TOPIC FIVE: PARTNERSHIP

5.1 Introduction
• A partnership is a relationship that subsists between two or
more persons carrying on a business common with a view to
making profit. Among others, reasons for partnership may be-
a) Additional capital incase a sole trader or one person is not able
to raise sufficient capital.
b) Incase there is need for skills or expertise in certain areas of
the business.
c) To involve more persons in the business especially for a family
 5.2 Membership
• A partnership has minimum membership of two (2) maximum of
fifty (50) except for professional firms (e.g.) lawyers, doctors,
accountants etc. whose maximum membership is twenty (20)
persons.
• Where two or more persons wish to form a partnership, then it is
recommended that they agree on the terms upon which the
partnership will be run and the relationship between each other.
• This is done in writing and signed off as agreed by all the
partners and therefore it becomes a partnership deed or
agreement.
• Contents of partnership agreement
a) Names and addresses of both the firm and the partners
b) Capital to be contributed by each partner
c) The profit sharing ratios that may be expressed as a fraction or
as a percentage.
d) Salaries to be paid to any partners who will be involved in the
active management of the business
e) Any interest to be charged on drawings made by the partners.
f) Interests to be given to the partners on their capital balances.
g) Procedures to be taken on the retirement or admission of a
partner.
 5.3 Accounting for Partnership
• The interest of the partners in the business is either
a) long term or
b) short-term.
• The long-term interest is the capital contributed by each
partner and the balance is expected to remain fixed.
• It will only change when the partners agree or incase of any
changes in the partnership like admission of or retirement of a
partner.
• The short-term interest is reflected in form of a current account
which is affected by the trading activities of the partnership (i.e.)
the profits or losses and any drawings made by the partners.
• Hence, there are two accounting systems that can be
maintained:
i) Fixed Capital Accounting: In this method, two accounts are
opened:
a) Capital Account: Records only the capital contributed. It can
also record the long term changes to partners’ capital. E.g.
introduction of new capital, goodwill, gain on revaluation
b) Current Account: This records the short term changes to
partners’ capital. E.g. changes due to salaries to partners,
drawings, interest on drawings, interest on capital, interest on
loan
ii) Fluctuating Capital Accounting: Only one account is maintained,
the capital account. All changes affecting the partners’ capital
are posted in this account.
 5.4 Formats for financial accounts
• Capital Account (format)
 Current Account (format)
X Y Z X Y Z
Rwf Rwf Rwf Rwf Rwf Rwf
Bal b/d xx Bal b/d xx xx
Interest on drawings xx xx xx Interest on Capital xx xx xx
Drawings xx xx xx Salaries xx xx xx
Bal c/d xx xx Share of profits xx xx xx
Loan interest xx xx
Bal c/d xx
xx xx xx xx xx xx
Bal b/d xx xx xx
 Profit and Loss Account
• The profit and loss account is exactly as the one for the sole
trader and in addition to the profit and loss account, a new
section called the appropriation account is included and this
account shows how the partners share the Net Profit for the
period.
• In addition to other expenses in the profit and loss, an expense
for interest on loan given by one of the partners is included and
the credit entry is made on the partner’s current account.
• The format for the Appropriation account is as follows:
XYZ Partnership
Profit and loss Appropriation A/c
For the year ended 31st Dec 2020 Rwf Rwf
Net Profit for the year xx
Add: Interest on drawings
X xx
Y xx
Z xx xx
xx
Less: Interest on capital
X xx
Y xx
Z xx (xx)
Less: Salaries
X xx
Y xx
Z xx (xx)
Less: Interest on loan
X xx
Y xx
Z xx (xx)
Profit to be shared xx
Profit sharing:
X xx
Y xx
Z xx (xx)
-
 Balance sheet (extract)
• The balance sheet is also the same as that for a sole trader
but the interest of each partner in the business should be
shown separately
• Any loan given by a partner to the firm is also shown
separately in the non-correct liability section.
• Therefore, the format will be as follows.
XYZ Partnership
Statement of financial position (extract)
For the year ended 31st Dec 2020 Rwf Rwf
Net Assets xx
Capital and Liabilities
Capital:
X xx
Y xx
Z xx xx
Current Account:
X xx
Y xx
Z (xx) xx
Non-Current Liabilities:
Loan from Y xx
Loan from Bank xx xx
Total capital and liabilities xx
• E.g.1. A and B own a grocery shop. Their first financial year ended on
31 December 2002. The following balances were taken from the books
on that date:
Capital: A- £60,000 B - £48,000.
Partnership salaries: A - £9,000 B - £6,000.
Drawings: A - £12,000 B - £13,400.
i) The firm’s net profit for the year was £32,840.
ii) Interest on capital is to be allowed at 10% per year.
iii) Profits and losses are to be shared equally.
Required: Prepare the firm’s appropriation account and the partners’
current accounts.
Eg2. Given the following information draw up a profit and loss
appropriation account for the year ended 31 December 2007 and
the current account (all amount in 000Rwf)
i. Net profits 30,350
ii. Interest to be charged on capitals: W. 2,000; P. 1,500; H. 900
iii. Interest to be charged on drawings; W. 240; P. 180; H.130
iv. Salaries to be credited: P. 2,000; H. 3,500.
v. Profits to be shared: W 50%; P 30%; H20%.
vi. Current accounts: balances b/d W. 1,860; P. 946; H. 717
vii. Capital accounts: balances b/d W. 40,000; P. 30,000; H. 18,000
viii. Drawings: W. 9,200; P. 7,100; H. 6,900