PARTNERSHIPS
Partnerships
This is when two or more persons enter into a
business venture with the intention to make
money.
Partnership Agreement

Legal document containing terms of
agreement

Signed by partners

Used to avoid future disputes
Items found In Agreement

Share of profits/losses

Capital Contribution

Interest charged on drawings

Interest on Capital

Amount of salary to be paid

Duties and responsibilities

Agreement on admission of new partner
ADVANTAGES/DISADVANTAGES OF
PARTNERSHIP
Advantages



Disadvantages
Increased Capital
– Expand firm

Share burden of
work/holidays

Allows for
specialisation
(lawyer may deal
with criminal law,
corporate law, or
road traffic
offences etc


Profits must be
shared
More chance of
disagreement
Decisions slow
Partners have
Unlimited Liability
Terms Associated with
Partnership Accounts
Appropriation
Account
Limited
Liability
Profit
Sharing
Ratio
Unlimited
Liability
Current
Account
Capital
Account
Partnership Terms
INTEREST ON CAPITAL
•
Partners are awarded cash for the
amount of money they invested in the
business.
•
This cash is taken from the NET PROFIT
in the Appropriated Section of the
Accounts
•
It is also added to the partners
CURRENT ACCOUNT (source of income)
PROFIT SHARING RATIO
•
In a partnership the ‘Residual’ Profits are
normally shared based on the amount of
capital each partner has invested in the
company.
•
EG if H Larsson invests £20,000 capital
and G Best invests £10,000 into their
business.The share of profits should a
ratio of 2:1
•
Any share in profits partners receive is
entered in each partners CURRENT
ACCOUNT
Terms Associated With
Partnership
CURRENT ACCOUNT
•
Contains any share of profits, drawings,
interest on capital. Interest on drawings
•
Allows distinction between capital
investment and profit
CAPITAL ACCOUNT
•
Identifies initial fixed capital
•
Records further investment
•
Forms basis for profit calculation
•
Identifies fluctuations in capital
RESIDUAL PROFIT
•
This is the amount of profit remaining
after any payments have been made or
taken from each partner
•
This is the amount that is shared between
partners
Terms Associated With
Partnership
UNLIMITED LIABILITY
This is where the personal assets belonging
to an individual are sold in order to cover
any outstanding debts owed to the bank e.g.
house; car etc
LIMITED LIABILITY
In the event of the company going bankrupt
the owner/investor will only lose the
original capital that they invested in the
company nothing more.
Procedure for Creating
Partnership Accounts
1
Complete notes for TPL &
Balance sheet
2 Work down to RESIDUAL
PROFIT in TPL Acc
3 Work out share of profits for
each partner
4 Complete appropriation account
5 Complete partner’s current
accounts
6 Create balance sheet
Template for Partnership
PROFIT AND LOSS APPROPRIATED
SECTION FOR Partner 1 AND Partner 2
FOR YEAR ENDED (Enter Date)
£
£
NET PROFIT
£
x
ADD Interest on Drawings
Partner 1
x
Partner 2
x
x
x
LESS
Salary (insert name)
x
Interest on Capital
Partner 1
x
Partner 2
x
RESIDUAL PROFIT
x
x
SHARE OF RESIDUAL PROFIT
Partner 1
x
Partner 2
x
x
Should
Agree
Template for Partnership
CURRENT ACCOUNT
Details
PARTNER 1
DR
CR
Opening Bank Balance
BAL
X cr
+Interest in Capital
X
X cr
+Salary
X
X cr
+Share of Profit
X
X cr
-Drawings
X
X cr
X
- Interest in Drawings
X
X cr
X
(Closing Bank Balances get carried forward to
Balance Sheet- Financed By Section)
Template for Partnership
CURRENT ACCOUNT
Details
PARTNER 2
DR
CR
Opening Overdraft
BAL
X dr
+Interest in Capital
X
X dr
+Salary
X
X cr
+Share of Profit
X
X cr
-Drawings
X
X cr
- Interest in Drawings
X
X cr
(Closing Bank Balances get carried forward to
Balance Sheet- Financed By Section)
