Chapter
6
PARTNERSHIPS
 TO PRODUCE A FULL SET OF ACCOUNTS AND
FINANCIAL REPORTS FOR PARTNERSHIPS
FROM FORMATION TO DISSOLUTION

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 1

KEY TERMS
 active partner
 capital accounts
 capital adjustment account
 current account
 dissolution account (realisation account)
 fixed capital account
 Garner vs Murray ruling
 insolvency

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
2

KEY TERMS
 interest on capital
 interest on drawings
 loan and advances
 Partnership Act
 partnership agreement
 partnership funds
 profit and loss appropriation account
 profit distribution account

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
3

KEY TERMS
 profit-sharing ratios
 realisation account
 realisation expenses
 retained profits
 sleeping partner

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
4

FORMATION OF A
PARTNERSHIP
 Defined in the Partnership Act as the relationship between two or more people engaging in business for profit

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
5

FORMATION OF A
PARTNERSHIP
 Three important factors must be present in a partnership:
 partners must be carrying on a business, not one isolated business transaction
 must be agreement between two or more legally competent people who must be the business co-owners
 partners must have intent to make a profit

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
6

FORMATION OF A
PARTNERSHIP
 Partnerships are separate accounting entities to the partners
 Owner’s equity accounts are kept for each individual partner
 Each partner has the right to share in the profits and manage the business

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
7

PARTNERSHIP AGREEMENT
 Partnership agreement
 doesn’t always exist, making it difficult to establish if partnership exists
 no formal partnership agreement – Partnership
Act applies
 essential because partnerships:
 have unlimited liability
 have a limited life
• death of partner
• insolvency of partner
• retirement of partner

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
8

PARTNERSHIP AGREEMENT
 name of business
 details of each partner
 nature of business
 division of profit and losses

 authority, rights and

 capital contributions duties of partners details of salaries accounting methods
 drawings and interest rates
 interest for capital contribution
 voting and decisionmaking procedures
 admission of new partners
 resolution of disputes
 bankruptcy, death or retirement of partners

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
9

PARTNERSHIP ACT
 If there is no partnership agreement in writing, or if it does not cover an area of dispute, matters may be resolved by reference to the Partnership Act
 e.g. Act states all profits and losses are to be shared equally, so if profit ration is not defined in an agreement, the Act is applied

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
10

ADVANTAGES OF
PARTNERSHIP
 Creation and dissolution is easier than a company
 Minimal statutory regulations
 Resources can be pooled
 Expertise can be utilised
 Co-ownership of assets
 Duties and responsibilities are shared

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
11

DISADVANTAGES OF
PARTNERSHIP
 Liability is unlimited
 Partnership may cease if a partner dies, retires or becomes bankrupt
 Disagreements between the partners can occur
 Limits to raising large amounts of capital
 Partners can be sued by creditor, jointly or individually
 Partners are likely to pay higher income tax

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
12

PARTNERSHIP ACCOUNTS
 CURRENT ACCOUNTS
 working accounts containing details of profit, loss, drawings and interest on capital invested or on drawings
 CAPITAL ACCOUNTS
 partner’s original capital put into the business is considered to be ‘fixed’
 capital account of each partner is usually unchanged

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
13

PARTNERSHIP ACCOUNTS
 CREATION OF NEW PARTNERSHIP -
ACCOUNTING ENTRIES
 Can be created in two ways
 the introduction of cash only, entered in the cash receipts journal
 the introduction of cash and other assets and liabilities; general entries are raised for these entries

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
14

ACCOUNTING FOR NEW
PARTNERSHIP FORMATION
Illustration 6D (page 144)
Details
Knife
GENERAL JOURNAL
Debit Credit Date Details Date
1 June Cash
Inventory
A/c rec
A/c pay
Capital
Fork
Debit Credit
5000
8000
2000
1 June Motor vehicle 15000
Computer
Furniture
1000
14000
2000
3000
Inventory 6000
Bank overdraft
Capital
5000
21000
Capital invested by Knife Capital invested by Fork

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
15

PROFIT DISTRIBUTION
 PROFIT-SHARING RATIOS
 Profits and losses are shared in the way partners feel most appropriate
 Profit share can be determined in various ways:
 Amounts are shared on the basis of the contribution of fixed capital of each partner
 Amounts are shared on the contribution of capital balance of each partner
 Higher profit may go to a partner bringing something of particular value into the business, such as specialised expertise

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
16

PROFIT DISTRIBUTION
 PROFIT AND LOSS APPROPRIATION
ACCOUNT
 Net profit or loss transferred to this account from the profit and loss account
 May be adjusted for interest paid or earned on loans
 Net profit is brought in by general journal entry and is allocated to the partners at the agreed ratio

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
17

PROFIT AND LOSS
APPROPRIATION ACCOUNT
Illustration 6F (page 147)
Date
PROFIT AND LOSS APPROPRIATION ACCOUNT
Details
30 June Interest on capital
Salary - Able
Current – Able
Current – Bable
Current - Cable
Debit Date Details
30 June Profit and loss
3000
5000
2125
2125
2125
16500
Interest on drawings
Credit
16000
500
16500

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
18

PROFIT AND LOSS APPROPRIATION ACCOUNT
DEBIT CREDIT
INTEREST ON CAPITAL
PARTNERS’ SALARIES
NET PROFIT FROM PROFIT AND
LOSS ACCOUNT
OR: SHARE OF LOSS
BONUS TO PARTNERS
SHARE OF PROFIT
INTEREST ON DRAWINGS
CURRENT
ACCOUNTS

