Gyo.) Partnership accounts LEARNING INTENTIONS In this chapter you will learn how to: * explain why people form partnerships * calculate the profit shares as set out in a partnership agree! * apply the Partnership Act 1890 * prepare partnership capital accounts and current accounts * prepare the partnership appropriation account to distribute profit * prepare the statement of profit or loss and statement of financial position for tnership * evaluate the advantages and disadvar .ges of partnerships, including the disadvantage of unlimited liata Mahendra’s clothing company i anufacturing men’s Mahenclra has run his own business mi clothing for a number of years. He met an old fiend Duleep who owns his own business manufacturing and selling men’s shoes. The friends agreed that Seting up their own businesses had boon» good decision although being a sole trader was hard wor and stressful The two friends discussed the possibilty of joining their businesses together and forming a partnership. Both ‘men agreed to think about it some more. As the weeks passed, Mahendra decided he really iscussed the liked the idea and wanted to discuss it some more dra and his fiend oiscusse with Duleep. Figure 18.1 Maree ‘businesses together to form | possibility of joining Discuss ina pair or a group: Se ee + Why might Mahendra and Duleep find operating 2 arenes a8 sole traders hard work and stressful? ip? * What might be the benefits of joining together as a partnership + What might be some of the disadvantages of forming a partnership’ 18.1 What are partnerships? {In & partnership there is a need to ensure thatthe partners are in agreement about ae Hehts and responsibilities and how the partnership is to operate. The main issues include: partnership: two or more people carrying on a business together with a view to making a profit. ‘+ how much capital each person will bring to the partnership ‘+ the roles that willbe carried out by each partner ‘+ how the profits will be be shared partnership agreement: an agreement, usually | in writing, setting out the terms of the partnership. Partnership Act 1890: the rules that govern a partnership in the absence of a formal Partnership agreement * how new partners will be admitted if the partnership expands * what happens when a partner leaves, reties ot dies —or the whole partnership is dissolved * how decisions will be made and disputes resolved. cram, Parnership grecment is dravn upto ensue that al partners know thei rights ane responsibilities and how the busines wll operate day-o-day. The agreement ot be in aka egal by deed (a formal egal document, although verbal agreements ce aaa sso Advantage of having partnership agreement is that many dieeeace cat resolved without the need to involve the courts, oe Where there is no partnership agreement, some guidance is 1890. This chapter will largely concentrate on the fina the appropriation (sharing out) of the profit or losses. Unle States otherwise, the main provisions of the Partnership Act 1890, are as * All_partners are entitled to contribute equally to the * Partners are not entitled to interest on the c * Partners are not entitled to salaries, ial issues surrounding capital and the partnership agreement follows: 246 >1 18 Partnership accounts AS Level 1 avers are not to be charged interest on their dra porns wil share Profits and losses equa, ] raners are entitled to interest at 5% per ei ‘ntum on loans they make to 182 Advantages and disadvantages of artnershi rea number of advantages and disadvantages th f oe Se at ean arise from being in ‘The capital invested by the partners is often more th re than can be raised by a sole trader. partners are likely to have a wider ran, eee € of know sunning a business than a sole trader. ge of knowledge, experience and expertise in ete (orate) Sreater range of services to its customers ‘The business does not have to close down or be run by in Thence fone of the partners the other paren ois esenet ain he Losses are shared by all partners. pisadvantages |, Apartner doesn’t have the same freedom to act independently as a sole trader does — decisions may have to be agreed that may be a at may be a problem if the partners hav diferent views on how the business should develop ad operate. a «Partners generally have ‘unlimited liability’, which means that they are personally responsible for making good on all losses and debts of the business ~ tis can extend to their losing personal assets. + Apartner may be legally liable for the acts of the other partner(s), even if those acts ‘were committed without all of the partners’ knowledge. 