
• To state the division of profit and whether the profit will be guaranteed
Profit shared
• Partners will receive an equal share of profit or loss
Withdrawals
• To state the amount, timing and charges, if such withdrawals are allowable
Advances or loans
Interest on advances or loans
• An annual rate of 8% will be applied on the advances or loans made by partners
• To state the rate, if any, on the advances or loans actually made to the business
Remunerations
• To state the amount if partners are to be paid salaries and/or commissions
Remunerations
• Partners will not be given any salaries
TRANSACTIONS PERTAINING TO A PARTNERSHIP
Capital
contribution
Remuneration
• Salaries
• Commissions
Loans made by
a partner to the
business
Interest on
drawings
Drawings made
by a partner
Interest on loan
Interest on
capital
THE FINANCIAL STATEMENTS
OF A PARTNERSHIP
If the sales, inventory and expenses of a partnership were exactly the same as those of a sole trader
Then the statement of profit or loss (SOPL) would be identical with that prepared for the sole trader
However, a partnership would have an extra section at the end of the SOPL
This section is called the profit and loss appropriation account
It is in this account that the distribution of profits is shown
STATEMENT OF PROFIT OR LOSS
(SOPL)
ACCOUNTING
FOR
PARTNERSHIP
STATEMENT OF FINANCIAL
STATEMENT OF APPROPRIATION
POSITION
11
THE APPROPRIATION STATEMENT
Appropriation Statement for the year ended 31 December 20XX
RM
Net profit b/d
Add:
RM
XXX
Interest on drawings:
Partner A
XX
Partner B
XX
XX
XXX
Less:
Salaries:
Partner A
(XX)
Partner B
(XX)
(XX)
Interest on capital
Partner A
(XX)
Partner B
(XX)
(XX)
XXX
Profit shared
Partner A
XX
Partner B
XX
XXX
STATEMENT OF APPROPRIATION
Appropriation Statement for the year ended 31 December 2019
RM
Net profit
RM
xxx
(add or Less adjustment (if any) e.g. interest on loan to partners
Add : Revenue
Interest on drawings ( Amount X Rate X Monthly basis)
Less: Expenses
Interest on capital to Partner A ( Amount X Rate X Monthly)
Partner B
Salary paid to Partner A
Partner B
xxx
xxx
xxx
xxx
xxx
Profit or Loss sharing eg ratio of (3:2)
XXX
Partner A (3/5 X XXX)*
xxx
Partner B (2/5 X XXX)*
xxx
*to take into account of minimum guaranteed profit if any. Above is normal calculation without minimum guaranteed profit
(xxxx)
XXX
❖ To show the distribution of
net profit/loss to all
partners according to the
profit-sharing ratio agreed.
❖ Before distribution,
adjustment must be made
including
▪Adding Interest on
drawings
▪Minus Interest on capital
▪Minus Partners’ salaries
FROM THE
BUSINESS’
PERSPECTIVE
13
STATEMENT OF APPROPRIATION
14
THE CAPITAL STRUCTURE
There are 2
choices open to
partnership
Fixed capital
accounts +
current accounts
Fluctuating
capital accounts
Capital Accounts
CAPITAL
ACCOUNTS
Partner A
Partner B
Partner A
Partner B
RM
RM
RM
RM
Cash/Bank
(reduction)
XX
XX
Bal b/d
XX
XX
Bal c/d
XX
XX
Cash/Bank
XX
XX
Motor
vehicle
XX
XX
Office
equipment
XX
XX
Cash/Bank
(additional)
XX
XX
XXX
XXX
Fixed capital structure
XXX
XXX
CURRENT ACCOUNT
Fixed capital structure
Current Account
Partner A
Partner B
Partner A
Partner B
RM
RM
RM
RM
Drawings
XX
XX
Bal b/d
XX
XX
Interest on
drawings
XX
XX
Salary
XX
XX
Balance c/d
XX
XX
Interest on capital
XX
XX
Share of profits
XX
XX
XXX
XXX
XXX
XXX
THE FIXED CAPITAL STRUCTURE METHOD
CAPITAL STRUCTURE
A partner's total capital is the sum of the balances on their capital account and their current account.
1. Partners’ Capital Account –record the initial contribution of the partners plus any permanent increase
or decrease in the initial contribution while
2. Current Account - record current total of appropriations and the share of residual profit/loss, less drawings.
• Increase when receive salaries, interest on capital, interest on loan and profit made by partnership
• Decrease when there is drawings, interest on drawings or net loss.
