Chapter 10

Partnership Accounts

A partnership is a legally recognised association of between two and

twenty people who have joined together to contribute the capital of a firm
and share its profits.
Partners must provide a written agreement, known as the Deed of
Partnership. In such an agreement one finds:
(1)
How Profits and Losses are to be shared;
(2)
How much capital each partner is to contribute to the business;
(3)
The interest, if any, to be given to each partner on the capital invested.
(4)
Whether any partner is entitled to a salary or commission;
(5)
How much cash is to be withdrawn by each partner and the rate of
interest, if any, to be charged on drawings.
If no written agreement exists the partners must refer ton the Partnership Act
of 1890. This states that:
(1) Profits and Losses to be shared equally;
(2) No partner is entitled to extra salary / commission;
(3) No partner is entitled to interest on capital;
(4) Any loan made to the business by a partner is to carry interest at the rate
of 5% per annum.
Partnership Final Accounts:
These include:
(1) The Trading Account;
(2) The Profit and Loss Account;
(3) The Profit and Loss Appropriation Account;
(4) The Partners Current Account;
(5) The Balance Sheet.
One must note that when preparing final accounts in a vertical style format
the Profit and Loss Account and the Appropriation Account are presented in
one account, rather then, separately. On the other hand, as regards to the
Current Account there are two options, either present it as a ledger account or
else include it in the Financed By section of the Balance Sheet. These will be
clearly demonstrated in the detailed examples below.
Example 1
Smith and Jones are in partnership. According to their partnership agreement,
they share profits and losses equally (1:1). Smith is entitled to a salary of
Lm1,000 p.a. and Jones is given a commission of Lm500. Smith and Jones
contributed Lm4,500 each as capital with an interest on capital of 10% p.a.
Pg . 64

During the year ending 31st December 2002 Smith and Jones mad drawings of
Lm2,000 each. The rate of interest charged on such drawings being of 10% p.a.
The balances on the partners current account on 1 January were: Smith
Lm550 (Cr) and Jones Lm700 (Dr). The Net Profit registered for the year was
Lm5,000.
You are required to prepare:
(a) The Profit and Loss Appropriation Account;
(b) The Partners Current Account;
(c) The Balance Sheet (extract) showing the current account balances only.
(a)

Add

Less

Less

Less

Profit and Loss Appropriation Account for the year ending

31 December 2002
Net Profit
Interest on Drawings:
Smith (10% x 2,000)
200
Jones (10% x 2,000)
200
Interest on Capital:
Smith (10% x 4,500)
Jones (10% x 4,500)

450
450

Salary:
Smith

900

500

Share of Profits:
Smith (1/2 x 3,000)
Jones (1/2 x 3,000)
(b)
Dr
Smith
2,000
200
1,300

3,500
Balance b/d

400
5,400

1,000

Commission:
Jones

Balance b/d
Drawings
Interest on drawings
Balance c/d

5,000

2,400
3,000

1,500
1,500
Partners' Current Account
Jones
700
2,000
200

2,900
450

Pg . 65

Balance b/d
Interest on Capital
Salary
Commission
Share of Profits
Balance c/d
Balance b/d

3,000
Cr

Smith
550
450
1,000
1,500
3,500
1,300

Jones
450
500
1,500
450
2,900

The Balance in the Current Account may be either a credit or a debit balance.
A Credit Balance is that part of profit for the year, which the partner has not
yet taken. Therefore the partner is a creditor because the business owes
money to the partner.
A Debit Balance represents an excess of money taken by the partner over
profits earned. This leaves the partner to be a debtor for the sum because the
partner owes money to the business.
(c)
Balance Sheet (Extract) as at 31 December 2002
Financed by:
Capital Account Balances:
Smith
Jones

4,500
4,500

Current Account Balances

Smith
Jones

1,300
(450)

Notes:

Pg . 66

9,000

850
9,850

Example 2
Jimmy and Billy are in partnership and according to their partnership agreement they
share profits and losses equally; interest is allowed on capital at 5% p.a.
Jimmy is entitled to a salary of Lm500. The following Trial Balance is extracted from their
books on 31 December 2001.
Trial Balance as at 31 December 2001
Premises
Carriage
Bad Debts
Purchases and Sales
Returns
Salaries
Rates and Taxes
Insurance
Cash in hand
Stock 1 January 2001
Fixtures and Fittings (cost)
Wages
Capital: Jimmy
Billy
Current: Jimmy
Billy
Drawings: Jimmy
Billy
Debtors and Creditors
Provision for Bad Debts
Discounts
Office Expenses