18.3 The appropriation account Inparinerships, the division of the profit earned (or loss incurred) between the partners can beshown by preparing an appropriation account. The appropriation account is a continuation of the statement of profit or los. It begins vith the profit or loss for the year brought down from the statement of profit or loss, The {dling methods of dividing profits between partners must be treated as appropriations of profit in the appropriation account, I theres no partnership agreement then profits and losses are shared equally. There sno other appropriation of profit. However, if the partners draw up a partnership agreement, then the following have to be considered: * interest om partners’ drawings * partners’ salaries * interest on partners’ drawings interest on partners’ capital share of the residual profit. appropriation account: an account prepared after the statement of profit or loss that show how the profit for the year is divided between each partner. appropriation: the sharing out of something - in this ‘case, the profit made by the partnership.EBOOK TING: COURS! > _ CAMBRIDGE INTERNATIONAL AS & A LEVEL ACCOU! as business. The Riiness entity: A busines ia separate lege entity from the over ofa business. The to the persons a tir ‘to the business and not to yn dealing Spercdng os once TON Toe eae inane vm ‘with practical issues such as the appropriation of profit? Interest on partners’ drawings 10 deter partners from Interest on drawings operates as type of ‘ine’, whic is designed to deter pat taking excessive amounts of money out ofthe business interest on partnery drawings: a charge or fine imposed oe partners, usually 2g ercentage of dray, designed to cata" partners from remoyi too much mons the business. Partner's salaries A Partner may carryout a large proportion of the day-to-day work Gor inas ded for it. One solution is for that partner to have a larger share of tl oe aoe [However the profit share could become the ‘loss share’, This would mean tha lo Going all of the work would be paying more if, through no fault of their own, Y fom ae partner's salary: oo hare of the partner CAMBRIDGE INTERNATIONAL AS & A LEVEL ACE spent to show the If there are more than three or four partners it might be more accounts separately. would look Hike thi ‘The capital accounts in the absence of any major changes $ $s 0000 80000 balance b/d 4 180000 j000 80000 ee 0000 80000 a 80000 42100. | Closing balance b/d 008 a pital and liabilities The bottom half ofthe statement of ancl postion that shows the capital ‘would look lke this $s Capital and liebilities: Copia ‘Wayne Michael Cumrent = Sons 80000 ae . 12100 : es 149500 Current liabilities: Trade payables ‘ Total capital and liabilities : Note: Wayne has a debit balance on his current account and this is shown as a negative figure in the statement of financial position, Suppose there had been a partnership agreement that specified the following: 1 Profits are to be shared 30:70. Interest on drawings is to be charged at 6%. 2 3 Interest on capital is to be paid at 5%. 