Template for Partnership
BALANCE SHEET OF (PARTNER 1 AND PARTNER
2) AS AT (Enter Date)
£
£
£
Cost
Dep
NBV
Equipment
x
x
x
Premises
x
x
x
FIXED ASSETS
x
CURRENT ASSETS
Stock
x
Debtors
x
Prepayments etc
x
x
ADD
CURRENT LIABILITIES
Creditors
x
Accruals
x
Bank Overdraft
x
VAT (Cr)
x
WORKING CAPITAL
NET ASSETS
-x
+x
x
Template for Partnership
BALANCE SHEET OF (PARTNER 1 AND PARTNER
2) AS AT (Enter Date)
£
£
£
FINANCED BY
CAPITAL ACCOUNT BALANCES
Partner 1
x
Partner 2
x
x
CURRENT ACCOUNT BALANCES
Partner 1
x
Partner 2
x
NET WORTH
x
x
IF BALANCE SHEET BALANCES THEN
NET ASSETS (FROM PREVIOUS PAGE) =
NET WORTH
Procedure for Creating
Partnership Accounts
1
Complete notes for TPL &
Balance sheet
2 Work down to RESIDUAL
PROFIT in TPL Acc
Exercise 1 – Stewart & Kinsey
Notes
Interest on Capital 20%
P Stewart
Capital
Interest
20,000 Bal Sheet / Cap Acc
4,000 App Acc/ Current Acc
S Kinsey
Capital
Interest
15,000 Bal Sheet / Cap Acc
3,000 App Acc/ Current Acc
Interest on Drawings 10%
P Stewart
Drawings
Interest charged
9,000 Current Acc
900 App Acc/ Current Acc
S Kinsey
Drawings
Interest Charged
10,000 Current Acc
1,000 App Acc/ Current Acc
EX 1
Profit & Loss Appropriation Acc of P Stewart
& S Kinsey for the year ended 31 Mar 2011
£
£
NET PROFIT
16,790
ADD Interest on Drawings
P Stewart
S Kinsey
900
1,000
1,900
18,690
LESS
Salary Kinsey
8,000
Interest on Capital
Stewart
4,000
Kinsey
3,000
RESIDUAL PROFIT
15,000
3,690
Procedure for Creating
Partnership Accounts
3 Work out share of profits for
each partner
Exercise 1 – Stewart & Kinsey
Notes
Share of Residual Profit 3:2
P Stewart
Residual profit
3,690
Profit 3/5
2,214 App Acc/ Current Acc
P Kinsey
Residual profit
3,690
Profit 2/5
1,476 App Acc/ Current Acc
Procedure for Creating
Partnership Accounts
4 Complete appropriation account
EX 1
Profit & Loss Appropriation Acc of P Stewart
& S Kinsey for the year ended 31 Mar 2011
£
£
RESIDUAL PROFIT
3,690
SHARE OF RESIDUAL PROFIT
P Stewart
2,214
S Kinsey
1,476
3,690
Exercise 2 Glynn and Maloy
PROCEDURE
•
Complete notes for TPL &
Balance sheet
•
Work down to RESIDUAL
PROFIT in TPL Acc
NOTES
•
None at moment
•
No interest on capital or
drawings
EX 2
Profit & Loss Appropriation Acc of Glynn &
Maloy for the year ended 31 Dec 2010
£
NET PROFIT
£
7,000
LESS
Salary Glynn
RESIDUAL PROFIT
1.000
1,000
6,000
Procedure for Creating
Partnership Accounts
3 Work out share of profits for
each partner
Exercise 2 – Glynn & Maloy
Notes
Share of Residual Profit 2:1
Glynn
Residual profit
6,000
Profit 2/3
4,000 App Acc/ Current Acc
Maloy
Residual profit
6,000
Profit 1/3
2,000 App Acc/ Current Acc
Procedure for Creating
Partnership Accounts
4 Complete appropriation account
EX 2
Profit & Loss Appropriation Acc of Glynn &
Maloy for the year ended 31 Dec 2010
£
RESIDUAL PROFIT
£
6,000
SHARE OF RESIDUAL PROFIT
Glynn
4,000
Maloy
2,000
6,000
Exercise 2 b) – Current Acc - Glynn
Date
Details
Dr
30 Dec Opening Bal
Cr
Bal
200
200 Cr
30 Dec
Salary
1,000 1,200 cr
30 Dec
Share of Profit
4,000 5,200 cr
30 Dec
Drawings
1,500
3,700 cr
Exercise 2 – Theory
a) Explain the term Capital Expenditure
This is the money spent on buying assets
b)Give 2 examples of Capital Exenditure
Machinery, Vehicles, Fixtures & Fittings
c) Explain the term Revenue Expenditure
This is money spent on the running of
the business – eg paying bills
d)Give 2 examples of Revenue Expenditure
Rent, Rates, Telephone, Heating etc
EX 3 Cagney & Lacey
Profit & Loss Appropriation Acc of Cagney &
Lacey for the year ended 30 Apr 11
£
NET PROFIT
£
33,000
LESS
Salary – Cagney
Salary - Lacey
RESIDUAL PROFIT
10,000
8,000
18,000
15,000
Exercise 3 – Cagney & Lacey
Notes
Share of Residual Profit 2:1
Cagney
Residual profit
15,000
Profit 2/3
