15 Account Fo Partenership UD

Chapter 15
Accounting for Partnerships
Introduction
In Tanzania the Law of Contract Ordinance, 1961, governs partnerships. Section 190 of the Law
of Contract Ordinance, 1961 defines a partnership as a "relation that subsists between persons
carrying on business in common with a view to profit". Partnerships are formed for the following
three main reasons; raising capital, attracting expertise and sharing administrative responsibilities.
Raising additional capital
As a business expands one owner may not be able to finance all of its operations adequately. In
order to raise additional capital one or more partners may be sought.
Developing and attracting expertise
Expansion of business operations requires expert knowledge in key areas of the business. It is not
always possible for one person to be able to handle satisfactorily different areas of a business. It
then becomes necessary to attract expert knowledge so as to improve overall performance. One
effective way of attracting and committing experts to a business is by offering co-ownership.
Partnerships for this reason are the most common form of business organisation with
professionals.
Sharing of administrative responsibilities and losses
The burden of administrative responsibilities and losses can be eased when shared among partners
rather than being borne by a single owner.
General duties of partners

Under Section 192 of the Law of Contract Ordinance, 1961 the general duties of partners are;
a. To be just and faithful to one another

b. To carry on business of partnership for the greatest common advantage of the firm.
c. To render true accounts and full information of all things affecting the partnership to any
partner or his legal representatives.
2 Introductory Financial Accounting
The partnership agreement

Administration of a partnership is governed by a partnership agreement. A partnership relationship
arises from contract that can be written or oral. A partnership agreement emanates from this
requirement. Such an agreement sets out duties and responsibilities of individual partners. Once a
partnership agreement is in place its terms can only be varied by consent of all partners (Section
193).
Following are aspects that should be covered by a partnership agreement:
Capital contribution
How much capital should a partner contribute to the firm? Would capital be allowed to fluctuate
or remain fixed?
Profit sharing
The agreement must stipulate how profits and losses are to be shared among partners. It may also
prescribe whether or not some partners are guaranteed minimum profit shares.
Drawings
Whether or not drawings by partners will be allowed and if interest is to be charged on such
drawings.
Salaries
The agreement should indicate whether salaries are to be paid to partners and amounts of such
salaries, if any.
Interest on capital and current account balances
Whether such interest will be earned by partners and the rates of interest and which capital and
current account balances will be used in computation of interest.
Loans from partners
Where a firm receives loans or advances extended by partners how would these be rewarded?
Unless otherwise stated these will be treated as if they were from outsiders and interest will be
paid on them.
Accounts
The agreement shall stipulate the beginning and the end of an accounting period. It shall also
indicate whether accounts shall be audited.
Accounting for Partnerships 3
In the absence of a partnership agreement

Where a partnership agreement is absent Section 194 provides rules that determine the rights and
duties of partners in relation to the partnership. These are:
a. Every partner has a right to take part in management of partnership business.

b. Differences on ordinary matters are to be decided by majority but change in nature of
partnership requires consent of all partners.
c. Every partner has a right of access to, inspection and copying any books of the firm.
d. No remuneration will be received for managing or taking part in business. This implies
there will be no salaries or interest on capital.
e. Partners will contribute equal capital shares; profits and losses will be shared equally
whether losses are of capital nature or revenue nature.
f. A partner shall be indemnified in respect of payments made and personal liabilities
incurred by him in the ordinary and proper course of the business of the firm; and in or
about anything necessarily done for the preservation of the business or property of the
firm.
g. A partner shall indemnify the partnership for loss caused to it by fraud or willful neglect
in the conduct of business of the firm.
In addition to the above Section 222 stipulates that in the absence of any agreement to the
contrary, interest on indebtness of a partnership to individual partners shall be 5% per annum on a
loan balance.
Accounting records and financial statements

In accounting for partnership the aim is recording transactions in order to produce information on
the following events:
 The formation of a partnership,

 The admission of new partners,
 The appropriation of partnership profits among partners and updating of equity relating to
each partner, and
 Retirement of partners and other changes.
The accounting system and books of original entries in partnerships are similar to those of other
forms of business entities. Financial statements prepared differ from those of other forms of
business organisations in the following two aspects:
The appropriation section of the income statement
In contrast to other business organisations an Income Statement of a partnership is extended to

show how profit or loss for the year is distributed among the partners. This extension is known as
an appropriation account or statement.
Appropriation of profits is affected through distribution of shares of profit among partners, salary
entitlements and interest on capital balances. These are treated as a means of distributing
partnership profits. Interest on Loans from partners is not an appropriation of profit and it is
therefore not dealt with through the appropriation account. It is treated as a financial expense and
charged to the profit and loss account.
Where partners' drawings are charged interest it adds to the profits of the firm available for
distribution. Interest on drawings is also dealt with through the appropriation account.
Balance sheet
In the balance sheet the capital section is broken down to distinguish the following elements:
 The original capital contributed into the partnership by each partner,

 The share of profits accruing to each partner reduced by any drawings and interest on
drawings, and
 Any loans extended by a partner to the partnership over and above the agreed capital
contributions.
In order to generate information in capital, current, drawings and loans specific accounts are
normally kept for each of these items.
Capital account
This account is credited with the capital contributed as per the partnership agreement.
Current account
This account records appropriations of profits and losses. Therefore, it is credited with profit
shares, salaries and interest on capital. It is debited with interest on drawings charged to partners.
The balance in this account represents retained profits attributable to each partner, which could be
drawn for personal use depending on the partnership agreement. Drawings therefore, are
ultimately closed to this account.
Drawings account
This account records any cash or other business assets appropriated by partners. The final balance
in this account is closed to the current account at the end of the year. Sometimes drawings, if
made infrequently, are debited directly to the current account in which case there is no need for a
drawings account to be maintained.
Loan account
This account records loans or advances to the partnership. Such loans normally attract interest set
at the time they are made available. In the absence of agreement on loan interest a rate of 5 percent
per annum is fixed by the Law of Contract Ordinance, 1961.
Starting a partnership
When starting a business partners contribute capital to the firm. Capital contribution can be in the
form of cash or other assets. Where assets other than cash are contributed fair market values of
these have to be established by professional valuers or agreed upon by partners.
The following journal entry is made to record capital contribution:
Date Description Folio Debit Credit

Y-01
Jan 1 Cash 6,000,000
Buildings 4,000,000
Motor Vehicles 4,000,000
Furniture and Fittings 4,000,000
Capital Account - A 6,000,000
Capital Account – B 6,000,000
Capital Account – C 6,000,000
To record capital contribution by
partners.
Example:
Abuu, Salma and Leyla started a pizza home delivery service business each contributing the
following:
Shs.
Abuu:
Cash 60,000
Van 900,000
Salma:
Cash 100,000
Typewriter 300,000
Leyla:
Cash 500,000
The following entry will be made to record the start of the business:

