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Partnership Accounting

Definition of Partnership

According to the partnership ordinance of act of 1890, the partnership business can be defined as,

‘’A business in which two or more people work together as owners with a view to make profits.’’

According to above definition, there must be four aspects required to form a partnership business.

• People ( minimum 2 & maximum 20 )

• Business activity
• Members must be co-owners of the business
• Operated with a view point of earning a profit

In this case people can be a individuals or business entities. Co-ownership involves the right of each
partner to share in the profits of the business, to participate with the other partners in the management
of the business, and to own jointly with the other partners the property of the partnership.

Characteristics of a Partnership Business :

• Owned by minimum of 2 and maximum of 20 people

• Unlimited Liability
• No legal personality
• No continued existence

Advantages

o Losses can be shared

o More capital will be available
o Decision making will be more accurate
o Partners can cover each other during their personal matters
o Additional knowledge, experience and skills will lead to creative ideas and solutions.
o The responsibilities can be shared
o The risks can be shared
o Ideal type of an organization for professional practices such as accounting, law etc.

Disadvantages

o Profits will be shared between partners

o Unlimited liability
o Decision making may get delayed
o Possible disputes and disagreements between partners
o No continuity’ ( Partnership may be dissolved if partner dies )
o Importance of and need for a partnership agreement

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The Partnership agreement is a written contractual agreement of the partners of the business which
provides guidance to the business on how to operate. It is also known as ‘’Partnership Deed’’.

✓ It is not a legal requirement to have a partnership agreement in the business, but it is advisable
to do so as it helps to minimize the conflicts among the partners. ( Partnership Act of 1890 does
not require the partners to have the partnership agreement in writing. )

The usual contents that could be included in a partnership agreement.

• The name of the partnership

• The name and address of partners
• The nature of the business
• The principle place of the business
• The duration of the partnershio
• The amount of capital to be contributed by each partner
• The method of sharing profit and losses
• The rights and duties of partners
• The authority of each partner in contractual situations
• Whether interest on capital or on drawings, or both is to be
allowed or charged and if so, at what rate
• Whether partners are to be allowed remuneration ( salaries ) for
their services, and if so the amount thereof.
• Interest on partners loans
• The procedures to be followed in the event of disputes among the partners
• The assessment of goodwill
• How the operations are to be conducted and how the various partners interests are to be
satisfied upon the admission, death, retirement or expulsion of a partner.

Additional Knowledge –

Partnership Ordinance Act of 1890

This is the main act for partnership businesses. It is mainly applied for Partnership businesses which do
not have a agreement or when some of the conditions not been included in the agreement. The Section
24 of this act includes the following conditions.

Section 24 of the Partnership Ordinance of 1890

If the partnership agreement is silent on any matter relating to the rights and duties of the individual
partners, then resources will be made to the Partnership Ordinance. Section 24 of the Partnership
Ordinance 1890 provides a number of rules for determining the ordinary rights and duties of partners.

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These rules apply to all such matters of a partnership in so far as there is no agreement to the contrary.
These rules include the followings:

• Profits / losses of the partnership business must be shared equally.

• Partners are entitled to receive 5% interest per annum for the additional capital / advances they
provide to the business.
• Partners are not entitled to receive interest for their initial capital.
• Partners are not entitled to receive salaries for the general administration work they do.
• Every partner has right to involve in management function of the business.
• In order to admit new partners to the business, all the partners need to agree.

Accounting for Partnership

Accounting for partnership is similar in most respects to accounting for sole proprietorships, but in the
case of partnership we need to maintain following special accounts.

• Capital Account
• Current Account
• Profit & Loss appropriation Account ( not a separate statement, after the Income statement this
shows how profit will be shared between partners )
o Statement of Financial Position

Partnership Profit or Loss Appropriation Account

Profit or loss of a partnership, firm needs certain adjustments with regard to their partnership
agreement For this purpose, ‘’Profit & Loss Appropriation Account’’ may be prepared.

This is merely the extension of the income statement, that is prepared to show how the net profit is to
be distributed among the partners.

All adjustments relating to partners like interest on capital, interest on drawings, commission to
partners etc. are made in this account.

