Introduction of Partnership

Accounts

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Characteristics of Partnership
2 20 owners
Governed by the Partnership Ordinance
A partnership agreement can be drawn up
to define the rights and obligations of the
partners. If no agreement, the Partnership
Ordinance applies
A partnership has no separate legal identity
except for the limited partners
A limited partnership may also be formed,
which means that at least one unlimited
partner 2
Partnership Agreement
Not all partnership have agreements.
However, a written partnership
agreement will help prevent problems
and 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 shared
between partners
Rate of interest, if any to be allowed on
partners capital
Rate of interest, if any, to be charged on
partners drawings
Rate of interest, if any, to be allowed on
partners loans to firm
Salaries to be paid to the partners 4
 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 by
partners equally
3. No interest is to be paid on capital
4. No interest is to be charged on partners
drawings
5. Partners are entitled to interest of 5% per
annum 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 among
the partners
Capital Accounts
These accounts record the amount of
capital by each partners

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 Current Accounts
As the partnership makes profit/loss, and the
partners take the firms resources for private
uses, there will be fluctuation in the partners
capital balances. A current account is set up
to 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 loss
appropriation
Cr Partners current
Partners drawings Dr Partners current
Cr Partners Drawings

Interest on drawings Dr Partners current

Cr Profit and loss
appropriation
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Profit and Loss Appropriation

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 T- Form
Peter and John
Profit and Loss Appropriation Account for the year ended 31 December 1997
Partners Salaries Net Profit b/f X
Peter X Interest on Drawings
John X X Peter X
Interest on Capital John X X
Peter X
John X X
Share of Profit
Peter X
John X X

X X

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 Peter and John
Trading and Profit and Loss Account for the year ended 31 December 1997
Sales X
Less: Cost of goods sold
Opening stock X
Add: Purchases X
Less: Closing stock X X
Gross profit X
Less: Expenses
Rent X
Lighting X X
Net Profit X
Add: Interest on Drawings
Peter X
John (%*drawings) X X
Less: Partners Salaries
Peter X
John X X
Interest on Capital
Peter X
John (%* capital) X X
Share of Profit
Peter (1/2) X
John (1/2) X X
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 Capital account
Peter John Peter John
Bal b/f X X

Debit balance
Current account
Peter John Peter John
Bal b/f X Bal b/f X
Interest on drawings X X Share of profit X X
Drawings X X Interest on capital X X
Bal c/f X Partners salaries X X
Bal c/f X
X X X X

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 Peter and John
Balance Sheet as at 31 Dec 1997
Fixed assets Cost Dep. Net
Buildings X X X
Furniture X X X
X X X
Current assets
Stock X
Debtors X
Bank X
X
Less: Current liabilities
Creditors X
Working capital X
X
Financed by:
Capital Peter X
- John X
X

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Current account Peter John Total
Opening balance X (X)
add: Share of profit X X Debit balance
Partners salaries X X
Interest on capital X X
X X
Less: Drawings X X
Interest on drawings X X
X X X
X
Long term liabilities
15% Loan X
X

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Example 1

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Tom and David are in partnership, sharing profits and losses equally. The
Following is their trial balance as at 31 December 1997.
Dr Cr
Fixed assets 400000
Provision for depreciation 40000
Stock as at 1 Jan 1997 10000
Sales 290000
Purchases 150000
Expenses 30000
Capital Tom 197000
- David 197000
Current Tom 8000
- David 2000
Drawings Tom 5000
- David 5000
Debtors 70000
Bank 80000
10% 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 $30000
2. 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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Example 1 Tom and David
Trading and Profit and Loss Account for the year ended 31 December 1997
Opening Stock 10,000 Sales 290,000
Purchases 150,000
160,000

Less: Closing Stock 30,000

Cost of Goods Sold 130,000
Gross Profit 160,000
290,000 290,000

Expenses 30,000 Gross Profit 160,000

Depreciation 40,000
Interest on Loan
(20,000 X 10%) 2,000
Net Profit 88,000
160,000 160,000

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 Tom and David
Trading and Profit and Loss Account for the year ended 31 December 1997
Partners Salaries Net Profit 88,000
Tom 10,000 Interest on Drawings
Tom 250
David 5,000 15,000
David 250 500
Interest on Capital
Tom 1,970
David 1,970 3,940
Share of Profit
Tom (1/2) 34,780
David (1/2) 34,780 69,560
88,500 88,500

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 Tom and David
Current Account
Tom David 1997 Tom David
1997
Jan 1 Bal. b/f 2,000 Jan 1 Bal. b/f 8,000
Dec31 P&L Appropriation Dec 31 Profit and Loss Appropriation
-Int. on - Int. on Capital 1,970 1,970
Drawings 250 250 - Profits 34,780 34,780
31 Drawings 5,000 5,000 - Salaries 10,000 5,000
31 Bal. c/f 51,500 34,500 31 Profit and Loss
- Int. on Loan 2,000
56,750 41,750 56,750 41,750

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 Tom and David
Balance Sheet as at 31 December 1997

Fixed Assets 400,000 Capital Accounts

Less: Provision for Dep. 80,000 Tom 197,000
David 197,000 394,000
320,000
Current Accounts
Current Assets Tom 51,500
Stock 30,000 David 34,500 86,000
Debtors 70,000 Long-term Liabilities
Bank 80,000 180,000 Loan from Tom 20,000
500,000 500,000

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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 to
the normal profit-sharing ratio is smaller
than the minimum share, that partner
will get his/her minimum share first,
while the balance of the profits is to be
shared between the other partners

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Example 2

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 Paul, Betty and Rose are in partnership
sharing profits in the ratio of 5:3:2. Rose is
guaranteed a minimum share of profits of
$10000.
Profits for the years ended
31 Dec 1996 $200000
31 Dec 1997 $42000
Required
Calculate the share of profits to each partner
for 1996 and 1997 are:
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 Paul, Betty and Rose
Profit and Loss Appropriation Account for the year ended 31 December 1997
Share of Profit: Net Profit 200,000
Paul (5/10) 100,000
Betty (3/10) 60,000
Rose (2/10) 40,000 200,000
200,000 200,000

Paul, Betty and Rose

Profit and Loss Appropriation Account for the year ended 31 December 1997
Share of Profit: Net Profit 42,000
Paul (5/10 X 32,000) 20,000
Betty (3/10 X 32,000) 12,000
Rose (guaranteed) 10,000 42,000
42,000 42,000

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