10,000 App Acc/ Current Acc
Lacey
Residual profit
Profit 1/3
15,000
5,000 App Acc/ Current Acc
EX 3
Profit & Loss Appropriation Acc of Cagney &
Lacey for the year ended 30 April 2011
£
RESIDUAL PROFIT
£
15,000
SHARE OF RESIDUAL PROFIT
Cagney
Lacey
10,000
5.000 15,000
Exercise 3 – Current Accounts
Cagney
Date
Details
Dr
30 Apr
Opening Bal
Cr
750
30 Apr Salary
30 Apr
750 Cr
10,000 10,750 Cr
10,000 20,750 Cr
Share of Profit
30 Apr Drawings
Bal
15,750 Cr
5,000
Lacey
Date
Details
30 Apr
Opening Bal
Dr
Cr
125
30 Apr Salary
30 Apr
125 Dr
8,000 7,875 Cr
5000 12,875 Cr
Share of Profit
30 Apr Drawings
Bal
10,000
2,875 Cr
EX 3
Balance Sheet of Cagney & Lacey as at
30 April 2004
£
£
£
Fixed Assets
Cost
Dep
NBV
Equipment
12,128
1,000 11,128
Premises
31,244
0 31,244
42,372
Current Assets
Stock
Debtors
8,900
3,678
12,578
Less Current Liabilities
Bank Overdraft
Vat
Working Capital
NET ASSETS
6,200
125 -6,325
+6,253
48,625
EX 3
Balance Sheet of Cagney & Lacey as at
30 April 2004 (Continued)
£
£
£
Financed by
Capital Acc
Cagney
20,000
Lacey
10,000 30,000
Current Acc
Cagney
Lacey
NET WORTH
15,750
2,875 18,625
48,625
Introducing a New Partner
When a new partner is introduced to
a company
• AT THAT POINT the final
accounts of the company are
drawn up and the profit
appropriated
• A NEW Partnership Agreement is
then drawn up
• Any further Accounts drawn up
should take the conditions in the
new agreement into account
Exercise 6 – Williams & Stewart
Notes
Interest on Capital
Williams
Capital
45,000
Interst 5%
2,250 per year
Divide by 2
1,125 6 months
Stewart
Capital
Interst 5%
Divide by 2
30,000
1,500 per year
750 6 months
EX 6
Profit & Loss Appropriation Acc of Williams
& Stewart for the 6 months ending 30 June
2010
£
NET PROFIT
£
8,200
LESS
Salary – Stewart
2,500
Interest on Capital
Williams
1,125
Stewart
750
RESIDUAL PROFIT
4,375
3,825
Exercise 6 – Williams & Stewart
Notes
Share of Profit
Williams
Residual Profit
3,825
3/5
2295
Stewart
Residual Profit
3,825
2/5
1,530
EX 6
Profit & Loss Appropriation Acc of Williams
& Stewart for the 6 months ending 30 June
2010
£
RESIDUAL PROFIT
£
3,825
Share of residual profit
Stewart
2,295
Williams
1,530
3,825
Exercise 6 – Current Accounts
Stewart
Date
Details
30 Jun
Opening Bal
Dr
2,500 1,700 Cr
750 2,450 Cr
Interest on Cap
30 Jun Share of profit
30 Jun Drawings *
Bal
800 Dr
30 Jun Salary
30 Jun
Cr
1,530 3,980 Cr
2,400
1,580 Cr
*Drawings - £400 per month x 6 months
Exercise 6 Part B – Williams,
Stewart & Dennis
Notes
Interest on Capital
Williams
Capital
60,000 (45,000 + 15,000)
Interst 10%
6,000 per year
Divide by 2
3,000 6 months
Stewart
Capital
30,000
Interst 10%
3,000 per year
Divide by 2
1,500 6 months
Dennis
Capital
Interst 10%
Divide by 2
15,000
1,500 per year
750 6 months
EX 6 – Part B
Profit & Loss Appropriation Acc of Williams
Stewart & Dennis for the 6 months ending
31 Dec 2010
£
NET PROFIT
£
22,250
LESS
Salary – Williams
3,000
Interest on Capital
Williams
3,000
Stewart
1,500
Dennis
RESIDUAL PROFIT
750
8,250
14,000
Exercise 6 – Williams & Stewart
Notes
Share of Profit
Total Capital = £105,000
Williams = 60/105 = 4/7
Residual Profit
14,000
4/7
8,000
Stewart = 30/105 = 2/7
Residual Profit
2/7
14,000
4,000
Dennis = 15/105 = 1/7
Residual Profit
1/7
14,000
2,000
EX 6 Part B
Profit & Loss Appropriation Acc of Williams
Stewart & Dennis for the 6 months ending
31 Dec 2010
£
RESIDUAL PROFIT
£
14,000
Share of residual profit
Stewart
8,000
Williams
4,000
Dennis
2,000 14,000
Exercise 8 – a) Correcting
Net Profit
Lawson & Johnston
Net Profit
£
Add Wages
3000
Depreciation (£1500-£1000) 500
Discount Received
500
£
24000
4000
28000
Less Sales Returns
Office Stationery
Corrected Profit
300
100
400
£27600
GOODWILL