Y-01
Jan 1 Cash 660,000
Motor Vehicles 900,000
Furniture and Fittings 300,000
Capital Account – Abuu 960,000
Capital Account – Salma 400,000
Capital Account – Leyla 500,000
To record capital contribution by
partners.
Following are some other events and accounting entries required to record the following events:
Loan advanced to partnership by a partner

Jan 1 Asset Account [with value of asset] 600,000
Loan Account – [Partner] 600,000

To record loan advanced by partner.
Interest on loans or advances made by a partner

Dec 31 Interest Expenses 6,000
Current Account – [Partner] 6,000
To record interest on loan due to a
partner.
Drawings by partners

Dec 31 Drawings Account [Partner] 46,000
Asset Account 46,000
To record drawings by partner.
Closure of drawings accounts

Dec 31 Current Account [Partner] 46,000
Drawings Account [Partner] 46,000
To close the drawings account.
Interest on drawings by partners
Date Description Foli Debit Credit

o
Dec 31 Current Account [Partner] 2,000
Profit and Loss [Appropriation] 2,000
To record interest on drawings
charged to a partner.
Interest on capital

o
Dec 31 Profit and Loss [Appropriation] 8,000
Current Account [Partner] 8,000
To record interest on capital balances
due to a partner.
Salaries to partners

o
Current Account [Partners] 8,000
To record salary entitlements of
partners.
When salaries are taken out the entry is the same as for drawings.
Apportionment of profits to partners

o
Current Account [Partners] 58,000
To record residual profit shares of
partners.
If a loss situation is encountered the entry to apportion a loss is the reverse of the above entry.
Example:
Ange, Lina, Conso and Mrefu are in partnership. Capitals they have contributed are shs. 750,000;
shs. 700,000; shs. 600,000 and shs. 600,000 respectively. Partners agreed on the following
arrangement:
a. Interest is to be allowed on capital at 10% per annum.

b. Ange, Lina, Conso and Mrefu are to receive salaries of shs. 100,000, shs. 100,000, shs.
80,000 and shs. 80,000 respectively.
c. Profits are to be shared as follows: Ange 35%; Lina 35%; Conso 20%; Mrefu 10%.
d. Interest is to be charged on drawings at 10% per annum. The amounts chargeable to each
partner for the year ended 31 December 19X2 have been worked out as:
Shs.
Ange 17,290
Lina 11,000
Conso 8,320
Mrefu 7,890
Total 44,500
During the year ended 31 December 19X2 the partners withdrew the following amounts from the
partnership:
Shs.
Ange 230,500
Lina 219,800
Conso 166,400
Mrefu 173,000
Total 789,700
The partners had the following balances on their current accounts as at 1 January 19X2:
Shs.
Ange 21,000 [cr]
Lina 33,700 [cr]
Conso 12,400 [dr]
Mrefu 9,800 [cr]
During the financial year ended 31 December 19X2 the partnership earned a net profit of shs.
855,500.
Required:
a. Draw up the appropriation section of the partnership's profit and loss account for the year
ended 31 December 19X2.
b. Prepare the partners' current accounts for the year ended 31 December 19X2.
c. Prepare an extract of the capital section of the partnership's balance sheet as at 31
December 19X2.
Income Statement [Appropriation section only]

Shs. Shs.
Net Profit b/f 855,500
Current Accounts
Interest on Drawings:
Ange 17,290
Lina 11,000
Conso 8,320
Mrefu 7,890
44,500
900,000
Interest on Capital:
Ange 75,000
Lina 70,000
Conso 60,000
Mrefu 60,000
265,000
Salaries:
Ange 100,000
Lina 100,000
Conso 80,000
Mrefu 80,000
360,000
Profit shares:
Ange [35%] 96,250
Lina [35%] 96,250
Conso [20%] 55,000
Mrefu [10%] 27,500
275,000
Current Accounts
Ange Lina Conso Mrefu Total
Balance b/f 21,000 33,700 (12,400) 9,800 52,100
Interest on Capital 75,000 70,000 60,000 60,000 265,000
Salaries 100,000 100,000 80,000 80,000 360,000
Interest on Drawings (17,290) (11,000) (8,320) (7,890) (44,500)
Profit shares 96,250 96,250 55,000 27,500 275,000
Drawings (230,500) (219,800) (166,400) (173,000) (789,700)
Balance c/f 44,460 69,150 7,880 (3,590) 117,900
Balance Sheet [extract only] as at 31 December 19X2

Capital Current Total
Ange 750,000 44,460 794,460
Lina 700,000 69,150 769,150
Conso 600,000 7,880 607,880
Mrefu 600,000 600,000
2,650,000 121,490 2,771,490
Note that where a partner's current account has a debit balance it is not netted off against the
capital account balance fixed in the agreement. Such a debit balance will be shown as a receivable
under current assets.
Changes in partnership
A change in partnership occurs when the contents of the partnership agreement change. This could
occur when there is:
a. Admission of a new partner,

b. Change of profit sharing plan, and
c. Retirement or death of a partner.
Technically a change in partnership gives rise to dissolution of an existing relationship and

creation of another.
Admission of a new partner
Section 198 of the Law of Contract Ordinance, 1961 requires that all existing partners agree upon
admission of a new partner. There are two ways a partner can be admitted into an existing
partnership. One is by buying interest from an existing partner and the other is by buying a share
of interest from the firm.
Buying interest from an existing partner
The new partner buying interest from an existing partner can affect admission of a new partner in
a partnership. Accounting treatment for such an arrangement is straightforward. An existing
partner's interest in the firm is decreased and a new partner is given a share of interest given up by
the existing partner. Consideration can be passed privately between the two partners or can be
recorded through the partnership books.
The following journal entry is made to record such form of admission:

o
Jan 1 Capital Account [existing partner] 500,000
Capital Account [new partner] 500,000
To record transfer of share of
ownership to an incoming partner.
Example:
Abe, Bani and Chombo are in business sharing profits in the ratio 3:2:1 respectively. Capital
account balances as at 31 December 19X1 are:
Shs.
Abe 300,000
Bani 200,000
Chombo 100,000
Danny is admitted on 1 January19X2 by buying a third of Abe's interest at shs. 300,000.
The entries to record the above events would be as follows:

o
19X2
Jan 1 Capital Account [Abe] 100,000
Capital Account [Danny] 100,000
To record transfer of share of
ownership from Abe to Danny - an
incoming partner.
There is no other entry if consideration passes privately. However, if consideration is recorded in