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The format of the Profit or Loss Appropriation Account

XYZ Partnership
Profit & Loss appropriation account for the year ended ….....
Profit for the year xxx
( + ) Interest on drawings -X xx
Y xx
Z xx xxx
xxx
( - ) Partners' salary -X xx
Y xx
Z xx ( xxx )
xxx
( - ) Interest on capital - X xx
Y xx
Z xx ( xxx )
xxx
Residual Profit

Share of Profits - X ( 2/5 ) xx

Y ( 2/5 ) xx
x ( 1/5 ) xx ( xxx )
0

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Question 01
Kate and William are in partnership. Their financial year ends on 31 May. They provide
the following information.
$
Capital on 1 June 2021 – Kate 40,000
– William 20,000
Drawings during the year ended 31 May 2022 – kate 11,000
– William 8,000
Profit for the year ended 31 May 2022 24,680

The partnership agreement includes the following terms:

Interest on capital is allowed at 5% per annum
Interest on drawings is charged at 3% per annum
Padma is entitled to a partnership salary of $ 9,500 per annum
Kate & William share profits on a 2:1 ratio.

Required : Prepare the Profit & Loss appropriation account for the year ended 31 May
2022.

Question 02
Disen & Aron are in partnership. Their financial year ends on 31st December 2022. Their partnership
agreement provides for:
• Interest on capital at 4% per annum
• Annual salary of Disen -$ 3200 & Aron - $ 2500
• Interest on drawings at 2 ½% per annum
• Residual profits and losses to be shared in proportion to the capital invested
The following information is available :
Disen Aron
($) ($)
Capital account at 1/1/2022 50,000 40,000
Drawings during the year 3000 5000

The profit for the year ended 31/12/2022 11,280

Required : Prepare the profit and loss appropriation account for the year ended 31/12/2022.

Capital Account

The capital account maintains to record partners’ capital contribution. The capital account can be
prepared in tabular format in the same account by including separate column for each partner. The
capital account usually maintains in ‘’fixed capital method’’. It usually includes the items that
permanently increase or decrease of partners equity.
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The following items can be recorded in capital account.

o Contribution of opening capital -Credit

o Additional capital introduced during the period -Credit
o Withdrawal of capital -Debit

Format of Partners’ Capital Account given below :

Capital Account
Date Details X Y Z Date Details X Y Z
Withdrawal of capital xx xx xx Balance b/f xx xx xx
Additional capital xx xx xx
Balance c/d xx xx xx
xx xx xx xx xx xx
Balance b/d

Partner’s Current Account

The partner’s current account can be used to record the short term changes in partner’s equity such as
interest on capital and drawings, partner’s salary, share of profits and drawings etc.
Partner’s salary, interest on capital and share of profit will be credited to current account and drawings
and interest on the drawings will be debited to it.

• Partner’s current account credit balance represents - Business(partnership) owes the partners
o Partner’s share of profits and other contributions they’ve made is higher than the
withdrawals
• Partner’s current account debit balance represents – Partner owes the business (partnership)
o Partner has taken more withdrawals than their share of profits

Partner’s current account usually maintained the columnar format and contained the followings:

• Interest on capital -Credit

• Interest on loans to the partnership -Credit
• Partner’s salary -Credit
• Interest on drawings -Debit
• Drawings -Debit
• Partner’s share of profit or loss -Profit – Credit / -Loss – Debit

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Format of Current Account is given below :

Current Account
Date Details X Y Z Date Details X Y Z
Balance b/d xx Balance b/d xx xx
Drawings xx xx xx Partners' salary xx xx xx
Interest on Drawings xx xx xx Interest on capital xx xx xx
Interest on loans xx
Share of Profits xx xx xx

xx xx xx
xx xx xx xx xx xx
xx xx xx

Division of Profits and losses among partners

There are several ways and methods of dividing profits and losses among partners. Whatever the
method by a partnership, it must be described in detail in the partnership agreement. Following are the
commonly used methods for this purpose.

o Dividing equally
o According to fixed ratio
o In the ratio of partners’ capital account balance
o As stated earlier in the absence of an agreement the partnership act requires its profits and
losses should be shared equally among partners.

Drawings Accounts

A drawings account is maintained for each partner. The total of this account is transferred to the
partner’s current account at the end of the financial year.