Dr
Lm
6,000
100
50
16,000
80
1,400
400
140
700
3,500
4,500
2,600

Cr
Lm

28,000
60

6,000
6,000
100
150
800
900
8,000
100
110
45,480

Additional Information
1) Stock on 31 December 2001 was Lm2,800.
2) Lm60 of the carriage is for carriage in.
3) Depreciate Fixtures and Fittings by 10% p.a.
4) wages accrued Lm400.
5) Provision for Bad Debts to equal 10% of Debtors.
You are required to prepare in vertical format:
a) A Trading, Profit and Loss and Appropriation Account for the
year ending 31 December 2001;
b) A Current Account
c) A Balance Sheet as at 31 December 2001.

Pg . 67

5,000
250
20
45,480

(a)

Jimmy and Billy

Trading, Profit and Loss and Appropriation Account for the year ending
31-Dec-01
Sales
28,000
Returns Inwards
(80)
Net Sales
27,920
Cost of sales
Opening Stock 1 Jan 2001
3,500
Purchases
16,000
Returns Outwards
( 60)
Net Purchases
15,940
Carriage Inwards
60
19,500
Closing Stock 31 December 2001
2,800 (16,700)
Gross Profit
11,220
add Discount Received
20
11,240
Expenses:
Discount Allowed
100
Office Expenses
110
Carriage Outwards
40
Bad Debts
50
Salaries
1,400
Rates
400
Wages (+400)
3,000
Insurance
140
Bad Debts Provision (800-250)
550
Depreciation (10% x4,500)
450
(6,240)
Net Profit
5000
Interest on Capital:
Jimmy: (5% x 6,000)
300
Billy: (5% x 6,000)
300
600
Salary:
Jimmy
500
(1,100)
3,900
Share of Profits
Jimmy (1/2 x 3,900)
1,950
Billy (1/2 x 3,900)
1,950
3,900
Notes:

Pg . 68

(b)
Dr
Balance b/d
Drawings
Balance c/d

Current Account
Jimmy Billy
Jimmy
100
Balance b/d
800
900 Interest on Capital
300
1,850
1,500 Salary
500
Share of Profits
1,950
2,750
2,400
2,750
Balance b/d

1,850

Cr
Billy
150
300
1,950
2,400
1,500

(c)

Jimmy and Billy

Balance Sheet as at 31 December 2001
Fixed Assets
Cost
Total Net Book
Dep
Value
Lm
Lm
Lm
Premises
6,000
Nil
6,000
Fixtures and Fittings
4,500
450
4,050
10,500
450
10,050
Current Assets
Stock 31 December 2001
2,800
Debtors
8,000
Less Bad Debts Provision
(800) 7,200
Cash in Hand
700
10,700
Current Liabilities
Creditors
5,000
Wages Accrued
400
(5,400)
Net Current Assets
5,300
Net Assets
15,350
Financed By:
Jimmy
6,000
1,850
7,850

Capital Balances
Current Balances

Notes:

Pg . 69

Billy
6,000
1,500
7,500

15,350

Example 3
Jack and Richard are in partnership as retail grocers. Their partnership agreement allows
interest on capital at 1 January 2001 at the rate of 8% p.a. Jack is allowed an annual salary
of Lm5,000 and Richard, who works part-time a salary of Lm3,000. Profits or Losses are
shared equally. The following Trial Balance was extracted from their books on 31 December
2001.
Trial Balance as at 31 December 2001
Dr
Cr
Lm
Lm
Capital 1 January 2001: Jack
90,000
Richard
45,000
Current Account 1 January 2001 Jack
150
Richard
70
Sales
120,000
Stock 1 January 2001
2,500
Purchases
104,780
Premises
100,000
Delivery Van
15,000
Rates
1,500
Van Expenses
950
Insurance
360
Cash at Bank
3,500
Cash in Hand
60
Creditors
1,170
Repairs to Premises
12,300
Drawings: John
10,000
Richard
5,000
256,170 256,170
Taking into consideration the following:
1) Stock 31 December 2001 Lm4,600.
2) Insurance prepaid Lm90.
3) Depreciation of delivery van 10 of book value.
4) An extension costing Lm10,000 had been posted as repairs to premises.
You are required to prepare:
a) Trading and Profit and Loss Accounts, including the Appropriation section for the year
ending 31 December 2001.
b) Partners Current Account for the year ending 31 December 2001.
c) A Balance Sheet as at 31 May 2001.