partnership books, the entry will be:

o
19X2
Jan 1 Cash 300,000
Current Account [Abe] 300,000
To record consideration to Abe for
transfer a third of share of ownership
to Danny.
Abe can then take the amount out, as he would do for ordinary drawings.
After the transfer of Abe's interest is effected the new profit sharing ratio will be 2:2:1:1 for Abe,
Bani, Chombo and Danny respectively.
Buying a share of partnership interest from the firm
In this mode of admission all existing partners' shares of interest are affected. When a new partner
is admitted he is expected to contribute to the partnership an amount commensurate with the share
of the business he is expected to own. At the point of admission the total of capital and current
accounts of individual partners represent the net assets of the firm. However, the net assets figure
may not reflect the value of a business. It is normal for a firm to be worth more than the sum of its
individual assets net of all liabilities.
Tangible assets could have a higher or lower values than those carried in the books of accounts.
This calls for revaluation of assets before admission of a new partner in order that changes
[increases or decreases] in values of these assets are attributed to existing partners who contributed
towards such changes in value.
Even when tangible assets have been revalued it is possible for a firm to attract a value higher than
the sum of all tangible assets. This is attributed to the existence of an intangible asset called
goodwill. Goodwill may exist in a firm because of:
 Being conveniently located

 Having loyal customers
 Having good competent management
 Having partners of good reputation.
These attributes are intangible and difficult to quantify and value. Consequently, goodwill can
only be estimated. There are several approaches to estimating goodwill.
Methods of estimating goodwill
Revenue based methods
This approach estimates goodwill as for example "n years purchase of annual sales of the past y
years". The methodology involves getting average annual sales of the past 'y' years and
multiplying the average annual sales figure with "n".
Example:
The following are sales figures of a firm, Chaki & Poki.
Year Shs. Year Shs.

1985 230,000 1989 450,000
1986 300,000 1990 460,000
1987 400,000 1991 420,000
1988 420,000 1992 430,000
Goodwill is to be valued at 2 years' purchase of average annual sales of the past 8 years.
3,110,000
Average Annual Sales = = Shs. 388,750
8
Goodwill will be shs. Shs. 777,500 [388,750*2]
Profit based methods
In principle this is similar to the revenue-based method. In the profit based method the basis for
estimation is average profit rather than average revenue.
Example
Chaki & Poki generated the following profits over the past eight years:
Year Shs. Year Shs.

1985 70,000 1989 95,000
1986 90,000 1990 80,000
1987 80,000 1991 85,000
1988 65,000 1992 75,000
If goodwill is valued as 10 years' purchase of average annual profits of the past 8 years goodwill is
obtained at follows:
640,000
Average Annual Profits = = Shs. 80,000
8
Goodwill then becomes shs. 800,000 [80,000*10].
Capitalization of average super profits
Super profits are profits in excess of what is required to earn a normal return on capital in a
business. Super profit is estimated and capitalized for an agreed time period using the normal rate
of return. Capitalization of super profits requires application of the concept of time value of
money. This approach will be covered in sufficient detail in an intermediate accounting course.
Goodwill in partnership accounts

A change in partnership usually necessitates valuation of goodwill. To recognize goodwill upon
admission of a new partner the following journal entry will be made:

o
Jan 1 Goodwill Account 1,300,000
Capital Account [old partners] 1,300,000
To recognize goodwill in books of
accounts.
The value of goodwill will be credited to old partners' capital accounts on the basis of the old
profit sharing plan, i.e. before admission of a new partner.
Although a firm may possess goodwill it is not common practice to maintain a goodwill account
in the books. Usually after goodwill account is raised when a new partner is admitted it will be
written off immediately from the books of accounts. The entry to record such a write off of
goodwill is as follows:

o
Jan 1 Capital Account [old and new partners] 1,300,000
Goodwill Account 1,300,000
To write off goodwill in books of
accounts.
Thus, the value of goodwill is written off among all partners using the new profit sharing plan as a
basis of apportioning the write off.
The effect of this entry is to adjust the capital accounts of old and new partners.
Example:
Abe, Bani and Chombo are in business sharing profits at the ratio 3:2:1 respectively up to 31
December 19X1. On 1 January 19X2 Danny is admitted to the partnership and brings in shs.
230,000 cash. The new profit sharing ratio being 1:1:1:1.
Goodwill is estimated at shs. 120,000.

Capital account balances on 1 January 19X2 are:
Shs.
Abe 350,000
Bani 200,000
Chombo 100,000
Capital Accounts
Abe Bani Chombo Danny Total
Balance b/f 350,000 200,000 100,000 650,000
Goodwill 60,000 40,000 20,000 120,000
Goodwill (30,000) (30,000) (30,000) (30,000) (120,000)
Cash 230,000 230,000
Balance c/f 380,000 210,000 90,000 200,000 880,000
Goodwill Account no. 00

Date Details Fol. Debit Date Details Fol. Credit
Jan 1 Capital [Abe] 60,000 Jan 1 Capital [Abe] 30,000
Capital [Bani] 40,000 Capital [Bani] 30,000
Capital [Chombo] 20,000 Capital [Chombo] 30,000
Capital [Danny] 30,000
120,000 120,000
Comparison of capital account balances before and after the adjustments involving goodwill
shows how each partner's capital account has been adjusted.
Admission with revaluation of assets

If fair values of assets differ from values recorded in the books there is an argument for
revaluation of assets at the point of admission of a new partner. This is done so that any
appreciation or appreciation in value of assets is shared among the old partners. To record
revaluation of assets the following entries are made:
Increase in value of an asset

o
Jan 1 Asset Account [amount of increase] 300,000
Revaluation Account 300,000
To record increase in asset value on
revaluation.
Decrease in value of an asset

o
Jan 1 Revaluation Account 100,000
Asset Account [amount of 100,000
decrease]
To record decrease in asset value on
revaluation.
The revaluation account is then balanced. A credit balance represents a net increase in value of
assets, which should be shared by existing partners before admission using old profit sharing
ratios.
Sharing of increase in value of assets
The entry to record sharing of increase in value of assets is:

o
Jan 1 Revaluation Account 200,000
Capital Account [partners] 200,000
To record sharing of revaluation gain.
Where the revaluation account ends with a debit balance, it represents a fall in value of assets.
Again this is shared among old partners in the old profit sharing ratio. The accounting entry to
record this being the reverse of the previous journal entry.

o
Jan 1 Capital Account [partners] 200,000
Revaluation Account 200,000
To record sharing of revaluation loss.
Example:
Bino, Jesse and Bob, sharing profits and losses equally had been trading for a number of years. On
1 January 19X3 they admitted Shani. The balance sheet as at 31 December 19X2 was as follows:
Bino, Jesse & Bob

