Introduction of Partnership
Accounts
1
Characteristics of Partnership
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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
2
Partnership Agreement
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Not all partnership have agreements.
However, a written partnership
agreement will help prevent problems
and solve dispute between the partners
3
Terms of agreement
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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
4
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1.
2.
3.
4.
5.
6.
In the absence of partnership agreement,
the Partnership Ordinance applies which
states:
All partners may contribute capital equally
Profits and losses are to be share by
partners equally
No interest is to be paid on capital
No interest is to be charged on partners’
drawings
Partners are entitled to interest of 5% per
annum on loans to the firm
No salaries are allowed to partners
5
Features of Partnership Accounts
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Profit and Loss Appropriation Account
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It is drawn under the trading and profit
and loss account
It shows the distribution of profits among
the partners
Capital Accounts
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These accounts record the amount of
capital by each partners
6
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Current Accounts
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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:
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Share of profit /loss
Interest on capital
Interest on drawings
Interest on loans
Drawings
Partners’ salaries
7
Accounting Treatment
Items
Accounting Entries
Capital contributed in cash
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Share of profits
Share of losses
Interest on capital
Partners’ salaries
Cash
Partners’ Capital Accounts
Profit and Loss Appropriation
Partners’ Current Accounts
Partners’ Current Accounts
Profit and Loss Appropriation
Profit and Loss Appropriation
Partners’ Current Accounts
Profit and Loss Appropriation
Partners’ Current Account
8
Items
Accounting entries
Interest on partners’ loan
Dr Profit and loss
appropriation
Cr Partners’ current
Partners’ drawings
Dr Partners’ current
Cr Partners Drawings
Interest on drawings
Dr Partners’ current
Cr Profit and loss
appropriation
9
Profit and Loss Appropriation
10
T- Form
Peter and John
Profit and Loss Appropriation Account for the year ended 31 December 1997
Partners’ Salaries
Net Profit b/f
X
Peter
X
Interest on Drawings
John
X
X
Peter
X
Interest on Capital
John
X
X
Peter
X
John
X
X
Share of Profit
Peter
X
John
X
X
X
X
11
Peter and John
Trading and Profit and Loss Account for the year ended 31 December 1997
Sales
X
Less: Cost of goods sold
Opening stock
X
Add: Purchases
X
Less: Closing stock
X
X
Gross profit
X
Less: Expenses
Rent
X
Lighting
X
X
Net Profit
X
Add: Interest on Drawings
Peter
X
John (%*drawings)
X
X
Less: Partners’ Salaries
Peter
X
John
X
X
Interest on Capital
Peter
X
John (%* capital)
X
X
Share of Profit
Peter (1/2)
X
John (1/2)
X
X
12
Peter
Capital account
John
Bal b/f
Debit balance
Current account
Peter
John
Bal b/f
Interest on drawings X
Drawings
X
Bal c/f
X
X
X
X
X
X
Peter
X
Peter
Bal b/f
Share of profit
Interest on capital
Partners’ salaries
Bal c/f
X
X
X
X
X
John
X
John
X
X
X
X
X
13
Fixed assets
Buildings
Furniture
Current assets
Stock
Debtors
Bank
Peter and John
Balance Sheet as at 31 Dec 1997
Cost
Dep.
X
X
X
X
X
X
Less: Current liabilities
Creditors
Working capital
Financed by:
Capital – Peter
- John
Net
X
X
X
X
X
X
X
X
X
X
X
X
X
14
Current account
Opening balance
add: Share of profit
Partners’ salaries
Interest on capital
Peter
X
X
X
X
X
Less: Drawings
X
Interest on drawings X
X
Long term liabilities
15% Loan
John
(X)
X
X
X
X
X
X
X
Total
Debit balance
X
X
X
X
15
Example 1
16
Tom and David are in partnership, sharing profits and losses equally. The
Following is their trial balance as at 31 December 1997.
Dr
Cr
Fixed assets
400000
Provision for depreciation
40000
Stock as at 1 Jan 1997
10000
Sales
290000
Purchases
150000
Expenses
30000
Capital – Tom
197000
- David
197000
Current – Tom
8000
- David
2000
Drawings – Tom
5000
- David
5000
Debtors
70000
Bank
80000
10% Loan from Tom
20000
752000
752000
17
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1.
2.
3.
4.
Additional information:
Stock in hand as at 31 December has been
valued at cost at $30000
Depreciation is to be provided at 10% per
annum on the straight line bases
Pat interest on capital at 1% and charge
interest on drawings at 5%
Partners’ salaries are $10000 to Tom and
$5000 to David
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Example 1
Tom and David
Trading and Profit and Loss Account for the year ended 31 December 1997
Opening Stock
Purchases
10,000
150,000
160,000
Less: Closing Stock
Cost of Goods Sold
Gross Profit
30,000
130,000
160,000
290,000
Expenses
Depreciation
Interest on Loan
(20,000 X 10%)
Net Profit
30,000
40,000
2,000
88,000
160,000
Sales
290,000
290,000
Gross Profit
160,000
160,000
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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
David
5,000
15,000
Interest on Capital
Tom
1,970
David
1,970
3,940
Share of Profit
Tom (1/2)
34,780
David (1/2)
34,780 69,560
88,500
Net Profit
Interest on Drawings
Tom
David
88,000
250
250
500
88,500
20
1997
Jan 1 Bal. b/f
Tom
Tom and David
Current Account
1997
David
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
Tom
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
56,750 41,750
David
2,000
56,750 41,750
21
Tom and David
Balance Sheet as at 31 December 1997
400,000 Capital Accounts
Tom
197,000
80,000
David
197,000
320,000
Current Accounts
Tom
51,500
30,000
David
34,500
Long-term Liabilities
70,000
80,000 180,000 Loan from Tom
500,000
Fixed Assets
Less: Provision for Dep.
Current Assets
Stock
Debtors
Bank
394,000
86,000
20,000
500,000
22
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
23
Minimum Share of Profits
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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
24
Example 2
25
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 ended
31 Dec 1996
$200000
31 Dec 1997
$42000
Required
Calculate the share of profits to each partner
for 1996 and 1997 are:
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26
Paul, Betty and Rose
Profit and Loss Appropriation Account for the year ended 31 December 1997
Share of Profit:
Paul (5/10)
Betty (3/10)
Rose (2/10)
Net Profit
100,000
60,000
40,000 200,000
200,000
200,000
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
Betty (3/10 X 32,000) 12,000
Rose (guaranteed)
10,000
Net Profit
42,000
42,000
42,000
42,000
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