CHAPTER 2

PARTNERSHIP ACCOUNTS

14-Jun-22
 Introduction

• A partnership gives businessmen an alternative form

of business and offers various advantages which
cannot be found in sole trading/proprietorship.

• This chapter will cover the preparation of basic

partnership accounts from the formation of the
partnership right to the final accounts.
 Definition
• The partnership Act of 1961 defines a partnership as “the
relationship which subsists between person on business in
common with a view of profit”.

• People may form partnership for a variety of reasons, the

common of which are:
– A partnership is usually able to raise more capital than a sole
trader.
– Partners may contribute a diversity of knowledge,
experience and expertise in management of the business
– Partners can ‘cover’ each other during holidays and sickness
 Characteristic of a Partnership

• It is formed to make profits

• There must be at least two(2) members/partners and

maximum of twenty (20) members.
– Exceptions are professional partnership involving doctors,
accountants, solicitors, architects and others, where
membership can go up to fifty (50).

• Each partner is responsible for the liabilities of the

partnership so long as he still remains a partner of the
partnership.
– However, a partner is not liable for debts that occurred
before he joint the partnership.
 If a partner withdraws from a partnership without
giving any notice, he still be liable for the debts
incurred after his withdrawal.

 A partnership is dissolved automatically when one of

the partners dies. However, his/her descendant has
the right to his/her share.

 Each partner (except limited partners) must pay

their share of any debts that partnership could not
pay. If necessary, they have to sell their private
possessions to pay the debts. (unlimited liability)
 Profits of the partnership can be distributed in any
ways as agreed to by the partners.

 Remuneration’s and drawings of the partners could

also be arranged in any ways as agreed to by the
partners.
 Types of partnership
(Partnership Act 1961-Malaysia)

• Sleeping •Limited Liability

partner partner
• General
partner

- A partner not allowed to

take part in the management
and making decision.
-The sleeping partner is also -The partners are liable only
-Common type of partnership to the extent of their
fully liable for the partnership
-Each business partner faces same amount Capital invested
debts.
of risk as the other partner -The partners involves take part
-General partner involves in the management in the management
and decision making process.
- Liability of general partner is unlimited.
 Disadvantages of partnership

 Partners are not able to act as independently as a sole

traders.

 A partner’s plans for the direction and development

of the firm may be frustrated by the other partners.

 The number of partners is limited to 20 except for

certain professional partnership such as firm of
accountants, solicitors etc.
 A Partnership Agreement

 Every partnership should be based upon an

agreement which should be in writing to reduce the
possibility of disputes about their rights and duties
as partners.

 A partnership agreement should include reference

to the following matters such as:
 Amounts of partners’ salaries, if any
 Ratio in which profits and losses are to be shared
between the partners.
 Amount of capital to be subscribed by each
partner
 Rates of interest, if any, on partners; loans to firm
 Rates of interest, if any, to be charge on partners’
capital
 Rates of interest, if any, to be charge on partners’
drawings
 Where no Partnership Agreement exist

The following provisions apply only insofar as they are

not covered in the partnership agreement:-
 All partners may contribute equally to the capital of the
partnership
 Partners not entitled to : (a) interest on capital (b) salaries
 Partners not to be charged interest on drawings
 Partners to share balance of profits and losses equally
 Partners who put a sum of money into a partnership is excess
of the capital they have agreed to subscribe are entitled to
interest at the rate of 5% p . a on such an advance.
 Formation of Partnership

 Register to ROC

 Fill certain form including partnership agreement as

agreed by all partners.
 Special features of Partnership Accounts

 For each partner:-

 Capital account
 Drawings account
 Current account

 A Profit and Loss Appropriation Account

 Treat the balances on partners’ capital accounts as
fixed.
 Unless a question specifically requires it, do not post
interest, salaries or profit shares to the capital accounts.

 Debit Interest on Partners’ Loans to profit and loss

account:
 it is an expenses of the firm, not an appropriation of
profit and should not be debited in the appropriation
account.
❖When a question gives the net profit before charging
interest on loans;
 The interest must be deducted before the balance of net profit
brought to appropriation account.
Accounting entries Debit Credit

Interest on partners’ loans to

firm Profit & Loss a/c Partner’s Current a/c

Interest on drawings Partner’s Current a/c Appropriation a/c

Interest on capitals a/c

Partners’ salaries Appropriation a/c Partner’s Current

Shares of profit Appropriation a/c Partner’s Current a/c

Partners’ drawings Partner’s Current a/c Partners’ Drawings a/c

 Distribution Profit

 Profit distributed among partners as stated in

agreement.

 If the agreement not exist, profit and loss for

partnership will be distributed equally for each
partners.
 Preparation full set of partnership account
Name of Company
Profit and loss Appropriation account for the Year ended 31/12/2016
Net profit (from income statement) xxx
Add
Interest on drawings : A xx
B xx xxx
Less xxxxx
Interest on capital: A xx
B xx (xx)

Bonus/Allowance: A xx
B xx (xx)

Partner’s Salary: A xx
B xx (xx)
Profit shared: xxxx
A (60%) xx
B (40%) xx
 Capital account for A Capital account for B
Balance b/d xxx Balance b/d xxx

Balance c/d xxx Balance c/d xxx

xxx xxx xxx xxx

Current Account for A, B

Balance b/d (normal balance)
Drawings Interest on capital
Interest on drawings Salaries
Share of loss Interest on loan
Share of profit
Balance c/d (normal balance)