Balance Sheet as at 31 December 19X2
Shs. '000 Shs. '000
Fixed Assets:
Buildings 8,000
Machinery 4,000
Equipment 6,000
18,000
Current Assets:
Stocks 5,000
Debtors 6,000
Cash at Bank 3,000
14,000
Current Liabilities:
Creditors 8,000
Net Current Assets 6,000
Total Net Assets 24,000
Financed by:
Capitals:
Bino 10,000
Jesse 8,000
Bob 6,000
24,000
Shani is to contribute shs. 7 million cash towards the business as capital and including payment
for his share of goodwill. The value of goodwill was agreed at shs. 9 million.
Buildings had increased in value as a result of general economic conditions, the value being
agreed at shs. 12.1 million. Machinery and equipment were valued at shs. 3.6 million and shs. 5.3
million respectively.
Required:
Show the adjusted balance sheet of the firm after admission of Shani assuming:
i. The partners wish to retain the assets at their revised valuations.

ii. The assets are to be reflected in the balance sheet at their original valuations.
Assuming assets are retained at revised valuations
Revaluation Account no. 00

Date Details Debit Date Details Credit
Jan 1 Machinery 400,000 Buildings 4,100,000
Equipment 700,000
Capital [Bino] 1,000,000
Capital [Jesse] 1,000,000
Capital [Bob] 1,000,000
4,100,000 4,100,000

Jan 1 Capital [Bino] 3,000,000
Capital [Jesse] 3,000,000
Capital [Bob] 3,000,000 Balance 9,000,000
9,000,000 9,000,000
Capital Accounts
Bino Jesse Bob Shani Total
Balance b/f 10,000,000 8,000,000 6,000,000 24,000,000
Revaluation Account 1,000,000 1,000,000 1,000,000 3,000,000
Goodwill 3,000,000 3,000,000 3,000,000 9,000,000
Cash 7,000,000 7,000,000
Balance c/f 14,000,000 12,000,000 10,000,000 7,000,000 43,000,000
Bino, Jesse, Bob & Shani

Shs. '000 Shs. '000
Fixed Assets:
Buildings 12,100
Machinery 3,600
Equipment 5,300
21,000
Goodwill 9,000
Current Assets:
Stocks 5,000
Debtors 6,000
Cash at Bank 10,000
21,000
Creditors 8,000
Financed by:
Capitals:
Bino 14,000
Jesse 12,000
Bob 10,000
Shani 7,000
43,000
Assuming revised asset valuations are not retained in books

Jan 1 Capital [Bino] 3,000,000 Jan 1 Capital [Bino] 2,250,000
Capital [Jesse] 3,000,000 Capital [Jesse] 2,250,000
Capital [Bob] 3,000,000 Capital [Bob] 2,250,000
Capital [Shani] 2,250,000
9,000,000 9,000,000
Buildings Account no. 00

Jan 1 Balance b/f 8,000,000 Jan 1 Capital [Bino] 1,025,000
Revaluation 4,100,000 Capital [Jesse] 1,025,000
Capital [Bob] 1,025,000
Capital [Shani] 1,025,000
Balance c/f 8,000,000
4,100,000 4,100,000
Machinery Account no. 00

Jan 1 Balance b/f 4,000,000 Jan 1 Revaluation 400,000
Capital [Bino] 100,000
Capital [Jesse] 100,000
Capital [Bob] 100,000
Capital [Shani] 100,000 Balance c/f 4,000,000
4,400,000 4,400,000
Equipment Account no. 00

Jan 1 Balance b/f 6,000,000 Jan 1 Revaluation 700,000
Capital [Shani] 175,000 Balance c/f 6,000,000
6,700,000 6,700,000
Capital Accounts
Bino Jesse Bob Shani Total
Balance b/f 10,000,000 8,000,000 6,000,000 24,000,000
Revaluation Account 1,000,000 1,000,000 1,000,000 3,000,000
Goodwill 3,000,000 3,000,000 3,000,000 9,000,000
Goodwill (2,250,000) (2,250,000) (2,250,000) (2,250,000) (9,000,000)
Buildings (1,025,000) (1,025,000) (1,025,000) (1,025,000) (4,100,000)
Machinery 100,000 100,000 100,000 100,000 400,000
Equipment 175,000 175,000 175,000 175,000 700,000
Cash 7,000,000 7,000,000
Balance c/f 11,000,000 9,000,000 7,000,000 4,000,000 31,000,000
Bino, Jesse & Bob
shs. '000 shs. '000

Fixed Assets:
Buildings 8,000
Machinery 4,000
Equipment 6,000
18,000
Current Assets:
Stocks 5,000
Debtors 6,000
Cash at Bank 10,000
21,000
Creditors 8,000
Financed by:
Capitals:
Bino 11,000
Jesse 9,000
Bob 7,000
Shani 4,000
31,000
Retirement of a partner
Section 200 of the Law of Contract Ordinance, 1961 stipulates that where there is no fixed term a
partner may retire by giving notice of his intention to all partners.
In the absence of any agreement to the contrary an outgoing partner according to Section 222 is
entitled to opt for the share of profits made since his retirement or to interest at the rate of 5% per
annum on the amount of his share of partnership assets, if his share was not paid to him on
retirement.
If a retiring partner's share of partnership assets is not paid out on the date of retirement it becomes
a debt to the partnership. Subject to any agreement the amount due from continuing partners is a
debt accruing at the date of dissolution (Section 223). For the purpose of establishing the date of
dissolution where a partnership is dissolved by notice, the effective date is the date mentioned on
the notice or if no date is mentioned, as from date of communication of notice [Section 212 (c)].
There are two ways of effecting retirement of a partner:
 Remaining partners may purchase outgoing partner's interest in the firm, or

 Retiring partner is paid out of the firm's assets.
Purchase of interest by remaining partners
In this case the remaining partners divide up the capital share of a retiring partner. Consideration
can be paid privately or that payment can be recorded through partnership books. In any case this
approach does not result in a change of partnership's net assets.
Example:
A, B and C are in partnership sharing profits and losses in the ratio 2:1:1. A retires on 1 January
19X3 and the partnership balance sheet as at 31 December 19X2 was:
ABC Balance Sheet as at 31 December 19X2

