ACCOUNTING FOR PARTNERSHIP

A partnership is a form of business ownership in which there are at least two owners (partners) who share the
profits or losses made by the business. In most cases, the limit on the number of partners is 20.

MUTUAL AGENCY

This is a legal relationship between partners in a partnership where each partner has authorization powers and
the ability to enter the partnership into business contracts.

LIMITED PARTNERSHIP

This is where one or more of the partners has limited liability for the debts of the business.

*With Limited Liability, partners will only lose the capital invested if the partnership goes bankrupt.

CONDITIONS TO BE FULFILLED FOR LIMITED LIABILITY

1. Limited partners cannot take part in day-to-day management.

2. While the partnership is a going concern, the capital cannot be withdrawn.
3. There must be at least one general partner, a partner who is not a limited partner.
4. Limited partnerships need to be registered else it will be recognised as a general partnership.

HOW DO PARTNERS SHARE PROFIT AND LOSS?

There can be a written or oral agreement in relation to the sharing of profit and losses in a partnership. A
partnership can simply split profit/losses equally or using a profit and loss sharing ratio.

PROFIT AND LOSS SHARING RATIO

The ratio that is used to share any residual profit or loss of a partnership.

Other agreements:

1. Amount of capital to be invested by each partner;

2. Each partner’s responsibility;
3. Each partner’s limit on drawings.

A DEED OF PARTNERSHIP is a formal agreement between partners that states how profit and losses will be
shared and the rules under which the partners will work together.

SHARING PROFIT.
Question 2

Suppose that Amir and Travis invested $60,000 and $40,000 and decided to share profit/loss at 3:2. What is
Amir and Travis’ share of profit of $50,000?

3+2= 5 Shares of Profit

1 share= $50,000/5 = $10,000

Amir = $30,000 ($10,000 x 3) Travis = $20,000 ($10,000 x2)

INTEREST ON CAPITAL

A reward for each partner in the form of a share of profits that is related to the amount of capital contributed by
the partner.

*The interest on capital is deducted from the profit, which is then shared.

Say, 10% of interest is allowed to partners based on capital invested.

Amir Travis

Profit: $50,000

Interest on Capital (10%) 6,000 4,000

Residual Profit = 50,000- 10,000

= 40,000 shared in 5 shares 24,000 16,000

Total Shares of Profit 30,000 20,000

PARTNERSHIP SALARY

A reward in the form of a share of profits for any partner who has particular responsibilities in the business.

RESIDUAL PROFIT OR LOSS

The profit or loss of the partnership after all agreed rewards have been allocated to partners.

INTEREST ON DRAWINGS

A penalty whereby a partner is charged interest on drawings. The interest takes account of the amount of the
drawings and the timing. This interest is added to profit.
EXTRA ACCOUNTING
Sometimes, there is an arrangement whereby each partner’s capital contribution remains unchanged unless all
the partners agree to an alteration. This is called Fixed Capital.
MORE ABOUT ACCOUNTING PARTNERSHIP

FLUCTUATION CAPTIAL ACCOUNTS

This is where partners have just one account to record their capital contributions, drawings and shares of profits
and losses.
SOLE TRADERS AGREE TO FORM A PARTNERSHIP

From the SOFP of the sole traders, combine the assets, liabilities and appropriate the capital. Use Journal
entries to transfer the SOFP elements to the business.
If there were no written agreement on sharing profit and loss and a dispute arises, then the Partnership Act 1980
will take effect. It states:

- Profits and losses are to be shared equally

- No appropriation of profit e.g., interest on capital, salary.
- No interest on drawings
- * Interest on a partner’s loan: A partner who has made a loan to a partnership over and above the capital
contribution is entitled to interest at 5% per annum on the loan amount. That interest is treated as an
expense in the income statement.
PREPARING FINANCIAL STATEMENTS OF A PARTNERSHIP

Financial Statements:

1. Income statement: Unlike sole traders, this will include bank interest.
2. Appropriation Account
3. SOFP: assets and liabilities are expressed similarly to sole traders, but the capital section should reflect
that of the partners.
ANALYSING THE PERFORMANCE OF A PARTNERSHIP

RETURN ON INVESTMENT: