PARTNERSHIP ACCOUNTING
Partnership accounting revolves around the handling of equity. When two partners are setting
up a partnership, each person contributes assets as well as a capital investment.
The Initial Investment
There would be two opening entries to record this new partnership.
For example:
Cash
Accounts Receivable
Office Furniture
Partner 1, Capital
$2,000
1,500
2,500
Cash
Computer Equipment
Accounts Payable
Partner 2, Capital
$1,500
3,500
$6,000
$ 500
4,500
As there are two capital accounts, which will be shown separately on the balance sheet, there
are also two drawings accounts, one for each partner. The drawings account for wach partner
will be debited when there is:
 Payments of salaries to partners
 Withdrawal of assets or cash by a partner
Dividing Net Income
Partners may make any agreement they wish for division of the partnership’s net income or net
loss. One of the most important clauses of the partnership contract is the one stating how these
will be shared. Four factors considered by partners are:
 Payment for amount of work performed;
 Return on capital;
 Amount of capital invested; and
 individual skills, talent, and reputation
Methods of Dividing Net Income or Net Loss
Among the many methods used to divide net income and net loss are:
 Fixed ratio;
 Capital ratio;
 Salaries, and remaining net income (or net loss) to partners in a fixed ratio; and
 Interest on capital, salaries, and remaining net income (or net loss) to partners in
a fixed ratio.
Accounting for Salaries, Interest, and Drawings in a Partnership
Salaries and Interest
According to the law, a partner participates in a partnership for a share of the earnings of the
business, not for a salary or for interest on investment. Therefore, salaries and interest are only
used as mathematical factor when dividing net income. Salaries and interest are used in the
calculation at the end of the fiscal period. They are then distributed to the partners as part of
their share of the next income. But they are not entered into the accounts as salaries and
interest.
Drawings
The partners usually need to receive money from the business during the year. Any such
payments are considered to be drawings and are debited to the partners’ respective drawings
accounts. The partners should know roughly how well the business is doing. They can draw
money based on their anticipated share of the profits. IN some businesses, the amount of the
drawings is fixed by formal agreement.
The partners’ drawings accounts and their respective shares of the net income are
transferred to their capital accounts as part of the closing entry process.
Financial Statements for a Partnership
Financial statements for a partnership include more than the balance sheet and the income
statement. A partnership also requires a statement of distribution of net income, which you have
just studied, and a statement of partners’ capital.
The financial statements for a partnership have to be prepared in a certain order. This is
because information from one statement is needed to complete another. The statements of a
partnership are prepared in the following order:
1. Income Statement
2. Statement of Distribution of Net Income
3. Statement of Partners’ Capital
4. Balance sheet
The preparation of the four statements for a partnership is studied below.
Partnership Exercises:
Ex. # 1,2,3 p. 552-553 (t), p. 459-461 (w)