Partnerships

Partnership: An agreement between two or more people to carry on a business in order to

make a profit.
According to British Partnership Act 1890, Partnership is the relation which subsists between
persons carrying on business on common with a view to profit.

Advantages and disadvantages of partnership:

Advantages Disadvantages
Raise more equity Profits must now be shared
More skills and knowledge Disagreements can occur
Share the work/loss Partners cannot act independently
Easier and cheaper to set up than limited A partnership is dissolved on the death of a
companies partner

Nature of Partnership:
 The ultimate vision is to make profit.
 Generally there can be a minimum of two partners and a maximum of twenty
partners. For bank there cannot be more than 10.
 In the UK, it must obey the law as set out in the UK’s partnership Act 1890. Limited
partnership must comply with the Limited Liability Partnership Act 2000.
 Each partner could be forced to sell all their private possessions to pay their share of
debts that is said unlimited liability.
 Partners who are not limited partners are known as general partners.

Content of partnership agreement:

 The equity that is to be contributed by each partner.
 The ratio in which profits or losses will be shared.
 The rate of interest, if any, to be paid on equity before the profits are shared.
 The rate of interest, if any, to be charged on partners drawings.
 Salaries to be paid to partners.
 Arrangements for the admission of new partners.
 Procedures to be carried out when a partner retires or dies.

Where no partnership agreement exists:

 All partners contributes equal equity
 There is no interest allowed on equity
 Partners will not be charged interest on drawings
 Profits or losses will be shared equally
 Salaries are not allowed

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 Limited Liability Partnership

A partnership maybe unlimited or limited. In an unlimited partnership, all partners are

accountable for the debts of the business. In a limited partnership there must be at least one
partner who is not limited, limited partners are not liable for the debts of the business.

Characteristics of limited partnership:

1. A limited partner’s liability for the debts of the partnership is limited to the equity they
have invested in the partnership.

2. The partners are not allowed to take out or receive back any part of their contribution to
the partnership during its lifetime.

3. The partners are not allowed to take part in the management of the partnership business.

4. The partners cannot all be limited: as mentioned above, there must be at least one partner
with unlimited liability.

Special accounts for Partnerships:

1. APPROPRIATION ACCOUNT
 Continues from the income statement and shows how the profit or loss will be treated
between the partners.

2. EQUITY ACCOUNTS
Each of the partners will have their own equity accounts.
 Fixed equity accounts: The equity accounts balances do not change unless a partner
contributes more equity. The items in the Appropriation account now get entered into
the partner’s current account.
 Fluctuating equity accounts: All the items in the appropriation account are entered
in the equity accounts of the partners, the Drawings account of each partner is closed
off to the partner’s equity accounts.

3. CURRENT ACCOUNTS
 Each partner has their own Current Account if the equity accounts are fixed.
 These accounts are used to complete the double entry from the Appropriation account
(salaries, interest on equity, interest on drawings, profit share).

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 Classifications:

Income Statement

Appropriation Account

Partner’s Current Account

Partner’s Equity Account

Statement of Financial Position

Equity contributions: Partners need not contribute equal amounts of equity. What matters is
how much equity each partner agrees to contribute.
Interest on equity: An agreed rate of interest credited to a partner to compensate for unequal
equity contributions.
Interest on drawings: Interest charged to partners to discourage them from excessive
drawings.
Share of Profit/Loss: Profit/losses do not have to be shared in the same ratio as equity
contributed; it is the amount calculating after apportioning all the expenses.
Partnership salaries: Agreed amounts payable to partners in respect of duties undertaken by
them.
Interest on loan: Interest on loan to any partner is the amount treated as business expense in
the income statement and will be shown in the credit side of the current account since
business is liable to partner.
Bonus/Commission: Is apportioned to individual before sharing of profit in the
Appropriation account and treated on the credit side of the current account.
Goodwill: An intangible non-current asset and may be defined as the value of the reputation
of a firm.

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 Appropriation account for the year ended 31 December 20XX
£ £ £
Profit for the year 30000
Add: Interest on drawings:
X 2000
Y 3000 5000
35000
Less: Interest on equity
X 4000
Y 2000 6000
Less: Salaries
X -
Y 5000 5000 (11000)
Balance of profit 24000
Share of profit/loss: (According to ratio)
X (50% of 24000) 12000
Y (50% of 24000) 12000 24000

Partners’ Equity Account (fixed)

Date X Y Date X Y
Balance c/d *** *** Balance b/d *** ***
Transfer from current account *** ***
*** *** *** ***
Balance b/d *** ***

Partners’ Current Account

Date - Date +
X Y X Y
Balance b/d (debit balance)* *** *** Balance b/d (credit balance) *** ***
Share of loss* *** *** Share of profit *** ***
Drawings (cash + goods) *** *** Interest on equity *** ***
Interest on drawings *** *** Salary *** ***
Salary (paid) *** *** Interest on partner’s loan *** ***
Transfer to equity account *** *** Bonus or commission *** ***
Balance c/d (credit balance) *** *** Balance c/d (debit balance) *** ***
**** **** **** ****
Balance b/d* *** *** Balance b/d *** ***

Note: The balance brought down on the credit side is the amount owed by the business to
partner. If the balance b/d falls on the debit side then this would be the amount owing to the
business by the partner. This usually happens when the partner takes too many drawings.

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 X, Y
Statement of Financial position (extracts) as at 31 December 20XX
Accumulated Carrying
Cost
depreciation value
£ £ £
Same as Sole Traders, Up to Total Assets
Total assets ***
Equity and liabilities
Equity:
X ****
Y **** ****
Current account balances (from current a/c):
X Credit balance ****
Y Debit balance (****) **** ****

Alternatively:
Current Account: X Y
Balance b/d **** (****)
Share of profit **** ****
Interest on equity **** ****
Partner’s loan interest **** ****
Salary **** ****
**** ****
Less: Drawings (****) (****)
Interest on drawings (****) (****)
Salary paid (****) (****)
**** (****) ****
Liabilities
Non-current liabilities:
Bank and other loans ***
Current liabilities:
Trade payables ***
Other payables (Accrued exp. & Prepaid income) ***
Bank overdraft *** ***
Total equity and liabilities ***

MAHDI SAMDANI, Accounting Course Instructor. MBA, BBA (Accounting)

IGCSE & IAL (O&A LEVEL) EDEXCEL/CAIE.
Mobile: 01673869920.
E mail: ms12_acc@yahoo.com, mahdi.samdani007@gmail.com

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