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
19

PROFIT DISTRIBUTION
 ALLOCATION AS PER PARTNERSHIP
AGREEMENT
 Interest on capital may be payable
 Interest may be charged for drawings taken out of the business
 There may be a provision for the payment of a salary of a particular partner
 Interest may be payable on loans to partners by the business or loans by partners to the business

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
20

PROFIT DISTRIBUTION
 LOAN ACCOUNTS
 Where a partner makes loan to business, the debit is to cash at bank and the credit to loan account in that partner’s name
 DRAWINGS
 Where a partner withdraws cash from the business in anticipation of profits earned, the current account is debited and cash is credited

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
21

 REASONS FOR A NEW PARTNER
 New products and customers to business
 Specialised expertise to organisation
 Access to further capital
 Desirable assets
 New business contacts
 Requirement due to death, retirement or bankruptcy of existing partner

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
22

NEW PARTNERSHIP AGREEMENT
 ADJUSTING THE EXISTING BUSINESS
 All existing partners must agree on the admission of a new partner
 Assets of the business should be revalued before a new partner is admitted
 Liabilities need to be reviewed for accuracy in valuation
 Gains and losses to existing partners from new business value will be made at the existing profit-sharing ratio

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
23

RETIREMENT
 RETIREMENT OF PARTNER
 Retiring partner must give notice in writing and place advertisement stating that she or he has withdrawn from the partnership

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
24

1.
Review value of assets
2.
Consider inclusion of goodwill
3.
Record changes in general journal
4.
Open capital adjustment account and enter increases or decreases
5.
Calculate profit or loss on adjustment and transfer to partners’ capital account
6.
Prepare opening general journal for new partner
7.
Calculate partners’ new profit-sharing ratio
8.
Prepare a new Statement of Financial Position

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
25

 GOODWILL
 AASB 1013 defines goodwill as future benefits from assets that can not be individually identified e.g. reputation, customer database, management ability, product, location
 Goodwill is an asset

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
26

 VALUING GOODWILL
 AASB 103 states that goodwill is the excess of all acquisition costs over the fair value of the net identifiable assets acquired
 ACCOUNTING FOR GOODWILL
 There are two methods
 recording goodwill in the accounts
 goodwill is not recorded in the books

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
27

PARTNERSHIP DISSOLUTION
 REASONS FOR DISSOLVING PARTNERSHIP
 Partners giving notice of intention to dissolve
 Expiration of the time or purpose set for partnership
 Insolvency of a partner
 Ownership changes e.g. converting to company
 Inability to trade profitably
 Death of partner
 Voluntary agreement by partners
 Courts may also rule to terminate partnership

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
28

PARTNERSHIP DISSOLUTION
 THE REALISATION ACCOUNT
 When business finished, accounts are closed off and a realisation account is opened
 Debits to this account include:
 book values of assets to be sold (not including cash)
 debts to be collected
 legal and other expenses for winding up partnership
 any accrued expenses
 gains on realisation transferred to capital accounts

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
29

PARTNERSHIP DISSOLUTION
 THE REALISATION ACCOUNT
 Credits to this account include:
 cash value of assets sold
 details of assets taken over by partners
 amounts collected for accounts receivable
 existing provisions and accumulated depreciation
 discount revenue from paying accounts payable
 where purchaser takes over any liabilities
 losses on realisation transferred to the capital accounts in the proportion that partners share profits and losses

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
30

PARTNERSHIP DISSOLUTION
 WHEN A PARTNER IS INSOLVENT
 A partner is unable to contribute to partnership debts because they have insufficient funds, are bankrupt or have left the partnership
 The other partners are legally obliged to share the financial deficiency of the insolvent partner to insure business liabilities are paid
 Amount contributed is to be covered by ruling
Garner vs Murray
 The loss is shared by the solvent partners in the ratio of the capital balance at the time of dissolution

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
31

PARTNERSHIP DISSOLUTION
 WHEN ALL PARTNERS ARE INSOLVENT
 Funds available must first be used to pay legal and other associated fees
 Then funds must be used to pay staff entitlements and amounts owed for accounts payable and loans

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
32

REALISATION SUMMARY
1.
Transfer net profit to profit and loss appropriation account and distribute to partners
2.
Close asset accounts to realisation (include accumulated depreciation and provision doubtful debts and exclude bank)
3.
Sell assets
Dr: Bank
Cr: Realisation
4.
If partner takes asset then
Dr: Capital - Partner
Cr: Realisation

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
33

REALISATION SUMMARY
5.
Pay costs of realisation
Dr: Realisation
Cr: Bank
6.
Pay liabilities
Dr: Liabilities
Cr: Bank
7.
Accept discounts
Dr: creditors
Cr: realisation
8.
Close realisation account - distribute profit or loss on realisation to partners’ capital accounts

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
34

REALISATION SUMMARY
PARTNER INSOLVENT
1.
Balance capital accounts - if partner with capital deficit is insolvent (cannot pay), then ‘Garner vs Murray’ rule applies
Dr: Solvent partners’ capital
Cr: Insolvent partner’s capital
2.
Balance bank account
• Money in bank - pay partners
• Deficit in bank - paid by partners
3.
Bank account and all equity accounts now closed

2003 McGraw-Hill Australia Pty Ltd, PPTs t/a
Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson
35