Pg . 70

Trading, Profit and Loss and Appropriation Accounts for the year ending
31-Dec-01
Lm
Lm
Lm
Sales
120,000
Cost of Sales
Opening Stock 1 Jan 2001
2,500
Purchases
104,780
107,280
Closing Stock 31 Dec 2001
(4,600) (102,680)
Gross Profit
17,320
Expenses
Rates
1,500
Van Expenses
950
Insurance (-90)
270
Repairs to Premises (-10,000)
1,500
Depreciation (10% x 15,000)
1,500
(6,520)
Net Profit
10,800
Interest on Capital:
less
Jack (8% x 90,000)
7,200
Richard (8% x 45,000)
3,600
10,800
less

Salary:
Jack
Richard

5,000
3,000

Share of Loss
Jack (1/2 x 8,000)
Richard ( 1/2 x 8,000)
Dr
Balance b/d
Drawings
Share of Loss
Balance b/d

8,000

4,000
4,000

Partners' Current Account

Jack
Richard
150
70
Int. on Capital
10,000 5,000 Salary
4,000
4,000 Balance c/d
14,150 9,070
1,950
2,470

Notes:

Pg . 71

Jack
7,200
5,000
1,950
14,150

(18,800)
(8,000)

(8,000)

Cr
Richard
3,600
3,000
2,470
9,070

Jack and Richard

Balance Sheet as at 31 December 2001
Fixed Assets

Cost

Premises (+10,000)
Delivery Van

110,000
15,000
125,000

Current Assets
Stock 31 Dec 2001
Cash at Bank
Cash in Hand
Insurance Prepaid

Total
Dep
1,500
1,500
1,500

Net Book
Value
110,000
13,500
123,500

4,600
3,500
60
90
8,250

Current Liabilities
Creditors
Net Current Assets
Net Assets

(1,170)
7,080
130,580

Financed by:
Jack Richard
90,000 45,000 135,000
(1,950) (2,470) (4,420)

Capital
Current

130,580

Pg . 72

Exercises
1.

Sandro and Stephen are in partnership.

According to their partnership

agreement, they share profits or losses in the ratio Sandro : Stephen 3:2.
Stephen is entitled to a Salary of Lm5,000 p.a. Both partners are entitled to
5% Interest on capital.

During the year ended 31 October 1996, Sandro

made Drawings of Lm13,500 and Stephen of Lm9750. A 10 % interest on

drawings is charged.
Net Profit for the year was Lm23,200. The balances on the partners Capital
and Current Accounts at 1 November 1995 were:
Sandro
Lm
60,500
2,475 Cr

Capital Account :
Current Account :

Stephen
Lm
27,500
(860) Dr

You are asked to prepare:

a.
b.
c.
2.

the Appropriation Account for the year ended 31 October 1996 for
Sandro and Stephen;
the Partners Current Account for the year ended 31 October 1996.
the Balance Sheet Extract as at 31 October 1996.

Peter and Paul are partners in a retail business. Their partnership agreement
provides for :
a.
Profits or losses to be shared equally;
b.
Interest to be paid on Fixed Capital at 5%p.a.;
c.
Peter to receive a salary of Lm10,000 p.a.
The following information is also available :
i.

Capital Accounts 1 January 1996:

Peter
Lm20,000
Paul
Lm15,000

ii.

Current Account Balances 1 January 1996:

Peter
Lm500 (Cr)
Paul
Lm800 (Cr)

iii.

Drawings for the year 1996:

Peter
Lm11,000
Paul
Lm 5,000

iv.

Net Profit for the year ending 1996 Lm18,100.

Prepare: Appropriation, Current A/cs and Balance Sheet (Extract).

Pg . 73

3.

Karl and Kurt are in Partnership. Their agreement allows them 10% interest
per annum on Capital, Karl is to have a salary of Lm6,000 and Profits or
Losses to be shared equally.
On 31 May 1998 their accounts showed the following :
1 June 1997 CAPITAL:
Karl
Lm20,000
Kurt
Lm 7,000
CURRENT: Karl
Lm 470 (Cr)
Kurt
Lm 300 (Cr)
Year ended 31 May 1998:
Drawings for year:
Karl
Kurt

Cash
Lm8,000
Lm4,000

Goods
Lm700
Lm900

The Net Profit for the year was Lm 14,700

From the information given above:
a.
b.
c.

