DPA 20033 FINANCIAL ACCOUNTING 2/Aleza/2020

7.1 NATURE OF PARTNERSHIP BUSINESS ACCORDING TO PARTNERSHIP

ACT 1961

7.1.1 Definition :

Partnership is a business that is established by a minimum of 2 members and not more than 20
person. Partnership is defined by the Partnership Act 1961, as the relationship which exists
between person carrying on a business in common with a view to make profits.

7.1.2 Characteristics of Partnership business

The Partnership Agreement is a written agreement which include the terms of the partnership
to avoid any problem occurred. However, the partnership can be form without the above
agreement but to rely on Partnership Act 1961.
Important details to be mention in the Partnership Agreement are:
a. Name of firm/partnership together with partner’s name.
b. Type of business and business address
c. The amount of capital contributed by each partner
d. Ratio of profit/loss allocation between partners
e. Salary for active partners
f. Interest on capital and interest on loan allowed by partner
g. Interest on amount of drawing that withdraw by partnership.

If partners do not make any partnership agreement, therefore partnership agreement will be base
on regulations under Partnership Act 1961 stated as follows:

i) Profits are to be shared equally between partners

ii) Partners are not entitled to receive any interest on the capital invested in the business.
iii) No Partner shall be entitled to remuneration (salary) for acting in the partnership business.
iv) Partners are entitled to receive interest 8 % per annum on any loans advance to business.
v) Any business decision may be decide by majority of the partners.
vi) All Partner may take part in the management of the business and has access to the books of
accounts.

vii) Accounts and books must be keep at the principal place of business and be make available
to all partners. All partners are allow to keep a copy of the accounts.

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7.1.3 Types of Partnerships

1. General Partnership

A general partnership is a partnership with only general partners. Each general partner must
actively participate in managing the business and any partner may sign a contract on behalf of
the partnership. The partners must agree to major decisions, acting as a corporate board of
directors.

Since general partners are actively participate, they all must take personal responsibility for the
liabilities of the business and for debts incurred by other partners. If one partner is sued, all
partners are held liable. General partnerships are the least desirable for this reason.

2. Limited Partnerships

A limited partnership includes both general partners and limited partners. In many cases, only
one general partner who manages the business and a number of limited partners. A limited
partner does not participate in the day-to-day management of the partnership and his/her
liability is limited to his/her investment in the business.

In many cases, the limited partners are merely investors who do not wish to participate in the
partnership other than to provide capital and to receive a share of the profits. Since limited
partners do not participate in management, they are consider passive investors. This means they
cannot take partnership losses off their income tax return if they do not have other income to
offset it.

3. Limited Liability Partnerships

A limited liability partnership (LLP) is different from a limited partnership or a general

partnership but is closer to a limited liability company (LLC). In the LLP, all partners have
limited liability. LLP's are often form by groups of professionals who want to pool their
resources and save money by sharing space.

An LLP combines characteristics of partnerships and corporations. As in a corporation, all

partners in an LLP have limited liability, from errors, omissions, negligence, incompetence, or
malpractice committed by other partners or by employees. If any partners involved in wrongful
or negligent acts, are still personally liable, but other partners are protect from liability for
those acts.

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Personal injury law firms commonly make use of this type of business partnership. Other
businesses that can benefit from forming a limited liability partnership include:
 Accounting firms
 Architectural business

 Healthcare practices

Ownership/ members:

 2 – 20 members for common business.

 2 – 10 members for banking.
 2 – more than 20 members for professional firm such as Legal firm, Audit firm.

7.1.4 Advantages and Disadvantages of Partnership

7.2 Types of Accounts for Partnership

Generally similar to the accounts of sole traders. But due to the existence of more than one
partner, the appropriation of profit needed to show for each partner. The sequence of partnership
accounting records are as follow :

1.Statement of Comprehensive Income

2.Appropriation of Statement of Comprehensive Income
3.Current Account and Capital Account
4.Statement of Financial Position

Capital Account record any fixed capital contribution to partnership by partner.

Capital Account – Partner A

Jan. 1 Bank xxx

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Current Account - prepared to separate any capital contribution from any transaction due to
partner’s drawing, interest on drawing, interest on capital, interest on loan, salary, bonus and
profit shared.

Current Account – Partner A

Drawing xxx Bal b/d xxx

Interest on drawing xxx Interest on capital xxx
Bal c/d xxx Interest on loan xxx
Salary (accrued only) xxx
Bonus (accrued only) xxx
Profit shared xxx

xxxx xxxx

Appropriation of Statement of Comprehensive Income

Any other allocation of profits to the partners will be recorded in the appropriation Statement of
Comprehensive Income. It is the final part of the income statement for partnership business.

Appropriation of Statement of Comprehensive Income for the year ended ……….

RM RM
Net Profit for the year xxx
Add:
Interest on Drawings
Partner A xx
Partner B xx xxx
xxx
Less:
Interest on Capital :
Partner A xx
Partner B xx (xxx)

Salary (xxx)

Bonus (xxx)
Profit to be shared xxx

Profit shared :
Partner A xx
Partner B xx xxx

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Interest on capital

Interest on capital is compensation given to partners based on the capital they have contributed
will be deducted from the net profit before the profit is distributed among partners. The
partnership agreement will state the interest rate of each partner.

Salaries and bonus

It is compensation for the active partner’s service contribution in partnership business and will
charged to the Appropriation of Statement of Comprehensive Income.

Interest on Drawing

Interest on drawing is charged on partners who withdraw money or goods from partnership
business for personal used. Interest on drawing is revenue to partnership business and is added
to profit before distributing the profit among partners.

Statement of Financial Position

Similar to the sole trader Statement of Financial Position . The difference is due to to the way
capital balance of each partner is reported in the Statement of Financial Position .

Statement of Financial Position as at ……

Non Currrent Asset

Owner’s Equity
Capital A XXX
Capital B XXX
Capital C XXX

Current Account A XXX

Current Account B XXX
Current Account C XXX

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Example

Bong, Cheng and Kaw were partners of BCKs Partners sharing profits and losses equally. Their
partsnership agreement includes:

a) Salary to Cheng is RM 7,200 per annum

b) Interest on capital is at 5% per annum
c) Interest on drawings is at 10% per annum
d) The Interest rate on the loan by partner is 8% per annum

Partnership books show the following balances as at 31/12/2019

Capital Account Current Account Loan Account

RM RM RM
Bong 35,000 925 10,000
Cheng 30,000 772 5,000
Kaw 20,000 225 (debit) -

On 1/7/2019, Kaw was inject additional capital by cash RM10,000. Net profit for the year ended
31/12/2019 was RM 38,100. Total salary paid to Cheng during the year was RM 6,000.

Drawing by partners during the year were as follow:

RM
Bong 16,630
Cheng 17,240
Kaw 8,130

You are required to prepare:

a) Appropriation Statement of Comprehensive Income for the year ended 31/12/2019

b) Current account for each partner.
c) Statement of Financial Position extract as at 31/12/2019.

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Answers

Bong, Cheng and Kaw

Appropriation Statement of Comprehensive Income for the year ended 31/12/2019

RM RM
Net profit for the year 38,100
(+)
Interest on drawings:
Bong 1,663
Cheng 1,724
Kaw 813 4,200
42,300
(-)
Interest on capital:
Bong 1,750
Cheng 1,500
Kaw 1,250 (4,500)
Salary - Cheng (7,200)
PROFIT TO BE SHARED 30,600

Profit shared:
Bong 10,200
Cheng 10,200
Kaw 10,200 30,600

Current a/c
Bong Cheng Kaw Bong Cheng Kaw
RM RM RM RM RM RM
Bal b/d - - 225 Bal b/d 925 772 -
Drawings 16,630 17,240 8,130
Interest on 1,663 1,724 813 Interest on 1,750 1,500 1,250
drawings capital
Interest on loan 800 - 400
Salary - 1,200 -
Profit shared 10,200 10,200 10,200
Bal c/d _____ _____ 2,682 Bal c/d 4,618 5,292 _____
18293 18964 11,850 18293 18964 11,850
Bal b/d 4,618 5,292 Bal b/d 2,682

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Bong, Cheng and Kaw

Statement of Financial Position as at 31/12/2019
RM RM
Owner’s Equity
Capital:
Bong 35,000
Cheng 30,000
Kaw 30,000

Current Account:
Bong (4,618)
Cheng (5,292)
Kaw 2,682

Exercise 1

Syira and Aina agreed to establish a business based on partnership. They agreed to share profit
and loss equally. Their agreement stated the following:

1. RM 500 montly salary to be paid to Aina.

2. Interest of 10% per year paid on capital contributed by partners.
3. Interest of 5% is charge on drawing.

Capital account and current account showed the following balances on 1 January 2018
Capital Account(RM) Current Account(RM)
Syira 100 000 2 920 (Cr)
Aina 60 000 2 250(Cr)

Profit and loss account on 31 December 2018 showed net profit of RM 77 000.