Shs.
Land 150,000
Other net assets 250,000
400,000
Capitals:
A 200,000
B 100,000
C 100,000
400,000
It was agreed that B and C were to buy jointly A's interest.
The entry to record the purchase of interest from A by B and C is made as follows:

o
Jan 1 Capital Account [A] 200,000
Capital Account [B] 100,000
Capital Account [C] 100,000
To record transfer of share of ownership
from Partner A to Partner B and C.
Consideration for that purchase can be passed privately or recorded through partnership books. If
it is through partnership books, the continuing partners will bring money into the partnership and
it will be paid over to Partner A.
The balance sheet after the transfer of interest will look as follows:
ABC Balance Sheet as at 1 January 19X3

shs.
Land 150,000
Other net assets 250,000
400,000
Capitals:
B 200,000
C 200,000
400,000
Purchase of interest of the retiring partner by the firm
When a partner retires and is to be paid out of firm's assets the partnership agreement needs to be
consulted for guidance. In the absence of any agreement a retiring partner is entitled to his share of
net assets of the firm.
When a partner retires balance sheet values may not represent properly net assets of a firm. As
such, a retiring partner is entitled to have assets revalued and goodwill recognized. Usually
continuing partners will not wish to maintain a goodwill account in the books or assets at their
revised values.
The share of net assets due to the retiring partner can be paid out immediately but it may also be
treated as a loan to the firm and paid out in installments. Where the amount is converted into a
loan it shall carry interest at the rate of 5% per annum, unless there is agreement to the contrary
(Section 222).
Example:
Bino, Jesse and Bob sharing profits and losses equally had been trading for a number of years.
Bob decided to retire as at 31 December 19X2. The partnership balance sheet on that date was as
follows:
Bino, Jesse & Bob

shs. '000 shs. '000
Fixed Assets:
Buildings 800
Machinery 400
Equipment 600
1,800
Current Assets:
Stocks 500
Debtors 600
Cash at Bank 300
1,400
Creditors 800
Net Current Assets 600
Financed by:
Capitals:
Bino 1,000
Jesse 800
Bob 600
2,400
The value of goodwill is agreed at shs. 900,000. The buildings had increased in value as a result of
general economic conditions. The value being agreed at shs. 1,120,000. Machinery and equipment
were revalued at shs. 360,000 and shs. 530,000 respectively and it was agreed to provide 5% in
respect of debtors as doubtful.
Required:
Show the balance sheet after retirement of Bob and show the amount to which Bob will be
entitled.
Revaluation Account no. 00

Jan 1 Machinery 40,000 Jan 1 Buildings 320,000
Equipment 70,000
Provision for d/debts 30,000
320,000 320,000

Jan 1 Capital [Bino] 300,000 Jan 1
Capital [Bob] 300,000 Balance 900,000
900,000 900,000
Capital Accounts
Bino Jesse Bob Total
Balance b/f 1,000,000 800,000 600,000 2,400,000
Revaluation Account 60,000 60,000 60,000 180,000
Goodwill 300,000 300,000 300,000 900,000
Loan (960,000) (960,000)

Balance c/f 1,360,000 1,160,000 0 2,560,000
Loan [Bob] Account no. 00

Jan 1 Balance c/f 960,000 Jan 1 Capital [Bob] 960,000
960,000 960,000
Bino & Jesse

Balance Sheet as at 31 December 19X2 (After Bob's retirement)
shs. '000 shs. '000 shs. '000
Fixed Assets:
Buildings 1,120
Machinery 360
Equipment 530
2,010
Goodwill 900
Current Assets:
Stocks 500
Debtors 600
Less: Provision for doubtful debts 30
570
Cash at Bank 300
1,370
Creditors 800
Financed by:
Capitals:
Bino 1,360
Jesse 1,160
2,520
Loan [Bob] 960
3,480
If the partnership had enough cash the amount due to Bob as a loan could have been paid
immediately, the entry being as follows:

o
Loan Account [Bob] 960,000
Cash 960,000
To record settlement of Bob’s Loan
after retirement.
In the above balance sheet the partners wished to report goodwill and other assets at their revised
values. If they chose to retain old values (i.e. revised values were for the purpose of effecting
Bob's retirement only) the gain on revaluation of shs. 180,000 and goodwill of shs. 900,000 would
be written off against partners capital accounts. The following journal entry being made:

o
Machinery Account 40,000
Equipment Account 70,000
Provision for Doubtful Debts Account 30,000
Buildings Account 320,000
Goodwill Account 900,000
To restate revalued assets at their
original values and write off the gain on
revaluation.
The balance sheet of the firm assuming assets are restated at their original values will look as
follows:
Bino & Jesse

shs. '000 shs. '000
Fixed Assets:
Buildings 800
Machinery 400
Equipment 600
1,800
Current Assets:
Stocks 500
Debtors 600
Cash at Bank 300
1,400
Creditors 800
Financed by:
Capitals:
Bino 820
Jesse 620
1,440
Loan [Bob] 960
2,400
Changes in partnership during an accounting period

Admissions and retirements can be effected at any time during an accounting period. So far
examples have involved changes in partnership occurring at the end or beginning of an accounting
period.
Where changes occur during an accounting period a trading profit and loss account for the period
has to be prepared up to the date of change and also a balance sheet as at that date. When financial
statements are prepared immediately after such a change, the new arrangement starts with the
books of accounts which reflect the new arrangement. However, in a number of cases changes
occur during the year and these are not reflected until after financial statements have been prepared
at the end of the year.
In these cases the approach is to apportion results of operations such that results of the period
before change are reported separately from the results after change. This is done because a change
in partnership may result in a change in profit sharing plan. Therefore, a profit sharing plan ruling
before change should apply to the results before change and the profit sharing plan ruling after
change should apply to results after change.
Example:
Bavos, Chuma and Dula have been working in partnership as mechanics for several years. At 1
January 19X3 a summarized balance sheet shows the following items:
Bavo, Chuma and Dula Balance Sheet as at 1 January 19X3