4.

Write up the Partners Profit and Loss Appropriation Account for the
year ended 31 May 1998.
Write up the Partners Current Account for the year ended 31 May
1998.
Draw up the Balance Sheet (Extract ) as at 31 May 1998.

Gorg and Mario have been partners in business for several years. The terms
of Partnership agreement include:
i.
interest on fixed capital to be 10% p.a.
ii.
Profits to be shared between Gorg and Mario in the ratio 1:1
iii.
Mario is to receive an annual salary of Lm8000.
i.v.
Interest on drawings is 5% p.a.
The following information relates to the year ended 31 December 1999.
a.
Balances at 1 January 1999:
Capital Accounts:
Lm
Gorg
10,000
Mario
12,000
Current Accounts:
Gorg
150 Dr
Mario
230 Cr
b.

c.

Drawings during the year were:

Cash
Gorg
Lm5000
Mario
Lm8000

Goods
Lm400
Lm1000

The Net Profit for the year was Lm60,500.

You are required to:

i)
Prepare the Profit and Loss Appropriation Account for the year ending
31 December1999.
ii)
Prepare the current account for the year ending 31 December1999.

Pg . 74

5.

Tom and Jerry are in partnership, sharing profits in the ratio Tom:Jerry 3:2,
after allowing for interest on capital of 10% p.a. and a salary for Jerry of
Lm12,000 p.a.
The following is their Trial Balance for the year ended 30 April 1999:

Trial Balance as at 30 April 1999

Capital at 1 May 1998 :
Tom
Jerry
Current Account Balances 1 May1998:

Dr (Lm)

Cr (Lm)
90,000
60,000

Tom
Jerry

2,700
1,340

Drawings :
Tom
Jerry
Employees Salaries
General Expenses
Car Expenses including repairs
Advertising
Insurance
Carriage Inwards
Returns Inwards
Premises
Purchases and Sales
Stock at 1 May 1998
Office Equipment (Cost)
Provision for Depreciation :
Office Equipment 1 May 1998
Debtors and Creditors
Bank Overdraft

15,500
21,250
116,240
39,920
5,350
2,300
1,270
600
1,900
130,000
123,450
17,930
34,200
40,000
551,250

343,300

13,600
36,400
5,250
551,250

Additional information is also available:

a.
b.
c.
d.
e.

A provision for doubtful debts is to be created at 2% of debtors

Depreciation on office equipment is calculated at 10% p.a. using the
straight line method.
An amount of Lm650 for the repair of Toms private car has been
included in car expenses.
Lm2,100 is owing for employees salaries at 30 April 1999, and an
insurance premium of Lm160 for the year beginning on 1 May 1999
has already been paid.
Stock at 30 April 1999 was Lm20,170.

You are required to prepare:

Trading and Profit and Loss accounts, including Appropriation section, for the
year ended 30 April 1999 for Tom and Jerry, together with the Balance Sheet
as at 30 April 1999.

Pg . 75

6.

Rita and Sonya are in partnership owning a Hairdressing Salon. Their

partnership agreement allows for Profit to be shared in the ratio 3:2 to Rita
and Sonya respectively; interest to be paid on fixed capital at 10% p.a.; and
Sonya to receive a Salary of Lm5,000 p.a. The following balances relating to
the year ending 30 April 1999 were extracted from their books.
Trial Balance at 30 April 1999

Dr

Cr
Lm

Capital Amount : Rita

Sonya
Current Account : Rita
Sonya
Drawings : Rita
Sonya
Equipment at Cost
Fixtures and Fittings at Cost
Stock of Hairdressing Lotions 1 May 1998
Purchases of Hairdressing Lotions
Rent
Laundry Charges
Telephone
Receipts from clients
Creditors
Electricity
Bank
Cash in hand
Provision for Depreciation : Equipment
Fixtures and Fittings

Lm
6,000
4,000
500

300
2,500
4,000
15,000
6,500
95
1,200
6,500
1,300
535
25,000
150
840
3,200
30

42,000

4,500
1,850
42,000

The following additional information is available :

1.
Stock of Hairdressing Lotions held on 30 April 1999 was Lm125.
These lotions are used only in the Salon and are not sold to
customers.
2.
An invoice Lm300 for the purchase of a Hairdryer on 30 April 1999
from Electrical Supplies Ltd. had not been entered in the books.
3.
Both equipment and fixtures and fittings are depreciated by 10% p.a.
of the cost of the assets held on 30 April 1999.
4.
Laundry charges unpaid at 30 April 1999 amounted to Lm275.
(i)
a.
b.
c.
(ii)
a.

From the above information prepare for the partners for the year
ending 30 April 1999:
Profit and Loss Account;
Appropriation Account;
Current Account.

Balance Sheet as at 30 April 1999.

Pg . 76

7.

Farrugia and Fenech are partners in an accounting practice, sharing profits

and losses in the ratio Farrugia: Fenech 3:2 after allowing for interest on
Capital at 10% per annum and a salary for Fenech of Lm18,000 per annum.
Interest is charges on drawings at the rate of 10% per annum.
The partnership had produced the following Trial Balance at 30 April 1999:

Trial Balance as at 30 April 1999

Dr

Cr
Lm

Capital at 1 May 1998 : Farrugia

Fenech
Current accounts at 1 May 1998 : Farrugia
Fenech
Premises
Motor Vehicles
Provision for Depreciation on Motor Vehicles 1 May 1998
Office Equipment
Provision for Depreciation on Office Equipment 1 May 1998
Debtors and Creditors
Bank
Fees received from clients
Rent received from tenant
Office employees Salaries
Insurance
Heating and Lighting
Postage
Telephone
Sundry Expenses
Drawings : Farrugia
Fenech
Motor Vehicle Expenses

Lm
140,000
110,000
30,000

10,000
182,500
40,000
25,600
85,000
45,000
22,700

25,500
12,500
277,900
6,000

134,300
2,600
1,900
2,150
2,880
4,970
57,000
34,000
2,500
627,500

627,500

The Partners also provide the following information:

i.

Depreciation on Motor Vehicles is charged at 40% per annum using

the Reducing Balance Method.

ii.

Depreciation on office Equipment is charged at 10% per annum on

cost.

iii.

Lm600 of the insurance is prepaid.

iv.

At 30 April 1999 the rent received owing Lm2,000.

v.

Fenech had drawn an additional Lm3000 from the business bank

account which has not yet been entered into the accounts.

vi.

Motor Vehicle Expenses include an amount of Lm400 for the repair of

Farrugias private car.

You are required to prepare:

a.
Profit and Loss Account for the year ended 30 April1999.

Pg . 77

b.
c.

8.

Appropriation and Current Accounts for the year ended 30 April1999.

The Balance Sheet as at 30 April 1999.

Joe and Charles are partners in a retail business selling cameras and
photographic equipment. Their partnership agreement provides that profits
and losses are to be shared in the ratio 3:1 to Joe and Charles respectively;
that interest on fixed capital be allowed at 5% p.a. ; and that Charles be paid
on annual salary of Lm8000. The following Trial Balance was extracted from
their books on 30 April 1999, the end of the financial year of the Partnership.
Trial Balance as at 30 April 1999

Dr
Lm

Capital accounts : Joe

Charles
Current accounts : Joe
Charles
Drawings : Joe
Charles
Bank
Wages to Assistants
Debtors and Creditors
General Expenses
Returns Inwards
Motor Vehicles at Cost
Fixtures and Fittings at Cost
Provision for Depreciation : Motor Vehicles
Fixtures and Fittings
Purchases and Sales
Stock 1 May 1998
Loan from Joe
Rent

Cr
Lm
20,000
10,000

500
300
4,500
9,000
5,300
10,000
21,000
12,100
2,500
8,000
9,000

87,400
25,000

12,000

2,000
3,000
145,000
10,000

8,000
202,300

202,300

Additional Information:
1.
Stock at 30 April 1999 was Lm27,500.
2.
The Motor Vehicles and Fixtures and Fittings are to be depreciated by
10% of cost per annum.
3.
Interest at 10% p.a. on the loan is to be paid to Joe, through his
current account.
4.
Goods costing, Lm1,200 have been taken by Charles for his own use
but no entries have been made in the accounts.
5.
General Expenses Lm400 had not been paid at 30 April 1999.
From the above information, prepare the partnership set of final
accounts.

Pg . 78

Pg . 79