If P/L is
net loss
FROM THE
PARTNERS’
PERSPECTIVE
If P/L is
net Profit
18
Fluctuating Capital Structure
Capital Account
Partner A
Partner B
Partner A
Partner B
RM
RM
RM
RM
Cash/Bank
(reduction)
XX
XX
Bal b/d
XX
XX
Drawings
XX
XX
Cash/Bank
XX
XX
Interest on drawings
XX
XX
Motor vehicle
XX
XX
Balance c/d
XX
XX
Office equipment
XX
XX
Cash/Bank
(additional)
XX
XX
Salary
XX
XX
Interest on capital
XX
XX
Share of profits
XX
XX
XXX
XXX
XXX
XXX
THE FLUCTUATING METHOD
CAPITAL STRUCTURE
❖ A partner's total capital records the initial capital plus any increase or decrease, along with
other matters (e.g. interest on drawings, interest on capital, salaries and etc.
❖ No current account is maintained.
If P/L is
net loss
If P/L is
net Profit
20
Changes in Partnership
ADMISSION
• When new partner are admitted. The partnership is
legally dissolved, and a new partnership begin.
• Admission
1. by purchase of an interest (Purchase the interest of
one or more existing partners. Only capital account
affected
2. by investment. (invest asset in the partnership. Both
net assets and Capital of the partnership increase.
21
Changes in Partnership
RETIRE/WITHDRAWALS
• When an existing partner retires or withdraw from
the partnership, goodwill and the revaluation of the
net assets should be determined at the retirement
date . The remaining balances of the retired
partners' capital and current account will be paid to
him /her. The amount to be paid either in full or in
installments
22
TUTORIAL –
PREVIOUS TEST 2
operating expenses
23
Partners’ Capital Account – Balance b/d
Partners’ Current Account – Balance b/d
Statement of Appropriation – Net Profit
Interest on Loan by partner (3%) – Hani
Interest on Drawings (6%) – Hani & Teha
Interest on Capital (5%) – Hani & Teha
Salary (2,500x 12 mths) – Hani & Teha
(if teha’s profit is less than RM 10,000,
so, Hani will have to topup.)
Statement of Appropriation –
minus from Net profit first
before you add interest on
drawings
Statement of
Appropriation &
Partners’
Current
Account
24
Appropriation Statement of Profit or Loss for the year ended 31 December
2021
Net Profit
Less: Other expenses not yet incurred – Dep exp (from Q RM 500)
- Int on loan (3%* RM100k *11/12)
Add: Interest on Drawings
Hani – July ( 30,000 x 6% x 6/12)
Teha – Dec ( 20,000 x 6% x 1/12)
Less: salary
Hani (2,500 x 12 months)
Teha (2,500 x 12 months)
Less: Interest in capital
Hani – (200,000 x 5%)
Teha – (100,000 x 5%)
Net profit for appropriation
Share of profit (2:1)
Hani – (2/3*28930 =19,287) (19287-357)
Teha – (1/3*28930 = 9,643, cannot be less than RM 10k, so topup by Hani RM 357.
106,180
(500)
(2,750)
102,930
900
100
1,000
30,000
30,000
(60,000)
10,000
5,000
(15,000)
28,930
18,930
10,000
25
28,930
Current account
Hani
Bal b/f
Drawings
Interest on
drawings
Share of
profit – if NET
LOSS
Bal c/f
30,000
Teha
32,000
20,000
900
100
Bal b/f
Interest on loan
Interest on
capital
Share of profit –
if NET PROFIT
30,780
61,680
Hani
30,000
2,750
10,000
5,000
18,930
10,000
61,680
37,100
52,100
Bal c/f
52,100
Teha
26
Partner’s Capital Account
Bal c/f
Hani
200,000
Teha
100,000
200,000
100,000
Bal b/f
Hani
200,000
200,000
Teha
100,000
100,000
If questions mention additional capital, then you will have to record it in the capital account.
Example:
1. Additional capital by Teha Rm 1,000 paid in cash.
Partner’s Capital Account
Bal c/f
Hani
200,000
Teha
101,000
200,000
101,000
Bal b/f
Cash
Hani
200,000
200,000
Teha
100,000
1,000
101,000
27
THE END
References:
Business Accounting – Frank Wood & Alan Sangster
Financial Accounting for Non-accounting Students – Fatimah Abd Rauf et al.