Additional knowledge :

Special Double Entries related to Partnership Business

1. Interest on partners capital

Appropriation account Debit
Partner’s current account Credit
2. Partners annual wages
Appropriation account Debit
Partner’s current account Credit
3. Partners drawings
Cash drawings :
Partner’s current account Debit
Cash Credit

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Stocks drawings :
Partner’s current account Debit
Purchases Credit
4. Loans provided by partners
Loan amount obtained :
Bank Debit
Loan account from Partner X Credit

Interest for the loan due but not paid :

Interest expenses account Debit

Partner’s current account Credit

Payment of interest in cash :

Partner’s current account Debit
Bank Credit
5. Share of profit / loss
-Share of profit :
Appropriation account Debit
Partner’s current account Credit
-Share of loss :
Partner’s current account Debit
Appropriation account Credit

Question 03
Rojer and Shane are in partnership. Their financial year ends on 31 May. They provide the following
information.

Rojer Shane
$ $
On 1 June 2020
Capital account 40,000 20,000
Current account 130 Cr 910 Dr
For the year ended 31 May 2021
Drawings 11,000 8,000
Interest on drawings 330 240
Interest on capital 2,000 1,000
Partner’s salary 9,500
Profit share 8,500 4,250

Required :
Prepare the capital account and the current accounts of Rojer and Shane for the year ended 31 May
2021.

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Financial Statements of a Partnership

Preparation of the Income statement for partnership is same as sole trader’s final accounts. In sole
trader’s business the profit or loss will be transferred to his capital account. But in the case of
partnership, there are several owners and profits or losses need to distributed among partners with
agreed ratio. For the purpose we need to prepare a special account called ‘’ Profit & Loss Appropriation
Account’’. All payments to make to partners and charges against them will be recorded in this part of
the account.

Therefore, as final accounts of partnership we need to prepare the followings.

a) Profit & Loss Appropriation account

b) Statement of financial position
c) Partners’ Current and Capital accounts

Preparation of a Statement of Financial Position

Extracts of Statement of Financial Position

XYZ Partnership XY Partnership
Statement of Financial Position as at ….....
Statement of Financial Position as at ….....
Cost Acc. Dep. NBV
X Y Total
Non Current Assets

Current Assets Capital accounts xx xx xx

Current accounts xx xx xx
xxx
Equity & Liabilities
xxx xxx xxx
Capital: X xx
Y xx
Z xx xx

Current A/C: X xx
Y xx
Z xx xx

Non Current Liabilities

Current Liabilities
xxx
Or

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Question 04
Rojer and Shane are in partnership. Their financial year ends on 31 May. They provide the following
information.
Rojer Shane
$ $
On 1 June 2020
Capital account 40,000 20,000
Current account 130 Cr 910 Dr
For the year ended 31 May 2021
Drawings 11,000 8,000
Interest on drawings 330 240
Interest on capital 2,000 1,000
Partner’s salary 9,500
Rojer and Shane share profits on a 3:1 ratio.
Required :
a) Prepare the profits and loss appropriation account for the year ended 31/05/2021.
b) Prepare the capital account and current account of Rojer and Shane for the year ended
31/05/2021.
c) Prepare a relevant extract from the statement of financial position of Rojer and Shane at
31 May 2021.

Question 05
A,B,C are in partnership sharing profit and losses in the ration of 2:2:1. The following balances are
available for the year ended 31 March 2018.
Profit for the year 60,000
Capital Account balance A: 120,000
B: 80,000
C: 60,000
Current Account balance A: 12,000 Cr
B: 7,500 Cr
C: 6,000 Dr
Drawings A: 15,000
B: 20,000
C: 10,000
Interest on capital 5%
Interest on drawings 4%
Partners salary A: 12,500
B: 7,500
C: 5,000
Required :
a) Prepare the partners Income Appropriation account for the year ended 31 March 2018.
b) Prepare the capital and Current account of A, B and C for the year ended 31 March 2018.
c) Prepare a relevant extract from the statement of financial position of A,B & C at 31 March 2018.
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Question 06
Kidd and Mellor are in partnership. They share profits in the ratio : Kidd three fifths to Mellor two fifths.
The following trial balance was extracted as at 31 March 2019 :
Trial Balance as at 31 March 2019
Equipment at cost 26,000
Motor vehicles at cost 36,800
Provision for depreciation at 31.03.2018
Equipment 7,800
Motor vehicles 14,720
Stocks at 31/03/2018 99,880
Debtors & Creditors 83,840 65,100
Cash at bank 2,460
Cash in hand 560
Sales 361,480
Purchases 256,520
Salaries 45,668
Office expenses 1,480
Motor expenses 2,252
Heating & Lighting 2,000
Current accounts at 31/03/2018
Kidd 5,516
Mellor 4,844
Capital accounts
Kidd 86,000
Mellor 50,000
Drawings
Kidd 16,000
Mellor 22,000
595,460 595,460