Total drawings by partners on 31 December 2018 are as follows:

Drawing (RM)
Syira 33 000
Aina 34 400

You are required to prepare:

1. Appropriation Statement of Comprehensive Income for year ended 31/12/2018
2. Current Account of each partner.

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Exercise 2

Luqman, Hakim and Amir are in partnership sharing profits in the ratio 3:2:1. The partnership
agreement includes:
1. Interest on capital is at 12% per annum
2. Salary to Amir is RM 8,000 per annum
3. Interest on drawings is at 6% per annum
4. The interest rate on the loan by Luqman is 6% per annum

Additional Information:
a. Net profit for the year ended 31 December 2019 was RM 26,530

b. Capital balances as at 31 December 2019 were:

RM
Luqman 22,000
Hakim 10,000
Amir 8,000

c. Current accounts balances as at 31 December 2019

RM
Luqman 5,500
Hakim (2,700)
Amir 3,800

d. Drawings by the partners during the year were:

RM
Luqman 8,000
Hakim 6,000
Amir 9,000

e. Loan from Luqman RM 8,000

You are required to prepare:

a) Appropriation Statement of Comprehensive Income for the year ended 31/12/2019
b) Current account for each partner.
c) Statement of Financial Position extract as at 31/12/2019.

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Exercise 3

Afiq and Anas are partners of a trading firms sharing profits and losses in the ratio of 2:3. The
agreement between them provides that:
a. Afiq and Anas are entitled to salaries of RM 3,000 and RM 2,000 per annum
respectively
b. Interest on drawings is at 2% per annum.
c. Interest on capital is at 5% per annum

The capital and current accounts for partners as at 1 January 2017 are as follows:
Capital Account(RM) Current Account(RM)
Afiq 20,000 ( 2,110) Dr
Anas 25,000 3,450 Cr
Drawings made by the partners were as follows:
Afiq RM 4,350
Anas 5,100

Net profit for the year ended 31 December 2017 was RM 24,400. Total salary paid to Afiq
during the year was RM 2,500.

You are required to prepare:

1. Appropriation Statement of Comprehensive Income for year ended 31/12/2017
2. Current Account of each partner.

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7.3 Accounting Treatments on Admission New Partners and Retirement or Death

of Partners

When a partnership changes (admission/retirement), it is appropriate to calculate the current

value of the net assets. This will allow each partner know the current worth of their share of the
net assets.

Normally all asset will be revalue except for cash and bank. Revaluation Account will be
balance and it balance transferred to member’s capital account based on profit and loss sharing.

i) Increase : Dr Asset Account

Cr Revaluation Account

ii) Decrease : Dr Revaluation Account

Cr Asset Account
.
A) Journalize

1) Dr Asset Account 2) Dr Revaluation Account

Cr Revaluation Account Cr Asset Account
( Increasing in asset value) (Decreasing in asset value)

3) Dr Goodwill Account 1) Dr RevaluationAccount

Cr Revaluation Account Cr Doubtful debt
(Goodwill exist) (Doubtful debt exist)

5) Dr Cash /Bank Account

Cr New Partner Account
(Capital contributes by new partner)

B) Revaluation Account
RM RM
Any Asset that being decrease Any Asset that being increase
In it’s value xx In it’s value xx
Doubtful Debt xx Goodwill xx
Profit on Revaluation:
Capital A x
Capital Z x xx
______ ______
xxx xxx
===== =====

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Capital Account
RM RM
If goodwill being written off xx Bal b/d xx
Profit on revaluation xx

Journal Entries

Particulars Dr(RM) Cr(RM)

1. Asset x
Revaluation x
(Asset value being increase)
2. Revaluation x
Asset x
(Asset value being decrease)
3. Goodwill x
Revaluation x
(Goodwill being valued)
4. Revaluation x
Doubtful Debt x
(Doubtful Debt exist)
5. Bank x
New partner capital x
(Capital contributes by new partner)

7.3.1 GOODWILL

Goodwill may be referred to as an excess amount of the value of the business as a whole and the
total value of the tangible net assets. Goodwill might have existed due to various factors such as
good business location, staff customer relationship and ability to earn profits.

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Computation of Goodwill

Simple average method

On 1 January 2018, the goodwill value is equal to three years’ of average profit that was
calculated 5 years ago. The following are profits in the period of 5 years:
2004 – RM 60 000 2007 - RM 100 000
2005 - RM 80 000 2008 - RM 130 000
2006 - RM 90 000

Calculate the goodwill value.