shs.
Assets:
Service Yard 100,000
Motor cycles 160,000
Equipment 40,000
Net current assets 40,000
340,000
Capitals:
Bavos 160,000
Chuma 100,000
Dula 80,000
340,000
The partnership agreement allows for 10% per annum interest on capital - then profits shared in
the ratio of Bavos 5/12; Chuma 1/3; and Dula 1/4, with Dula being guaranteed a minimum of shs.
130,000 per annum in addition to his interest on capital.
Bavos retired on June 30 19X3 on which date goodwill was valued by an agreed method at shs.
240,000. A goodwill account is not to be maintained in the books. Bavos took the motorcycle he
had been using. Its book value at 1 January 19X3 was shs. 60,000 and the agreed valuation at 30
June 19X3 was shs. 46,000. Chuma and Dula continued in partnership sharing profits equally after
allowing interest on capital at 10% per annum as before. Dula is no longer going to have a
guaranteed profit share.
At 30 June 19X3 Chuma agreed to purchase the service yard which is adjacent to his house for
shs. 220,000 cash and then to lease it to the partnership for shs. 30,000 per annum. This
arrangement enabled the partnership to pay Bavos all but shs. 80,000 of the amount owing to him
with interest of 15% per annum being paid on that balance as per agreement. The profit on the sale
of the service yard is to be credited to the partners’ capital accounts. Chuma and Dula withdrew
shs. 160,000 and shs. 150,000 respectively during the year.
Income earned during the year was shs. 640,000 and shs. 360,000 of that relate to the first half-
year. The working expenses were shs. 160,000 for the year and shs. 90,000 of that relates to the
first half-year. Depreciation on motorcycles is charged at 20% per annum on book value and on
equipment at 10% per annum on book value.
Required:
Prepare partners' capital accounts, current accounts, the profit and loss account for the year ended
31 December 19X3 and a summary Balance Sheet as at 31 December 19X3.
Profit and Loss Account for the year ended 31 December 19X3
Jan - Jun Jul - Dec Total
shs. shs. shs.
Income earned 360,000 280,000 640,000

Working expenses 90,000 70,000 160,000
Depreciation - Motorcycles 16,000 10,000 26,000
Depreciation - Equipment 2,000 2,000 4,000
Service Yard hiring charges 15,000 15,000
Loan interest 6,000 6,000
Operating expenses 108,000 103,000 211,000
Profit from operations 252,000 177,000 429,000
Loss from sale of motorcycle 8,000 8,000
Net Profit 244,000 177,000 421,000
Current Accounts
Interest on Capital
Bavos 8,000 8,000
Chuma 5,000 5,000 10,000
Dula 4,000 2,500 6,500
17,000 7,500 24,500
Profit Shares
Bavos 90,000 90,000
Chuma 72,000 84,750 156,750
Dula 65,000 84,750 149,750
227,000 169,500 396,500
Current Accounts
Bavos Chuma Dula Total
Balance b/f 0 0 0 0
Interest on Capital 8,000 10,000 6,500 24,500
Profit shares 90,000 156,750 149,750 396,500
Drawings 0 (160,000) (150,000) (310,000)
Capital (98,000) (98,000)
Balance c/f 0 (6,750) (6,250) (13,000)
Capital Accounts
Bavos Chuma Dula Total
Balance b/f 160,000 100,000 80,000 340,000
Goodwill 100,000 80,000 60,000 240,000
Gain on sale of yard 50,000 40,000 30,000 120,000
Goodwill [write off] (120,000) (120,000) (240,000)
Motorcycle disposal (46,000) (46,000)
Current account 98,000 98,000
Cash (282,000) (282,000)
Loan account (80,000) (80,000)
Balance c/f 0 100,000 50,000 150,000
Bavo, Chuma and Dula Balance Sheet as at 31 December

19X3
shs. shs. shs.
Assets:
Motor cycles 80,000
Equipment 36,000
Net current assets* 127,000
243,000
Capital Current
Chuma 100,000 6,750 106,750

Dula 50,000 6,250 56,250
150,000 13,000 163,000
Loan Account [Bavos] 80,000
243,000
* Note that Net current assets is a balancing figure.

Review questions
1. Define a Partnership.
2. What are the rights of partners in a firm?
3. What are the advantages of a partnership over a sole trader?
4. If a partnership agreement does not exist, how would a partnership be administered?
5. Can you list the main clauses usually covered in a partnership agreement? Must they be
written to be legal?
6. What are the differences between financial statements of a partnership and those of a sole
trader?
7. Mention three modes by which partnerships profits can be appropriated.
8. Sometimes a partner would extend a loan to a firm at an interest. How would you treat
such a loan for income determination and balance sheet purposes?
9. There are two ways a new partner may be admitted in a partnership. What are they? and
what is their basic difference?
10. Do you think that when an incoming partner invests in a partnership rather than
purchasing an interest from an existing partner, assets and equity of a firm will both
increase?
11. Why is it necessary to revalue assets when there is a change in partnership?
12. What is goodwill and how does it arise?
13. There are two ways of effecting the retirement of a partner. What are they?
14. In a balance sheet how would you classify the amount outstanding to a retired partner?
15. When there is a change in partnership during an accounting period a profit and loss
account and a balance sheet should preferably be prepared at that point. Why?
Exercises
1. (a) On January 1, Chenga and Sadia are starting a partnership to be called
Sachenga & Co. Chenga is contributing land, building and office equipment that
have a fair market value of shs. 100,000, 200,000 and 50,000 respectively. Sadia
is contributing cash of shs. 200,000. Prepare the general journal entry to record
the transfer of assets to the partnership.
(b) Chenga and Sadia each invest an additional cash shs. 100,000 in Sachenga & Co.
on September 1. Prepare the general journal entry.
2. (a) If a partnership agreement between Viringe and Dodo allows for a salary
of shs. 60,000 to Viringe and shs. 40,000 to Dodo. Calculate the distribution of
net income of shs. 300,000 to Viringe and Dodo.
(b) Assume the same facts as in (a) above, except interest of 10% is paid on
beginning capital balances of shs. 350,000 for Viringe and shs. 200,000 for
Dodo. Show the distribution of net income to Viringe and Dodo.
3. Ali and Issa have been partners in a clothing business for five years. Ali decided to sell
his interest to his brother Mwalimu. Issa agrees to admit Mwalimu to the partnership.
Ali's capital account has a balance of shs. 150,000. He sells his interest to Mwalimu for
shs. 200,000. Prepare the general journal entry to record this transaction.
4. A, B & C are in partnership sharing profits in the ratio 3:2:1 up to 31 December X1. From
1 January X2 D is admitted forming a new partnership ABC & D, the new profit sharing
plan being 1:1:1:1. Goodwill has been estimated at shs. 120,000 and is to be written off
immediately. Capital account balances before admission of D were A: shs. 350,000 B:
shs. 200,000 and C: shs. 100,000. D is to contribute shs. 200,000 cash as capital and shs.
30,000 cash as his share of goodwill. Show the general journal entries to record the above
transactions.
5. Cero a partner in a firm died on 31 March 19X3 and his share of capital and goodwill is
ascertained to be shs. 760,000. It was arranged that this should be paid out by annual
installments of shs. 200,000 to include principal and interest on the outstanding balance at
5% per annum. The first payment being made one month after death and succeeding
payments are made on the anniversary of the date of death. Show the account in the firm's
books. Make calculations to the nearest hundred shilling. The firm's year end is 31
December.
Problems
1. Othello, Sweet and Demona have been trading in partnership sharing profits and losses
5
/10, 3/10 and 2/10 respectively. The summarized Balance sheet at 31 March 19X5 of the
partnership is as follows:
shs. '000 shs. '000

