PARTNERSHIP ACCOUNTS

Partnership is an agreement between two or more people who enter into business with a view of
earning profit.

Features of Partnership
 Existence of a business with a major objective of making profits
 There must be two or more persons who are mutually agreed to carry on business
 There is always contractual relationship between the members.
 Each partners is liable to the liability of the partnership
 Its formed with the motive of making profit

Partnership Agreement/Deed
This is a written document stipulating the terms of the partnership operation.

Content of Partnership Deed

 Name of the partners
 Capital to be contributed by each partners
 Interest on capital
 Drawing by partners
 Duties of partners
 Salaries to be paid to partners
 Nature and kind of the business
 Duration of the partnership
 Admission and retirement of partners
 Preparation and auditing of account
 Interest on drawing (if any)

Types of Partners
 Active partners
 Dormant/sleeping partners
 Quasi/Holding out/Nominal partners
 Sub-partners
 Partners in profit
 Minor partners
 Limited partners

Merits of Partnership
 Access to more capital through the contribution of the partners
 It can command to a wide range of experience and skills from the partners
 The risks are spread across a large number of people

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  Easy formation of the partnership business
 There is a wider network of contact

Demerits of Partnership
 Profits are spread between a number of people
 Dilution of control over the business
 There is limitation on the number of partners
 Delay in decision making
 Risks of implied authority
 Unlike a limited company, partnerships always have limited resources and may not be
able to undertake large-scale operations
 The members has unlimited liability.

ACCOUNTING FOR PARTNERSHIPS

Records pertaining a partnership account are recorded in capital and current account.

Partnership Capital Account

The capital account of partnership account is maintained in a columnar form using two methods
i.e. the fixed balance method and fluctuating capital balance method.

1. The fixed balance method

Under this method, the capital account records the partners’ contribution only and a current
account is opened to record the individual partners dealing with the partnership.
Format of the capital account
Details A B Details A B
Bal b/d xx Xx
Additional capital xx xx
Bal c/d Xx Xx
Xxx Xxx xxx Xxx

Format of current account

Details A B Details A B
Drawing Xx Xx Bal b/d xx Xx
Interest on drawing xx xx Interest on capital xx xx
Salaries xx xx
Bal b/d xx xx Profit to be shared xx xx
Xxx Xxx xxx Xxx

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2. Fluctuating capital balance method
Here the capital account records both the individual partners dealing with the partnership and
their capital contribution. The current account is not maintained.
Capital account
Details A B Details A B
Drawing Xx Xx Bal b/d xx Xx
Interest on drawing xx xx Additional capital xx xx
Interest on capital xx xx
Salaries xx xx
Share of profit xx xx
Bal c/d xx xx Revaluation profit xx xx
Xxx Xxx xxx Xxx

NB. The most preferred method is the fixed capital balance method since it allows proper and
independent monitoring of capital contribution of partners and their dealing with the partnership.

FINANCIAL STATEMENT OF PARTNERSHIPS

1. Statement of financial performance/ comprehensive income/P&L a/c
The statement is prepared in the same way as for the sole proprietor but the only difference is in
the appropriation of profit into their ratios.

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Title
Sales xx
Less sales returns (xx)
Net sales xxx
Less cost of sales;
Opening stock xx
Add purchases xx
Goods available for sales xx
Less closing stock (xx) (xxx)
Gross profit xxx
Add other income xx
Gross income xxx
Less operating expenses (xx)
Net profit xxx
Add interest on drawing xx
Less interest on loan (xx)
Less interest on capital:
A: (xx)
B: (xx)
Less partners salaries; Appropriation account
A: (xx)
B: (xx)
Profit to be shared xxx
Share of profit
A: xx
B: xx

2. Format for the statement of financial position/balance sheet

It is also similar to the balance sheet prepared by the other form of business expert the owners’
equity component as illustrated below.

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Title
NCA COST ACC DEPN NBV
Motor Vehicle xx xx xx
Furniture xx xx xx
xxx
Current Assets
Bank xx
Inventory xx
Debtors xx xxx
TOTAL ASSET xxx
Capital and liabilities
Capital account
A: xx
B: xx
Current account
A: xx
B: xx
Liabilities
Non-current liabilities xx
Current liabilities xx
TOTAL CAPITAL+LIABILITIES xxx

The Basic Double Entry records under partnership

1. When additional capital is brought into the business
DR. Cash/Bank A/c
CR. The individual partners’ capital A/c
2. When partners are entitled to interest on capital
DR. Interest on capital A/c/Income statement
CR. Individual partners’ current A/c
3. In case of drawings
DR. Individual partners’ current A/c
CR. Cash/Bank
4. When partners are entitled to salaries
DR. Partners’ salaries/income statement
CR. Individual partners’ current A/c
5. If there is share of profit made during the year
DR. Income statement
CR. Individual partners’ current A/c
6. If there is share of losses

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 DR. Individual partners’ current A/c
CR. Income statement
7. When partners are charged interest on drawing
DR. individual partners’ current A/c
CR. Interest on drawing/income statement