Total profits of 5 years = RM(60 000+80 000+90 000+100 000+130 000)

= RM 460 000

Average Profit = RM 460 000 / 5 Goodwill value = RM 92 000 x 3

= RM 92 000 = RM 276 000

Based on Super Profits

Super profits are what left of the net profits after allowances have been made for any salary to
the partners and interests that would have been earned if their capital had been invested
elsewhere. The annual super profits is then multiplied by an agreed number.
Example
Assume total salaries paid to Along, Angah and Alang was RM30,000. Their capital employed
were RM550,000 and return on capital employed was 20% per annum. Net profit for the year
ended 31 December 2016 was RM200,000. Goodwill was taken as equal to 4 years purchase of
annual super profit on retirement of Angah. Required to calculate the amount of goodwill.

Solution
RM RM
Annual net profit 200,000
(-)
Salary of partners 30,000
Interest on capital 110,000 (140,000)
(20%xRM550,000) 60,000
=======
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Goodwill = RM 60,000 x 4 = RM240,000

Example 1
Ahmad and Shakir are partners in partnership. Profits and losses are to be share in the ratio 3:2.
The following is a summarized balance sheet of the partnership as at 31 December 2017

Statement of Financial Position as at 31 December 2017

Non-Current Asset RM RM RM
Motor Vehicles 25,000
Furniture & Fitting 8,500

Current Assets
Stock 22,800
Debtor 9.300
Bank 3,300
35,400
Current liabilities
Creditor 8,900
Short term loan 10,000 (18,900)
Working capital 16,500
50,000

Owner’s Equity
Capital : Ahmad 30,000
Shakir 20,000
50,000
On 1 January 2018, they agreed to admit a new partner, Muru with the following agreement
terms:

a) Motor vehicles was revalue at RM 20,000. Furniture & fitting was revalue at RM 8,000
and Stock was revalued at RM 24,000.
b) Goodwill is valued at RM 5,000.
c) Provision for doubtful debt is valued at 5% from total debtor.
d) Murugadas contribute RM 30,000 as capital.
e) Shortterm loan will be paid after admission of Murugadas.

You are required to prepare:

(a) Journal transaction.
(b) Revaluation Account, Capital Account and Bank Account
(c) Statement of Financial Position after admission of a new partner.

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Solution:
General Journal
Particulars DR(RM) CR(RM)
1 Stock 1200
Revaluation 1200

2 Revaluation 5500
Motor Vehicle 5000
Furniture & Fitting 500

3 Goodwill 5000
Revaluation 5000

4 Revaluation 465
Prov. Doubtful Debt 465

5 Bank 30000
Murugadas 30000

Revaluation a/c
RM RM
Motor vehicle 5,000 Stock 1,200
Furniture&Fitting 500 Goodwill 5,000
Prov.Doubtful debt 465
Profit on revalue:
Ahmad 141
Shakir 94 235
6,200 6,200

Capital A/c
Ahmad Shakir Murugadas Ahmad Shakir Murugadas
RM RM RM RM RM RM
Bal b/d 30000 20000

Revaluation:
Profit on revalue 141 94 -

Bal c/d 30141 20094 30000 Bank 30000

30141 20094 30000 30141 20094 30000

Bal b/d 30141 20094 30000

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Bank a/c
RM RM
Bal b/d 3,300 Shortterm 10,000
Capital-Murugadas 30,000 Bal c/d 23,300
33,300 33,300

Ahmad, Shakir dan Murugadas

Statement of Financial Position as at 1 January 2018

Non-Current Asset RM RM RM
Motor Vehicles 20,000
Furniture & Fitting 8,000

Goodwill 5,000

Current Assets
Stock 24,000
Debtor 8,835
Bank 23,300
56,135
Current liabilities
Creditor (8,900)
Working capital 47,235
80,235
Owner’s Equity
Capital : Ahmad 30,141
Shakir 20,094
Murugadas 30,000
80,235

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Example 2
Adam, Aryan dan Aina are in partnership sharing profits and losses in the ratio 3:2:1
respectively. The balance sheet for the partnership as at 31 December 2014 is as follows:

Statement of Financial Position as at 31 December 2014

RM RM RM
Non-Current Assets
Vehicle 14 600
Furniture 22 200
36 800
Current Assets
Inventory 5 920
Accounts receivable 21 952 27 872

Current Liabilities
Accounts payable 7 400
Bank Overdraft 9 272 16 672 11 200
48 000

Owner’s Equity
Capital : Adam 20 000
Aryan 16 000
Aina 8 000 44 000

Current account
Adam 4 000
Aryan (2 000)
Aina 2 000 4 000
48 000

On 1 January 2015, Aryan decided to retire from partnership and accepted Auni as a new
partner. Auni had to pay RM14,000 as her capital.