A set of final accounts for the year ended 31 March 2019 for the partnership are to be drawn up taking
into consideration the following notes :
a) Stock at 31 March 2019 was valued at $ 109,360
b) Office expense owing $ 440
c) Provision for depreciation : Motor vehicles 20% of cost, equipment 10% of cost
d) Charge interest on capital at 6%
e) Charge interest on drawings : Kidd $ 628 , Mellor $ 892
f) Charge $ 15,000 for salary for Mello.
Required :
1) Prepare Partners’ appropriation account for the year ended 31 March 2019 and Partners’’
current account.
2) Draw up Statement of financial position as at that date.
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Past Paper Questions

Question 08
( 7110/22/O/N/17 )

Jian and Shen are in Partnership sharing profits and losses in the ratio 3:1. Interest is allowed on capital
at the rate of 5% per annum and is charged on drawings ( excluding salaries ) at the rate of 10%. A salary
is paid to Shen of $ 5,000 per annum.

The following balances were extracted from the books on 30 June 2017.

$
Leasehold buildings ( cost ) 120,000
Motor Vehicles ( cost ) 40,000
Office fixtures ( cost ) 18,000
Provisions for depreciation:
Leasehold buildings 30,000
Motor vehicles 10,000
Office fixtures 4,000
Capital accounts
Jian 70,000
Shen 50,000
Current accounts
Jian 500 Debit
Shen 900 Debit
Drawings
Jian 8,000
Shen 6,000
8% Bank loan ( repayable 2025 ) 50,000
Bank Loan interest paid 2,500
Trade receivables 63,500
Trade payables 23,150
Bank overdraft 10,600
Provision for doubtful debts 2,000
Revenue 520,000
Inventory at 1 July 2016 37,800
Purchases 314,000
Returns from customers 10,300
Returns to suppliers 8,200
Carriage 12,550
Wages and salaries 87,500
Electricity and water 8,450
General expenses 28,850
Motor vehicle expenses 19,100

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Additional information:

1. Inventory at 30 June 2017 was valued at $ 42,900.

2. At 30 June 2017 :
Electricity and water, $ 1150 were accrued.
Motor vehicle expenses, $ 200 were prepaid
3. The partner’s salary had been paid to Shen. This had been posted to the wages and salaries
account.
4. The carriage included $ 3,000 for the collection of purchases. The remainder was for delivery to
customers.
5. Office fixtures costing $ 2,000 and with an accumulated depreciation of $ 1,500 had been sold
for $ 500. A cheque was received on 20 June 2017. No entries had been recorded in the books.
6. Depreciation is to be charged on all non – current assets owned at the end of each year.
i. Leasehold buildings are held on a 20 year lease. An appropriate amount is to be written
off the lease.
ii. Motor vehicles are depreciated at the rate of 25% per annum using the diminishing
( reducing ) balance method.
iii. Office fixtures are depreciated at the rate of 10% per annum using the straight line
method.
7. Trade receivables include a debt of $ 3,500 which is considered irrecoverable. The provision for
doubtful debts is to be increased to $ 5,000.

Required:

a) Prepare the income statement and appropriation account for the year ended 30 June 2017.
b) Prepare the current accounts for the year ended 30 June 2017. Balance the accounts and bring
down the balances on 1 July 2017.
c) Prepare the statement of financial position at 30 June 2017.

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Question 09 ( Edexcel – Nov 2021 – Q 2 )

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