Successful business build a
reputation over a number of years
This reputation is linked to their
name
Example Marks & Spencer is
associated with good quality
products at a reasonable price They
also have lots of loyal customers.
This reputation and loyalty
associated with a business is called
Goodwill
Goodwill is a an asset to the company
and is acquired through time but it is
not specifically bought like other
assets
It is also difficult to quantify in
money terms
Goodwill therefore is known as an
Intangible Asset (cannot be seen or
touched)
GOODWILL
HOW TO TREAT GOODWILL IN
THE FINAL ACCOUNTS:

It is entered just below the fixed
assets in the Balance Sheet under a
new heading – Intangible Assets
WRITING OFF GOODWILL
In this instance the value of Goodwill
should be

Entered as Zero in the balance sheet
GOODWILL
Calculating goodwill






Calculated by taking the average
weekly, monthly or annual sales over a
period of time
Goodwill is A DEBIT balance in the
ledger
No Guarantee that a purchaser or an
incoming partner will agree to the
value of goodwill .
This is the main reason that
goodwill very rarely appears in the
balance sheet
If goodwill is introduced, when a new
partner joins, it is normally shared
between the original partners based
on their PROFIT SHARE RATIO.
This amount is then CREDITED to
each partners CAPITAL ACCOUNT
REVALUATION OF ASSETS

Fixed and current Assets of any
Partnership Account are normally
REVALUED with the introduction of a
new partner
RISE IN VALUE


Split the rise between the partners
according to their profit sharing ratio.
Credit (Add) the amount for each
partner in his/her CAPITAL ACCOUNT
DROP IN VALUE


Split the decrease between each partner
according to their profit sharing ratio
Debit (subtract) the amount for each
partner from the value in his/her
CAPITAL ACCOUNT
Exercise 9– Bendix & Chan
Question ai)

Chan has paid a premium for
goodwill because the business
– is a going concern
– Has a large number of customers
will continue to use the business
– Has a good reputation
– Has experienced and efficient
staff
– Situated in a good location
– It has established links with
suppliers
Exercise 9 – Bendix & Chan
Question aii)