Fixed Assets:
Fixture, Fittings and Motor Vehicles 14,000
Current Assets:
Stocks 6,200
Debtors 2,800
Cash at Bank 2,000
11,000
Creditors 5,000
Financed by:
Capitals:
Othello 11,000
Sweet 5,000
Demona 4,000
20,000
On 1 April 19X5 Sweet retired from the partnership when it was agreed that:
a. The car owned by the partnership would be transferred to Sweet at an agreed valuation of
shs. 1,000,000.
b. The remaining fixed assets which stay in the partnership would be valued at shs.
17,000,000.
c. Stocks would be valued at shs. 4,000,000 and debtors at shs. 2,400,000.
d. Goodwill would be valued at shs. 6,000,000.
e. Shs. 1,200,000 cash would be paid immediately to Sweet the balance due to him to
remain as a loan to the partnership until 30 June 19X5, interest being payable on the loan
at 10% p.a.
f. The partnership continued with its policy of not maintaining a Goodwill account in the
books of accounts.
Required:
i. Capital accounts of Othello, Sweet and Demona recording the above transactions.
ii. Balance sheet at completion of all the above transactions.
2. Abe, Bani and Chombo have been in partnership as practicing accountants for a number
of years sharing profits and losses in the ratio 6:5:3.
The Balance sheet of the partnership on 31 March 1991 showed the following position:-
shs. '000 shs. '000

Fixed Assets at net book value 224,000
Goodwill 129,500
353,500
Current Assets:
Stocks
Debtors 735,000
Cash at Bank 104,500
839,500
Creditors 676,000
Financed by:
Capitals:
Abe 250,000
Bani 180,000
Chombo 87,000
517,000
On 31 March 1991 Abe retired from the partnership and it was agreed to admit Denda as
a partner on the following terms:
i. Goodwill is to be revalued to 2 years purchase of the average profits over the past 3 years
and then to be written off immediately.
Profits for the past 3 years have been as follows:

shs.'000
Year ended 31 March 1989 124,000
ii. (2)Abe is to take over his car - a BMW at shs. 10,000,000. The net book value on 31
March 1991 was shs. 5,940,000 which is included in the partnership fixed assets.
iii. (3)Although work-in progress had not been and will not be included in partnership
accounts the new partners are to credit Abe with his share which is to be based on an
estimate that work-in-progress is equivalent to 20% of the debtors.
iv. The new partnership of Bani, Chombo and Denda are to share profits in the ratio 5:3:2.
Their initial capital is to be shs. 250,000,000 contributed in proportion to profit sharing
ratios.
v. Bani, Chombo and Denda are each to pay Abe the sum of shs. 50,000,000 out of their
personal resources in part payment for his share of the partnership.
vi. From the amount due to him Abe is to lend Denda any amount required to make up his
capital in the firm and any further balance due to Abe is to be left in the firm as a loan at
9% per annum.
vii. Any adjustments required to the capital accounts of Bani and Chombo are to be paid into
or withdrawn from the partnership bank account.
Required:
a. Show how you arrive at the balance of capital accounts of the partners taking account of
all of the above items.
b. A balance sheet upon completion of the change.
3. Good, Better and Best trading as Fine & Co. share profits and losses in the ratio of 5:9:6.
A balance sheet of the partnership was prepared on the 31 December 19-4 as follows:
shs. shs.
Net Assets:
Langoni factory 1,350,000
Ufukweni factory 680,000
Mugango factory 570,000
Total Net Assets 2,600,000
Financed by:
Capitals:
Good 500,000
Better 900,000
Best 600,000
2,000,000
Loan Accounts:
Better 400,000
Excel 200,000
600,000
2,600,000
Note: Cash adjustments were made which cleared the balance on the current accounts of
the partners.
The partnership agreement included the following details:-
a. Each partner is entitled to a salary of shs. 60,000 per annum.

b. When a partner retires he will receive a lump sum payment equal to one half of the net
amount due to him including his share of goodwill. The balance will be paid in six equal
half-yearly installments. Interest will be charged on the outstanding balance at the rate of
10% per annum.
c. Profits and losses are to be shared as stated above.
The following information is relevant:
d. Excel is a manager in the firm earning shs. 60,000 per annum. On 1 January 19-2 he and
Better made loans to the firm to help it over financial difficulties. Excel has received 10%
annual interest on his loan but Better has not received any interest.
e. Better retired on 30 June 19-5. Excel was admitted as a partner on 1 July 19-5.
f. Due to pressure of work the required adjustments relating to the partnership changes had
not been made in the accounts by 31 December 19-5. The profit figure shown in (g)
below represents the position which would have applied, if there had been no partnership
changes.
g. Profits after charging Excel's salary and interest but before charging any salary for
partners:
Year ended Langoni Ufukweni Mugango Total

shs. shs. shs. shs.
19-2 360,000 180,000 160,000 700,000
19-3 380,000 210,000 220,000 810,000
19-4 460,000 240,000 220,000 920,000
19-5 420,000 260,000 240,000 920,000
All profits accrued evenly over each year.
h. Goodwill was valued at shs. 600,000 on 30 June 19-5 and 1 July 19-5. Goodwill
adjustments are to be made through the partners' capital accounts and goodwill is not to
be shown in the books as an asset.
i. The following are the main points of the new agreement:-
Profit sharing plan Good Best Excel

