Partnership1 (1)

8/3/2019 Partnership1 (1)

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Introduction of PartnershipAccounts


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Characteristics of Partnership 220 owners

Governed by the Partnership Ordinance

A partnership agreement can be drawn upto define the rights and obligations of thepartners. If no agreement, the PartnershipOrdinance applies

A partnership has no separate legal identityexcept for the limited partners

A limited partnership may also be formed,which means that at least one unlimited

partner


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Partnership Agreement Not all partnership have agreements.

However, a written partnershipagreement will help prevent problemsand solve dispute between the partners


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Terms of agreement Amount of capital to be contributed by each

partners

Ratio in which profits and loss to be sharedbetween partners

Rate of interest, if any to be allowed onpartners capital

Rate of interest, if any, to be charged onpartners drawings

Rate of interest, if any, to be allowed onpartners loans to firm

Salaries to be paid to the partners


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In the absence of partnership agreement,the Partnership Ordinance applies which

states:1. All partners may contribute capital equally

2. Profits and losses are to be share bypartners equally

3. No interest is to be paid on capital4. No interest is to be charged on partners

drawings

5.

Partners are entitled to interest of 5% perannum on loans to the firm

6. No salaries are allowed to partners


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Features of Partnership Accounts Profit and Loss Appropriation Account

It is drawn under the trading and profit

and loss account

It shows the distribution of profits amongthe partners

Capital Accounts These accounts record the amount of

capital by each partners


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Current AccountsAs the partnership makes profit/loss, and the

partners take the firms resources for privateuses, there will be fluctuation in the partnerscapital balances. A current account is set upto maintain constant capital balances of the

partners as stated in the agreement. Current account is to record:

Share of profit /loss

Interest on capital

Interest on drawings Interest on loans

Drawings

Partners salaries


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Accounting Treatment

Items Accounting Entries

Capital contributed in cash Dr. Cash

Cr. Partners Capital Accounts

Share of profits Dr. Profit and Loss Appropriation

Cr. Partners Current Accounts

Share of losses Dr. Partners Current Accounts

Cr. Profit and Loss Appropriation

Interest on capital Dr. Profit and Loss Appropriation

Cr. Partners Current Accounts

Partners salaries Dr. Profit and Loss Appropriation

Cr. Partners Current Account


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Items Accounting entries

Interest on partners loan Dr Profit and lossappropriation

Cr Partners current

Partners drawings Dr Partners current

Cr Partners Drawings

Interest on drawings Dr Partners current

Cr Profit and lossappropriation


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Profit and Loss Appropriation


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Peter and John

Profit and Loss Appropriation Account for the year ended 31 December 1997

Partners Salaries

Peter XJohn X X

Net Profit b/f X

Interest on DrawingsPeter X

John X XInterest on Capital

Peter X

John X X

Share of Profit

Peter X

John X X

X X

T- Form


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Peter and JohnTrading and Profit and Loss Account for the year ended 31 December 1997

Net Profit XAdd: Interest on Drawings

Peter XJohn (%*drawings) X X

Less: Partners SalariesPeter XJohn X X

Interest on CapitalPeter XJohn (%* capital) X X

Share of ProfitPeter (1/2) XJohn (1/2) X X

Sales X

Less: Cost of goods soldOpening stock X

Add: Purchases X

Less: Closing stock X X

Gross profit X

Less: Expenses

Rent X

Lighting X X


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Capital account

Peter John Peter JohnBal b/f X X

Current accountPeter John Peter John

Bal b/f XShare of profit X XInterest on capital X XPartners salaries X X

Bal c/f XX X

Bal b/f XInterest on drawings X XDrawings X XBal c/f X

X X

Debit balance


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Peter and JohnBalance Sheet as at 31 Dec 1997

Fixed assets Cost Dep. NetBuildings X X X

Furniture X X XX X X

Current assetsStock XDebtors X

Bank XX

Less: Current liabilitiesCreditors X

Working capital X

XFinanced by:CapitalPeter X

- John XX


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Current account Peter John TotalOpening balance X (X)add: Share of profit X X

Partners salaries X XInterest on capital X X

X XLess: Drawings X X

Interest on drawings X X

X X XXLong term liabilities

15% Loan XX

Debit balance


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Example 1


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Tom and David are in partnership, sharing profits and losses equally. TheFollowing is their trial balance as at 31 December 1997.

Dr CrFixed assets 400000Provision for depreciation 40000Stock as at 1 Jan 1997 10000Sales 290000Purchases 150000Expenses 30000

CapitalTom 197000- David 197000

CurrentTom 8000- David 2000

Drawings Tom 5000

- David 5000Debtors 70000Bank 8000010% Loan from Tom 20000

752000 752000


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Additional information:

1. Stock in hand as at 31 December has been

valued at cost at $300002. Depreciation is to be provided at 10% per

annum on the straight line bases

3. Pat interest on capital at 1% and charge

interest on drawings at 5%4. Partners salaries are $10000 to Tom and

$5000 to David


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Tom and David

Trading and Profit and Loss Account for the year ended 31 December 1997

Opening Stock 10,000

Purchases 150,000

160,000

Less: Closing Stock 30,000

Cost of Goods Sold 130,000

Gross Profit 160,000

290,000

Expenses 30,000

Depreciation 40,000

Interest on Loan

(20,000 X 10%) 2,000Net Profit 88,000

Sales 290,000

Gross Profit 160,000

160,000 160,000

290,000

Example 1


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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

Interest on Capital

Tom 1,970

David 1,970 3,940

Net Profit 88,000

David 5,000 15,000

Share of ProfitTom (1/2) 34,780David (1/2) 34,780 69,560

Interest on Drawings

Tom 250

David 250 500

88,500 88,500


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Tom and David

1997

Current Account

Tom David 1997 Tom David

Jan 1 Bal. b/f 2,000

Dec31 P&L Appropriation-Int. on

Drawings 250 250

31 Drawings 5,000 5,00031 Bal. c/f 51,500 34,500

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 2,00056,750 41,750 56,750 41,750


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Tom and David

Fixed Assets 400,000

Less: Provision for Dep. 80,000

Current Assets

Stock 30,000

Debtors 70,000

Capital AccountsTom 197,000

David 197,000 394,000

Current Accounts

Balance Sheet as at 31 December 1997

320,000

Bank 80,000 180,000

Tom 51,500

David 34,500 86,000

Long-term Liabilities

Loan from Tom 20,000500,000 500,000


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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


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Minimum Share of Profits Sometime, one of the partners is

guaranteed a minimum profit. If the

amount of profits shared according tothe normal profit-sharing ratio is smallerthan the minimum share, that partner

will get his/her minimum share first,while the balance of the profits is to beshared between the other partners


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Example 2


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Paul, Betty and Rose are in partnershipsharing profits in the ratio of 5:3:2. Rose isguaranteed a minimum share of profits of

$10000.Profits for the years ended

31 Dec 1996 $200000

31 Dec 1997 $42000Required

Calculate the share of profits to each partner

for 1996 and 1997 are:

l d


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Paul, Betty and Rose


Share of Profit:

Paul (5/10) 100,000

Net Profit 200,000

Betty (3/10) 60,000Rose (2/10) 40,000 200,000

200,000 200,000

Paul, Betty and Rose


Share of Profit:

Paul (5/10 X 32,000) 20,000

Net Profit 42,000

Betty (3/10 X 32,000) 12,000Rose (guaranteed) 10,000 42,000

42,000 42,000

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