4) Wayne is to be paid a salary of $15000, Debit balances on current accounts are shown as negative figures on the statement of financial position,prot forthe Year interest on drawings: spay (8% = 16000) prchae (6% * 24000) tess Appropriation of profit sorest on capita {6% * 60000) je! (5% 80000) saaies: Wayne ‘available for distribution proft share (30:70): Wayne Michael Note: although not a movement nailable for distribution. ‘The current accounts would look like this: Closing balance c/d 12340 32060 37780 Closing balance b/d 2840 Note: the capital account will not have been affected in through the current account. Ctoeestas eee ee $ Opening balance b/d Opening balance b/d Drawings Interest on capital 3000 Interest on drawings 960 1440. | Salaries 15000 Profit share 11220 Closing balance bd _2840 32060 Closing balance b/d BA | tocctoue ree iSapennersip Spearan her Frpepinory ra muon, | eee eos ocits oer 7000) 52400 15000) 37400 (37400 Rewer $ 7600 4000 0 26180 37780 12340 any way because all appropriations BO , 251)SEBOOK INTING: COUR’ | > _ CAMBRIDGE INTERNATIONAL AS & A LEVEL ACCOU! 1 abilities ncial position that shows the capital a ‘The bottom half ofthe statement of Ould look Hike ths: ‘Copital and liabilities: Weyne Michee! 140000 ‘Copital accounts ‘60000 0008: 9500 12340 $ 5250 12100 20000 18350 The partnership made a profit of $12000 during the year ended 31 July 2020 and the partners’ drawings were Des $18000, Gallas $14200 and Terry $1540, The partnership agreement had specified the following: * Interest on drawings was to be charged at 10% per year. * A salary of $5000 was to be paid to Des and $14400 to Terry. * Interest on capital to be paid at 5% per year.i for the year Interest on drawings: {ales (10% * 14200) “ery (10% * 15400) tess Appropriation of profit Interest on capita: pes 6% * 80000) Galles (5% x 60000) ‘emy (5% x 20000) solaries: Des Terry ‘toss! available for distribution oss share (4:3:1): pes(4 « 10640) Gallas (3 « 10640) x 10640) Ten ( Notes: 12000 1800 1420 1540 _ 4760 16760 4000 3000 1000 _(8000) 8760 5000 14400 (19.400) (10640) 5320 3990 1330 10640 0 2 If the partnership had actually made a loss for the year, the appropriations would still have been honoured. The only difference would have been that the loss share figures would have been larger. 1 Even though the business has made a profit, the appropriations set out in the partnership agreement must still be honoured even after all of the profit has been distributed. The profit available for distribution has become a deficit ~ as if there was a Joss to be distributed — and so the partners’ profit shares have become ‘loss shares’.EBOOK : COURS LOUNTIN > _ CAMBRIDGE INTERNATIONAL AS & A LEVEL ACCS The current accounts would look like this aos s _ $ 1 ia Drawing yn capital 1 Imeetonchvings taro. ta) 1540,|itwestencaptel SO vey 5320 3990 1390 | Salaries . 10870 4519 Ela Bast sta fontaine) Ei) me po em) OU 3 ‘Closing balance b/d 10870 4510 Oe look like this and liabilities would Ic ‘The bottom half of the statement of financial positon that shows the capital and I Capital and liabilities: Des Galas Tery (000 Capital accounts 80000 0000 20000 Ee Current accounts (1 14510) 15480 ment accounts (10870) (4510) aaa Current abilities: Trade payables a Total capital and lables Z 3 Interest on capital is to be paid at 5%, 4 Sasha is to be paid a salary of $9000 and Fatima i Other information was available: $ $ $ =a Capital account balance 100000 25000 65000 Current account balance 12500 (credit) 1500(debi) 409 (credit) Drawings for the year 14000 10000 18000 Sasha, Fatima and Roop are in partnership. The profit for the yeer was $14000 and the Partnership agreement specified the following, 1 Profits are to be shared 50:30:20. 2 Interest on drawings is to be charged at 8%, isto be paid a salary of $130018 , cleark ly sotin 19 OUt how the pro show the curtent accounts forthe par oo to record the appropriations of clea priations of the profit” a" Setting out the enties needed show the capital section of the state, Ment of financial ial position 18.5 Partnership financial statements wa example 3 shows how the appropriati wh eral Preparation of Boe gee th capialeusent sons statements. ‘and Pavel are in partnership. The tri ial balance and of ae ance and other information at 31 March 2020 ‘Administration expenses . s = 23190 Capital account - Olga AOBSE Capital account - Pavel aco CGarent account - Olga pe Current account - Pavel Drawings - Olga 15300 Drawings — Pavel saa Fatures and fittings at cost 13250 ‘Accumulated depreciation on fixtures and fittings 3975 Inventory at 1 April 2019 12436 Loan from Olga 35000 (fice equipment at cost 18600 ‘Accumulated depreciation on office equipment 8370 Premises 90000 Fectoses 151670 ales 317120 Selling expenses, 13080 Trade payables tag Trade receivables a 86525 Wages and salaries (employees) = —= 478310 478310 ship accounts AS Level 1.1 and 1, 255 )OK couRseBO! OUNTING: > camenioce ivTERNATIONAL AS & A LEVEL ACE Debit interest on permers ion Fem in these Orprott orton net creatitto the current account, ‘Additional information at 31 Mareh 2020 1 Inventory is valued at S14 110 135 were prepa ued. of $560 were acer expenses of $5 jon fixtures and! 2 Seng xpos o 5 lng expec : ye straight-line method: 10" Depreciation i to be provided using th on office equipment repaid until 2025. 4 The oan has arate of inte ee fora sote trader foment of proft of losis produc and isnot due © the same way a Thes $ 317120 Revenue Less: Cont of sales Prise Seon 4151670 Purchases piel 164105 Less: Closing inventor qari) (149995) as 167128 Less: Expenses ‘Administrative expenses (23190 + 560) 23750 Depreciation (1325 on fixtures, 2790 on equipment) ans Interest on loan 2800 Selling expenses (13090 — 885) 12205 Wages and salaries 86525 Total expenses (129395) Profit for the year 3730 ‘The partnership agreement made the following arrangements Interest on drawings is 10%. Interest on capital is 5% 1 2 3 Pavel isto receive a salary of $1800, 4. Profits are to be shared between Olga and Pavel in the ratio of 3:2.jes: Pavel pot avaible for distribution | oft share: a (2 +1980) (21800) ‘pecurrent accounts will look like this: ‘Nate although the interest on Olga’s loan isan expense that aes been paid and so is owed to her. ‘Opening balance b/d 3720 | Opening balance b/e Inieest on drawings «1530-2490 | Interest on capital Interest on loan Drawings 15300 24900 | Salaries Profit share ‘Gosing balance id 10575 Closing balance e/d 27405 31110 iitelance bid «3840 | Closing balance bie harbor ged o Olgas eurrent account on the basi that it doesnot app 1530 2490 2600 1350 18000 11880 7920 10125 2600 2800 11880 27405 10575 37730 41750 (3950) 37800 (18000) 19800 the profit for the year, it to have already Complete the double entries from the appropriation account to the partners! ‘current accounts and transfer the end-of- year balances on the partners’ drawings accounts to their current accounts. IF the business does not use current accounts, then these entries will have to be made in the partners’ capital accounts instead.EBOOK INTING: COURS > CAMBRIDGE INTERNATIONAL AS & A LEVEL acco! "Non-current assets: Premises 00a) Fixtures and fitings Ngee Office equipment piaeey ia1e80 Current assets: ay 14110 ‘Trade receivables aoe 35 40625 Other receivables: —-*, 76015 746018 Total assets — Capital and labile: Olga Pavel Capital accounts 52000 27000 An Current accounts 10575 (840) acs 85753 Non-current liabilities: fosn Olga 35000 Current abilities: Trade payables 14165 Bank overdraft 10855 Other receivables 560 25280 146015 Total capital and liabilities18 Partnership accounts AS Level 1.1 and 1.5 alu are in partnershi 920 was a follows: Fy 'P- The tal balance and other infor ‘other information at ag | 90 acount ~ Saami ue | Beeb acount Tus oy | OE account ~ Saari a1 e0g | Spent count ~ Tuk an pangs Sam 19500 | ings - Tule Peon a1 April 2019 ted reo Tulu epayable 2026) nae 2000 «expenses woo 12828 tutor vehicles at cost ae Accumulated depreciation on motor vehicles 8220 | offce equipment at cost 13240 | Accumulated depreciation on office equipment 5296 fice expenses 19710 premises Be saces 127601 . 226983 Tade payables nae ‘ade receivables 36815 ges and salaries (employees) 41670 386053 386053 | Additional information at 31 March 2020 1 Inventory was valued at $23 592. 2 Motor expenses of $210 were prepaid and office expenses of $545 were accrued. a Depreciation is to be provided on the following basis: 20% straight-line on office equipment and 30% reducing balance on motor vehicles. 