The following matters were agreed:

1. Goodwill was valued at RM12,000 and Goodwill account has to be opened.
2. Vehicle were revalued at RM19,400.
3. Aryan took over furniture at net book value RM5,600 and brings out cash for
RM5,000. The remaining balance in the current account is transferred to Loan
account.
You are required to:
a. Show relevants journal
b. Revaluation Account
c. Provide Bank Account
d. Prepare Partner’s Capital and Current Account
e. Prepare Statement of Financial Position as at 1 January 2015.
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Solution:

General Journal
Particulars DR(RM) CR(RM)
1 Vehicle 4,800
Revaluation 4,800

2 Goodwill 12,000
Revalution 12,000

3 Bank 14,000
Capital- Auni 14,000

Revaluation a/c
RM RM
Profit on revalue: Vehicle 4,800
Capital- Goodwill 12,000
Adam 8,400
Aryan 5,600
Aina 2,800
16,800 16,800

Bank a/c
RM RM
Capital Auni 14,000 Bal b/d 9,272
Bal c/d 272 Capital Aryan 5,000
14,272 14,272
Bal b/d 272

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Capital a/c
Adam Aryan Aina Auni Adam Aryan Aina Auni

RM RM RM RM RM RM RM RM

Furniture 5,600 Bal b/d 20,000 16,000 8,000 -

Bank 5,000 Profit 8,400 5,600 2,800 -

on
revalue

Current 2,000 Bank 14,000

a/c

Loan 9,000

Bal c/d 28,400 - 10,800 14,000

28,400 21,600 10,800 14,000 28,400 21,600 10,800 14,000

Bal b/d 28,400 - 10,800 14,000

Current a/c
Adam Aryan Aina Adam Aryan Aina

RM RM RM RM RM RM

Bal b/d - 2,000 - Bal b/d 4,000 - 2,000

Capital 2,000

Bal c/d 4,000 - 2,000

4,000 2,000 2,000 4,000 2,000 2,000

Bal b/d 4,000 - 2,000

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Adam, Aina dan Auni

Statement of Financial Position as at 1/1/2015

Non-Current Asset RM RM
Building 19,400
Furniture 16,600
Goodwill 12,000
48,000
Current Assets
Inventory 5,920
A/c Receivable 21,952 27,872

Current Liabilities
A/c Payable 7,400
Bank Overdraf 272 7,672
Working capital 20,200
68,200
Financed by:
Capital - Adam 28,400
Aina 10,800
Auni 14,000 53,200

Current Account - Adam 4,000

Aina 2,000
6,000

Non Current Liabilities

Loan 9,000
68,200

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EXERCISE 1

King and Kong are in partnership sharing profits and losses in the ratio of 2:1. The balance
Sheet as at 31 December 2010 is as follows:

Statement of Financial Position as at 31 December 2010

RM RM RM
Non-Current Assets
Premises 50 000
Motor vehicles 20 000

Current Assets
Stock 13 000
Debtors 8 000
Bank 1 000
22 000

Current Liabilities
Creditors 17 000 5 000
75 000

Owner’s Equity
Capital : King 50 000
Kong 25 000
75 000

As at this date, they decided to admit Kang as their partner and contributed capital of
RM 32 000. It was agreed that goodwill be valued at RM 9 000. In addition to this, in order to
reflect a fairer value, it was agreed to revalue the assets as shown below:

Premises RM 68 000
Motor vehicle 15 500
Stock 11 500

You are required to prepare:

1. Journal transaction.
2. Revaluation Account, Capital Account and Bank Account
3. Statement of Financial Position after admission of a new partner.

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EXERCISE 2

Param, Pany and Pakiam shared profit and loss ratio to 1:2:2 in a partnership. Their Statement
of Financial Position as at 31 May 2017.