From 1 July 19-5 8 8 4
Annual salaries 60,000 60,000 60,000
j. Excel's salary and interest, as from 1 July, 19-5 are to be treated as drawings.
k. Excel's loan is to be treated as part of his capital contribution. He has to pay in shs.
300,000 as the balance of his capital and shs. 120,000 as his share of goodwill.
l. Better is claiming 10% interest on his loan as from the 1 January 19-2. The other partners
claim that he is not entitled to any interest as it was not mentioned in the partnership
agreement. They have agreed to accept your decision on this matter.
m. There were no partners' drawings during 19-5 other than Excel's salary and interest.
n. On leaving the partnership Better took his company car at an agreed valuation of shs.
75,000. The net book value of the car at 30.6.19-5 was shs. 55,000.
Required:
i. The partners' capital and current accounts reflecting the above matters.
ii. A balance sheet as at 31 December 19-5.
Note: A single combined figure for net assets is all that is required.
4. Raha and Leo commenced business on 1 January 1989. No agreement was made between
them as to profit sharing but it was understood that each partner should contribute capital
of shs. 5,000,000.
Both partners paid in the agreed amount on 1 January 1989 and Leo paid in a further shs.
2,000,000 on 1 April 1989 in order to provide additional working capital for the firm. All
the amounts of capital contributed were banked.
The partners have asked you to prepare their financial statements for the first trading year
and have given you the following information:
a. As at 31 December 1989
shs. '000
Debtors totaled 8,419
Creditors totaled 8,212
Stock was valued at 19,762
Advertising unpaid was 192
b. Payments made by cheque during the year, per Bank Statements totaled
shs. '000
for purchases 96,261
for rates - to 31.3.89 412
for rates - to 31.3.90 1,860
for electricity to 31.10.89 462
for advertising 846
for stationery 275
Miscellaneous business expenses 988
for rent - 4 quarters in arrears 2,000
c. No business expenses were paid by cash during the year.
d. Cheques drawn for purchases in December 1989 totaling shs.1,710,000 were not paid by
the bank until 4 January 1990.
e. Cash and cheque banked on 29 December 1989 amounting to shs. 985,000 were not
credited by the bank until 4 January 1990.
f. A direct transfer of shs. 498,000 made by a customer was credited by the bank on 16
December 1989, but was not entered in the customer's account until January 1990.
g. Bank charges during the year totaled shs. 153,000.
h. Bad debts written off during the year totaled shs. 428,000 and it is considered that 5% of
the debtors as at 31 December 1989 should be regarded as doubtful.
i. The closing balance in the partnership bank account as at 31 December 1989 per bank
statement was shs. 827,000 credit.
j. The partners drew the following amounts regularly in cash, Raha shs. 50,000 per week,
Leo shs. 150,000 per month.
Required:
To prepare the Trading and Profit and Loss Account of the partnership for the year to 31
December 1989 and the balance sheet as at that date.
Note: Assume additional capital carries interest at 5% p.a.

(NABOCE, May 1991)
5. Pesa, Talhiya and Shumbusho were in partnership sharing profits and losses; Pesa 40%,
Talhiya 35% and Shumbusho 25%.
The draft balance sheet of the partnership as on 30 September 19X3 was as follows:
shs. '000 shs. '000

Fixed Assets:
Leasehold Premises at cost 7,500
Plant and Equipment at cost 8,000
less: Accumulated depreciation 2,800 5,200
12,700
Current Assets:
Stocks 4,200
Debtors 3,400
less: Provision for doubtful
debts 600
2,800
Cash at Bank 6,700
13,700
Creditors 3,800
Loan - Talhiya 3,000 6,800
Financed by:
Capitals:
Pesa 9,000
Talhiya 5,000
Shumbusho 3,000
17,000
Current Accounts:
Pesa 1,200
Talhiya 800
Shumbusho 600
2,600
19,600
Talhiya retired on 30 September 19X3 and Pesa and Shumbusho continued in partnership
sharing profits and losses: Pesa 60%, Shumbusho 40%. Half of Talhiya's Loan was repaid
on 1 October 19X3 and it was agreed that shs. 8 million of the balance remaining due to
her should remain on loan to the partnership.
It was agreed that adjustments were to be made to the balance sheet as on 30 September
19X3 in respect of the following:
a. The leasehold premises which had been acquired on 1 October 19X1 on a 15 year lease
were to be written off over the period of the lease.
b. The plant and equipment was to be revalued at shs. 5.8 million.
c. The provision for doubtful debts was to be increased by shs. 120,000.
d. Creditors for expenses amounting to shs. 500,000 had been omitted from the books.
e. Shs. 400,000 was to be written off the stock in respect of obsolete items included therein.
f. Professional valuation charges of shs. 120,000 need to be accrued in the books.
The partnership agreement provided that on retirement of a partner goodwill was to be valued
at an amount equal to average annual profit of the three years expiring on the date of
retirement. The relevant profits were:
shs.'000
Year ended 30 September 19X1 14,400
30 September 19X2 16,800
30 September 19X3 (as per draft accounts) 18,820
It was agreed that for the purpose of valuing goodwill the revaluation of the plant and
equipment and the professional valuation charges should not be regarded as affecting the
profits.
A goodwill account is not to be maintained in the books and all adjusting entries of
transactions between partners should be made in their capital accounts.
Required:
i. The Revaluation account and Partners' Capital accounts,

ii. Talhiya's account showing the balance due to her, and
iii. The Balance Sheet of Pesa and Shumbusho as on 1 October 19X3.

15 Account Fo Partenership UD

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Chapter 15

Accounting for Partnerships

Raising additional capital

Developing and attracting expertise

Sharing of administrative responsibilities and losses

General duties of partners

a. To be just and faithful to one another

The partnership agreement

Following are aspects that should be covered by a partnership agreement:

Interest on capital and current account balances

Loans from partners

In the absence of a partnership agreement

a. Every partner has a right to take part in management of partnership business.

Accounting records and financial statements

 The formation of a partnership,

The appropriation section of the income statement

In contrast to other business organisations an Income Statement of a partnership is extended to

 The original capital contributed into the partnership by each partner,

The following journal entry is made to record capital contribution:

Date Description Folio Debit Credit

Date Description Folio Debit Credit

Loan advanced to partnership by a partner

Date Description Folio Debit Credit

Loan Account – [Partner] 600,000

Interest on loans or advances made by a partner

Date Description Folio Debit Credit

Date Description Folio Debit Credit

Closure of drawings accounts

Date Description Folio Debit Credit

Interest on drawings by partners

Date Description Foli Debit Credit

Date Description Foli Debit Credit

Date Description Foli Debit Credit

Apportionment of profits to partners

Date Description Foli Debit Credit

a. Interest is to be allowed on capital at 10% per annum.

Income Statement [Appropriation section only]

Balance Sheet [extract only] as at 31 December 19X2

a. Admission of a new partner,

Technically a change in partnership gives rise to dissolution of an existing relationship and

Admission of a new partner

Buying interest from an existing partner

Date Description Foli Debit Credit

Danny is admitted on 1 January19X2 by buying a third of Abe's interest at shs. 300,000.

The entries to record the above events would be as follows:

Date Description Foli Debit Credit

There is no other entry if consideration passes privately. However, if consideration is recorded in

Date Description Foli Debit Credit

Buying a share of partnership interest from the firm

 Being conveniently located

Methods of estimating goodwill

Revenue based methods

The following are sales figures of a firm, Chaki & Poki.

Year Shs. Year Shs.

Goodwill will be shs. Shs. 777,500 [388,750*2]

Profit based methods

Year Shs. Year Shs.

Goodwill then becomes shs. 800,000 [80,000*10].

Capitalization of average super profits

Goodwill in partnership accounts

Date Description Foli Debit Credit

Date Description Foli Debit Credit