4 The loan had a rate of interest of 7%. The partnership agreement made the following arrangements: 5 Interest on drawings was 8%. § Interest on capital was 10%. 7 Saami was to receive a salary of $18000. a Profits were to be shared between Saami and Tulu in the ratio of 1:2 259)sEBOOK UNTING: COUR’ CAMBRIDGE INTERNATIONAL AS & A LEVEL acco onus) sens profit or! for the year ended 31 March 2020. 2 Produce a statement of profit o 18 Bl BPetkae er eoeropaion acount showing coat thatthe BCT ce the your hes Been shared between te partners i parmersip agreement € Produce the curent accounts for Seam 31 March 2020. a Prepare the statement of financial position at 31 March 2020. ‘owing clearly the balances at 1d Tul sh REFLECTION posed to in a partnership (a5 0 1d ina partnership (85 opposed 0 you think that the advantages of being involve 7 pea estetele laren vantages? Why/why not? Discuss You being a sole trader), outweigh the disadvantages with another learner, What's mine is mine Mahendra and Duleep and their advisers are now discussing what should be included inthe partnership agreement. Duleep has recently inherited $100000 from an uncle and so could introduce far more assets, including the money, to the partnership. However, Duleep does not want to work so hard on a day-to-day basis while Mahendra is willing to take on more of the day-to-day responsbility It seems that there are several ways in which the profit could be appropriated - interest Con capita, salaries and share of profit - but it doesn’t seem likely that there would be an instant agreement. Who would be most likely to want interest on capital included? Why? Who would be most likely to want a salary? Why? Would the partners simply want a larger share of the profit? Why/why not? Figure 18.2: Mahendra and Duleep are discussing what should included in the partnership agreement,= 18 Partnership accounts AS Level 1.1 and 1.5 ‘The following ways of appropriating the 1 ' he profit appeared ina partnership agreement: \ me is interest on drawings, i a w Which ofthese would have appeared as debit entries in the part in the partners’ current accounts? A. iand B iandiv ¢ tiand it y anc a sepa ila a ere re $ $ 20000 credit 80000 credit Capital account 3000 credit 5000 debit Current account The partnership has made a profit for the year of $36000. How much is forthe year? ). How much is Moore's total share of the profit A $9000 B $12030 c $12255 D $1230 i Dalton and Lasenby are in partnership. Dalton is also entitled to a salary of $12000 per annum. Profits and Josses are shared 40:60. The partnership has made a profit for the year of $39000. How much is Dalton's total share of the profit for the year? AS10800 B 15600 ¢ $2280 > s27600 i) 4 Sven and Steve are in partnership. The profit for the year was $75000 and the partnership agreement specified the following. ‘A. Profits are to be shared 25:75. B Interest on drawings is to be charged at 10%. € Interest on capital is to be paid at 67%. D__ Sven is to be paid a salary of $20000.ING: COURSEBOOK NT > CAMBRIDGE INTERNATIONAL AS & A LEVEL Accol ‘Other information was availa st a ri between the partners. Ret amma tmptoe tree ee Peete era ae : appropriations of the profit. 3 a i eet bb Explain one reason why Sven may have opted for a salary rather than a large: P ‘¢ Explain rvo benefits that Sven and Steve might enin from being in a partnership. a. Bataan seneeil "After studying this chapter, complete a table li Needs Almost Ready to ie oo eked foe ‘Know that people form partnerships to combine resources or skills, share the workload and decision making or to raise more finance. Know how profits are shared when it is set out in a partnership agreement. Know where to apply the Partnership Act 1890. Prepare partnership capital accounts (that always has a credit balance) and current accounts (that can have either a debit or credit balance), Prepare the partnership appropriation account to distribute profit. I] Prepare the statement of profit or loss and statement of financial position fora partnership, Know the advantages and disadvantages of partnerships, including the disadvantage of unlimited liability