Non- Current Assets RM

Premises 85 000

Current Assets
Stock 18 000
Debtor 12 000
Cash 10 000
125 000

Owner Equity
Capital: Param 25 000
Pany 50 000
Pakiam 50 000
125 000

Pakiam decided to retire from the partneship business on 1st June 2017 and the following
agreement was achieved:
a) The following assets were revalued:
 Premises is valued at RM 100 000
 Stock is valued at RM 22 000
 Debtors is valued at RM 10 000
b) Goodwill is valued at RM 8 000
c) The partnership business paid Pakiam RM 4 000 and the balance will keep in the
business as loan with interest 10% per annum.
d) Param and Pany agreed the goodwill to be written off immedietly after Pakiam
retirement.

You are required to prepare:

1. Revaluation Account, Capital Account and Bank Account
2. Statement of Financial Position after Pakiam retirement.

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EXERCISE 3

Aman, Bakar and Cheng shared profit and loss equally in a partnership. Their Statement of
Financial Position as at 31 October 2018.

Aman, Bakar and Cheng

Statement Financial Position as at 31 October 2018

Non-Current Assets RM RM
Land and Building 116 000

Current Assets
Stock 18 000
Debtors 12 000
Bank 50 000
80 000
Current Liabilities
Creditors (16 000)
Working Capital 64 000
180 000
======

Financed by:

Owner’s Equity
Capital : Aman 60 000
Bakar 60 000
Cheng 60 000
180 000
=======
Additional Information:

On 1st November 2018, Cheng decided to retire from their partnership and the following
agreement was achieved:
1. The following assets in the partnership must be revalued:
 Land and building is valued at RM 130 000
 Stock is valued at RM 16 000
 Debtors is valued at RM 10 000
 Goodwill is valued at RM 20 000
2. Aman and Bakar are required to contribute RM 16 000 in cash each in the partnership
bank account.
3. The total amount to be paid to Cheng on his retirement is settled by check.
4. Aman and Bakar agreed that goodwill to be write off in their new partnership.

You are required to prepare:

1. Ledger entries to record all the above transactions
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2. Statement of Financial Position as at 1st November 2018.

EXERCISE 4

Ani, Su and Yati are partners in partnership. Profits and losses are to be share in the ratio 3:2:1.
The following is a Balance Sheet of the partnership as at 30/6/2019 adalah :
Statement of Financial Position as at 30/6/2019

Non Current Asset RM

Premises 120,000
Motor Vehicles 86,000
Office equipment 32,000
238,000
Current Assets
Stock 12,500
Debtor 2,500 15,000

Current Liabilities
Creditor 3,400
Bank Overdraf 3.200 6,600
Net Current Asset 8.400
246.400
Financed by:

Capital - Ani 90,000

Su 70,000
Yati 50,000 210,000

Current Account - Ani 19,000

Su 14,600
Yati (2,200) 31.400
241,400
Non Current Liabilities
Loan- Yati 5.000
246.400

Yati decided to retire from the partnership on 1/7/2019. Ani and Su agreed to continue the
partnership and shared profit and loss in the ratio 3:2. The following agreement between them
provide that :

1) The assets were revalued as follows :

Premises RM180,000
Motor Vehicles RM 65,000
Office equipment RM 28,000
Stock RM 13,600
2) Provision for doubtful debt is valued at 4% from total debtor.
3) Goodwill is valued at RM 18,000 but not maintain in the partnership’s books.
4) They agreed to transfer the Loan Account to Yati’s Capital Account. The Partnership agreed
to paid RM 20,000 for Yati and any balance due to her Capital Account will be treated as
loan to the partnership.
5) Ani and Su are required to contribute RM 12,000 respectively as additional capital.

You are required to prepare:

a) Revaluation Account
b) Goodwill Account
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c) Partners’ Capital Accounts

d) Statement of Financial Position after retirement of Yati

7.4 DISSOLUTION OF PARTNERSHIP

7.4.1 RULE OF GARNER vs MURRAY

Rule of Garner vs Murray is used as a guideline in partnership bankruptcy process. If a partner

is found bankrupt and cannot settle any decrease in current capital account, the partnership is
dissolved.
According to Garner vs Murray Rule: The loss on account of insolvency of a partner is a
CAPITAL loss which should be borne by the solvent partners in the ratio of their capitals
standing in the Statement of Financial Position on the date of dissolution of the firm.

Example

Jon, Juan dan Johan are partners in the partnership sharing profit and losses equally. The
following is the Statement of Financial Position as at 31 December 2016.