Calculate the initial amount of
capital for each partner
Bendix
Original capital
£53,000
Add good will
£10,000
£63,000
Less Loss in
Revaluation
£ 3,000
£60,000
Chan
Original capital
£40,000
Exercise 9 – Bendix & Chan
Notes
General Reserve
Net profit
30,000
Gen Res 20% 6,000
Interest on Capital
Bendix
Capital
Interest 5%
60,000
3,000
Chan
Capital
Interest 5%
40,000
2,000
Exercise 9 – Bendix & Chan
Notes
Interest on Drawings
Bendix
Drawings
Interest 20%
10,000
2,000
Chan
Drawings
5,000
Interest 20%
1,000
Ex 9 Bendix & Chan
Profit & Loss Appropriation Acc of Bendix &
Chan for the year ending 31 May 2011
£
NET PROFIT
£
30,000
Less Transfer to Gen Reserve
6,000
24,000
ADD Interest on Drawings
Bendix
2,000
Chan
1,000
3,000
27,000
LESS
Salary – Chan
2,000
Interest on Capital
Bendix
3,000
Chan
2,000
RESIDUAL PROFIT
7,000
20,000
Exercise 9 – Bendix & Chan
Notes
Profit Sharing Ratio
Capital
Bendix
60,000
Chan
40,000
3
2
= 3:2
Bendix
Residual Profit
20,000
3/5
12,000
Chan
Residual Profit
2/5
20,000
8,000
Ex 9 Bendix & Chan
Profit & Loss Appropriation Acc of Bendix &
Chan for the year ending 31 May 2011
£
RESIDUAL PROFIT
£
20,000
SHARE OF RESIDUAL PROFIT
Bendix
Chan
12,000
8,000 20,000
Exercise 9 – Q1(iv)
Current Account - Chan
Date
Details
Dr
31 May Opening Bal
Cr
Bal
0 Cr
31 May Salary
31 May Interest on Cap
2,000 2,000 Cr
2,000 4,000 Cr
31 May Share of profit
8,000 12,000 Cr
31 May Drawings
5,000
7,000 Cr
31 May Int on Drawings
1,000
6,000 Cr
Exercise 9 – Q2(i)
Bendix & Chan
Error / Omission
Effect on Amount
Profit
Sales understated
Increase
+450
Purchases Overstated
Increase
+2,700
Wrong type of account
Decrease
-70
Wages understated
Decrease
-180
Omission of VAT
Nil
0
Wrong type of account
Decrease
-100
Loss on asset
Decrease
-800
Change on profit
Increase
+2,000
Ex 9 Bendix & Chan
Additional Appropriation Acc of Bendix &
Chan for the year ending 31 May 2011
£
Change to profit
£
2,000
Less
Transfer to Gen Reserve (20%)
RESIDUAL PROFIT
400
1,600
SHARE OF ADDITIONAL RESIDUAL
PROFIT
Bendix
960
Chan
640
1,600
(H) Partnership revision Bogart &
Bacall
Notes
Bacall
Interest on Capital
Bacall
Interest 10%
3,000
Capital = 3,000 x 10 = 30,000
Drawings
Capital
Drawings 25%
30,000
7,500
(H) Partnership revision Bogart &
Bacall
a)
Current Account - Bacall
Details
Dr
Cr
Opening bal
0
Int on Capital
Salary
Bal
3,000
3,000 Cr
Drawings
8,000 11,000 Cr
3,500 Cr
7,500
Int on Drawings
1,500
Share of profit
2,000 Cr
4,000
6,000 Cr
(H) Partnership revision Bogart &
Bacall
b) Bogart
i)Capital Invested (twice as much as Bacall)
= 30,000 x 2 = £60,000
ii)Bogart Annual Drawings
Capital
Drawings 25%
60,000
£15,000
iii) Bogart Share of Profit 3:2
= Bacall’s profit = £4,000 (2/5)
Bogart = 3/5 so (£4,000 / 2) = £2,000 (1/5)
= £2000 x 3 = £6,000 = 3/5
(H) Partnership revision Bogart &
Bacall
Profit & Loss Appropriation Acc of Bogart &
Bacall for the end of Year 1
£
£
NET PROFIT
x
22,500
ADD Interest on Drawings
Bacall
1,500
Bogartl
3,000
4,500
LESS
Salary – Bacall
8,000
Interest on Capital
Bogart
6,000
Bacall
3,000
RESIDUAL PROFIT
17,000
10,000
SHARE OF PROFIT
Bogart
Bacall
6,000
4,000
10,000
Reverse workings = 10,000 + 17,000 – 4,500
(H) Partnership revision Bogart &
Bacall
di ) Introduction of a new partner
Bacall
Share of Goodwill = 15,000 x 2/5 = 6,000
Share of deficit = 20,000 x 2/5 = 8,000
CAPITAL ACCOUNT -BACALL
Details
Dr
Balance
Bal
30,000 30,000 Cr
Share of premium
Share of deficit
Cr
8,000
6,000 36,000 Cr
28,000 Cr
(H) Partnership revision Bogart &
Bacall
d) ii) Profit Sharing Ratio
New partners share = 25% = 1/4
Left over = 3/4 (to be split in a ratio of 3:2)
Bacall – Share of profit
= 2/5 x 3/4
= 6/20
= 3/10
= 30%
To Check Bogart
= 3/5 x 3/4
= 9/20
= 45%
Cagney
= 25%
100%