Statement of Financial Position as at 31 December 2016

Non-Current Assets RM RM
Office Equipment 35,000

Current Assets
Stock 8,000
Debtors 6,000
Bank 2,000
16,000
Current Liability
Creditors 6,000 10,000
45,000

Owner’s Equity
Capital : Jon 24,000
Juan 16,000
Johan 5,000
45,000

They decided to dismiss their partnership on 31 December 2016. The office equipment and
stocks were sold RM26,000 and debtors were realized RM4,000. The expenses of dissolution
were RM2,000. Ehsan is insolvent and therefore unable to contribute anything

You are required to prepare:

a) Realization Account
b) Partners’ Capital Accounts
c) Bank Account

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DPA 20033 FINANCIAL ACCOUNTING 2/Aleza/2020

Answer

Realisation A/c
RM RM
Office Equipment 35,000 Bank - Office equipment
Stock 8,000 and stock 26,000
Debtors 6,000 Bank -Debtors 4,000
Bank - Dissolution 2,000 Loss on Realisation:
Capital Jon 7,000
Capital Juan 7,000
Capital Johan 7,000
51,000 51,000

Capital a/c
Jon Juan Johan Jon Juan Johan

RM RM RM RM RM RM

Bal b/d - - - Bal b/d 24,000 16,000 5,000

Realisation 7,000 7,000 7,000

Capital - 1,200 800 Capital –

Johan Jon 1,200
Juan 800

Bank 15,800 8,200

24,000 16,000 7,000 24,000 16,000 7,000

Bank A/c
RM RM
Bal b/d 2,000 Creditor 6,000
Realisation - Realisation -
Office Equipment
& stock 26,000 Dissolution 2,000
Debtors 4,000 Capital -
Jon 15,800
Juan 8,200
32000 32000

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DPA 20033 FINANCIAL ACCOUNTING 2/Aleza/2020

EXERCISE 1

Azam, Kamal and Ehsan are partners in the partnership sharing profit and losses in the ratio of
3:2:1 respectively. They decided to dismiss their partnership on 30 June 2019. The following is
the Statement of Financial Position as at 30 June 2019.

Statement of Financial Position as at 30 June 2019

Non-Current Assets RM RM
Office Equipment 35,000
(-) Acc. Depreciation 8,000 27,000

Current Assets
Stock 18,000
Debtors 15,000
Cash 5,000
38,000
Current Liability
Creditors 31,000 7,000
34,000

Owner’s Equity
Capital : Azam 15,000
Kamal 17,800
Ehsan 1,200
34,000

Cash received from sold of assets and collection from debtor amounted to RM 42,000. All
liabilities were paid. Ehsan is insolvent and therefore unable to contribute anything.

You are required to prepare:

d) Realisation Account
e) Partners’ Capital Accounts
f) Cash Account

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DPA 20033 FINANCIAL ACCOUNTING 2/Aleza/2020

7.4.2 Realization Account and Record the closure the Books of Partnership

A partnership is legally dissolve when any partner leaves due to retirement or death or a new
partner is admitt into the business. When a business ceased to exist, the partners are entitled to a
repayment of the capital contributed to set up the business

The Step to record dissolution are as follows:

No Transaction DEBIT CREDIT

1 Close all Asset Account Realisation Asset

2 Close all liability Account Liability Cash/Realisation-Discount
3 To record amount realised Cash / Capital/ Share Realisation
from sold of asset

4 To record realisation expenses Realisation Cash

5 Transfer the balance of
Realisation Account:

i) If Profit Realisation Capital

ii) If Loss Capital Realisation
6 Close Capital Account Capital Cash

Realization Account

Realization Account
RM RM
All assets from Balance Sheet xx Accumulated Depreciation xx
Cash/ Bank- realization expenses xx Creditors- discount xx
Whether
Profit on realization: Cash/ Bank from sales of
Capital :
Assets xx
A x
B x xx Or
Assets being took over by
Any Partner xx
Or
Paid by shares xx
______ ______

===== =====

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DPA 20033 FINANCIAL ACCOUNTING 2/Aleza/2020

Partner Capital Account’s- A

RM RM
Assets being took over xx Bal b/d xx
Cash / Bank xx Profit on realization xx
Creditor being took over xx

______ ______

===== =====

Cash / Bank Account

RM RM
Bal b/d xx Realization expenses xx
Realization – Sales on assets xx Creditor xx
Capital :
A
B
_____ ______

===== =====

Example
Alya and Arif, who share profits and losses equally, decide to dissolve their partnership as at
30th June 2016. The following extracts taken from the Statement of Financial Position prior to
dissolution of the partnership.

Non-Current Assets RM RM
Buildings 80 000
Furniture 2 900
82,900
Current Assets
Debtors 8,400
Cash 600
9,000
Current Liability
Creditors (4,100)
4,900
87,800
=====
Owner Equity
Capital account: Alya 52,680
Arif 35,120
87,800
=====
Additional information:
a) The debtors were realized RM 8,200; the buildings RM 66,000 and furniture RM 1,800.
b) The expenses of dissolution were RM 400.
c) Discounts totaling RM 300 were receive from Creditors.

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DPA 20033 FINANCIAL ACCOUNTING 2/Aleza/2020

You are required to prepare Realization Account, Capital Partners Account and Cash
Account.

EXERCISE 1

Azah, Ana and Aini are partners in the textile company. They share their profit and loss at the
rate 3:2:1. At 31st December 2017, they decided to terminate their partnership. Below are the
partnership’s Statement of Financial Position at the date of termination:

Statement of Financial Position as at 31st December 2017

Non-Current Assets RM RM

Premises 50,000

Fittings 20,000

(-) Acc.Depreciation 4,000 16,000

Vehicles 22,000
(-) Acc. Depreciation 8,000 14,000
80,000
Current Assets
Stock 2,000
Debtors 16,500
Bank 8,500
27,000
Current Liability
Creditors 7,000 20,000
100,000

Owner’s Equity
Capital : Azah 50,000
Ana 30,000
Aini 20,000
100,000

Followings are the partnership’s termination process:

a. Fittings were taken over by Azah at RM 14,000, while Ana took over vehicles at
RM 12,000
b. Premises were sold at RM 60,000 and stock was sold at RM 3,500.
c. The collection from debtors were RM 15,000
d. The total payment to creditors were reduced up to 5% discount.
e. Realization expenses were RM 2,000

You are required to prepare:

1) Realization Account
2) Capital Account for each partner
3) Bank Account
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DPA 20033 FINANCIAL ACCOUNTING 2/Aleza/2020

EXERCISE 2

Dewi and Ratna are partners in the partnership, sharing profits and losses equally. The
Statement of Financial Position as at 31 December 2018 was as follows.

Statement of Financial Position as at 31 December 2018

Non-Current Assets RM RM RM

Office Equipment 3,200

Machinery 12,100
15,300
Current Assets
Stock 7,400
Debtors 2,320
(-) Prov DD (20) 2,300
Bank 12,300

22,000
Current Liability
Creditors 700 21,300
36,600

Owner’s Equity
Capital : Dewi 18,600
Ratna 17,000
Current Account:
Dewi 800
Ratna 200
36,600

On 1 January 2019, due to disagreement over business matters, the partnership had to be
dissolve. The following matters were agreed.

1) The following assets were realised :

a) Office Equipment - RM 10,000.
b) Machinery - RM 12,300
c) Debtor - RM 2,240
d) Stock - RM 7,60
2) All liabilities was paid in full including accrued advertising expense amounted RM 200
which not record in any books. Discount totalled RM 20 was received from creditors.

3) Dissolution expenses amounted to RM 3,200.

You are required to prepare:

a) Realisation Account
b) Partners’ Capital Accounts

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DPA 20033 FINANCIAL ACCOUNTING 2/Aleza/2020

c) Bank Account
EXERCISE 3

Jaja and Poozi were partners in a partnership sharing profit and losses in the ratio of 1:3. The
Statement of Fiancial Position as at 31 December 2018 was as follows:

Statement of Financial Position as at 31 December 2018

Non-Current Assets RM RM
Land and Building 1,220,000
Vehicles 310,000
(-) Accumulated Depreciation (130,000) 180,000

Current Assets
Inventories 38,000
Debtors 65,000
Bank 27,000
130,000
Current Liabilities
Creditors (52,000) 78,000
1,478,000
=======
Capital Account:
Jaja 370,000
Poozi 560,000 930,000

Current Account:
Jaja 328,000
Poozi 220,000 548,000
1,478,000
=======

On 1st January 2019, Jaja and Poozi decided to dissolve the partnership. The following matters
were agreed:

A. Land and building were realized for RM 1,380,000 and vehicles were realized for
RM 92,000
B. Jaja took over the inventories at the agreed price of RM 29,000
C. Amount collected from debtors was RM56,000
D. Trade creditors had agreed to receive RM50,000 as settlement.
E. Dissolution expenses amounted to RM 2,000

You are required to prepare:

1. Realisation Account
2. Partners’ Capital Accounts
3. Bank Account

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DPA 20033 FINANCIAL ACCOUNTING 2/Aleza/2020

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