Example one:
Obedi and Felix are in partnership sharing profits and losses in the ratio of 3:2 respectively. The
following trial balance was extracted from the partnership books as at 31st Dec, 2009
UGX ‘000’
Details DR CR
Office equipment(cost) 13,000
Motor Vehicle (cost) 18,400
Prov. For depreciation M.V 31.12.2008 7,360
Prov. For depreciation office equipment 31.12.2008 3,900
Stock 1.1.2009 49,940
Debtors and Creditors 41,920 325,50
Cash at hand 280
Cash at bank 1,230
Purchases and Sales 143,260 180,740
Salaries 16,834
Office expenses 2,740
Discount allowed 1,126
Drawings:
Obedi 11,000
Felix 8,000
Current account balances 1.1.2009
Obedi 2,758
Felix 2,422
Capital account balances 1.1.2009
Obedi 54,000
Felix 24,000
TOTAL 307,730 307,730

Additional information;
i) On 31st Dec, 2009 stock was valued at Ugx. 54,680,000
ii) Accrued office expenses Ugx. 220,000
iii) Depreciate Motor Vehicle by 20% on cost and office equipment by 10% on cost
iv) Charge interest on drawings: Obedi Ugx. 360,000 and Felix Ugx. 420,000
v) Charge 10% interest on capital account balance.

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Required;
a) Prepare an income statement for the partnership of Obedi and Felix for the year ended
31st Dec 2009
b) Prepare the balance sheet as at 31st Dec 2009.

ACCOUNTING FOR GOODWILL IN PARTNERSHIP ACCOUNT

Goodwill is an intangible assets arising from the business activities to earn more profit as
compared to other firms in the same or similar firm i.e. it’s the excess of purchase consideration
over the fair market value of the business.
This arises when the value of the business as a going concern is greater than its separate tangible
asset.

Reasons why Goodwill may arise in a business

 Monopoly
 The value of the labour force including management skills other than that of the retiring
proprietor may be carried forward.
 Possession of trade mark and patent rights may account for goodwill
 Location of the business premises
 The cost of research and development
 Trading on the same name as the original firm i.e. for the newly established firm
However, unlike other assets, goodwill fluctuates from time to time and differs from company to
company, it cannot be sold separately and its valuation involves a high degree of subjectivity.

TYPES OF GOODWILL
In accounting, goodwill is classified into inherent goodwill, purchased goodwill and negative
goodwill.

1. Purchased goodwill
It arises from a defined financial transaction and it is recorded in the financial statement as an
intangible asset in accordance with the IFRS3-Business Combination. IFRS 3 provides for
immediate write-off of goodwill after acquisition or amortization for a period not exceeding
twenty years using the straight line method.

2. Inherent goodwill
Its arises out of a normal process of carrying out business activities and it is never recorded in the
book of account because recording it would mean anticipating gains that would be only realized
on sales of the business that may never happen.

3. Negative goodwill

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It arises when the realizable value or the purchase consideration is less than the fair market value
realized from individual assets.

Circumstances that leads to the ascertainment of goodwill

 On admission of a new partner into the established partnership especially when the old
partners have built goodwill into the business
 On retirement or death of one partner from an established partnership
 At dissolution of the partnership
 When there is a change in the mode of ascertainment of profits and losses of the firm
 When there is a change in the profit sharing ratios

METHODS OF ACCOUNTING FOR GOODWILL

There are basically three methods and this includes;
 Premium method
 Revaluation method
 Memorandum revaluation method

1. Premium method;
Here, the new partner brings cash in addition to his/her capital contribution the excess cash being
premium for goodwill. The premium may be treated in three ways;
a) The partners share the cash premium without any record being raised in the book of
account
b) The premium is being used to increase the old/existing partners’ capital and is retained by
the partnership.
Accounting Entry
DR. Cash/Bank
CR. Old partners’ capital account
c) The cash premium paid by the new partners is withdrawn by the old partners and no goodwill
account is maintained.
Accounting Entry
On receipt of the premium
DR. Cash/Bank
CR. Old partners’ capital account

On withdrawal of the premium by the partners

DR. Old partners’ capital account
CR. Bank/Cash account

2. Revaluation method;

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Here the new partner contribute capital and agrees to pay for goodwill. The goodwill account is
opened and maintained in the book of account and it will appear in the balance sheet as an
intangible assets. The accounting entry is;
DR. Goodwill account
CR. Old partners’ capital account (using the old the old sharing ratio)

3. Memorandum Revaluation Method;

Under this method goodwill is raised but it does not remain in the books of accounts. That is
goodwill is recognized and written off immediately.
Accounting Entries
On recognition of goodwill
DR. Goodwill account
CR. Old partners’ capital account (using old profit sharing ratio)
On writing off
DR. Partners’ capital account (both the old and new partner at new profit sharing ratio)
CR. Goodwill account

Example two;
X, Y, Z are partners and have always shared profits and losses in the ratio 4:3:1 respectively.
They are altering their profit and loss sharing ratio to 3:5:2 respectively. Their balance sheet as at
31st Dec 2015 was as below;
Net Asset 100,000
Capital X 16,000
Y 70,000
Z 14,000
100,000
The partners agreed to value goodwill at shs. 70,000 on the change
Required: Prepare;
a) Goodwill account
b) Capital account
c) Balance sheet as at 31st Jan 2016
(Using Revaluation Method and Memorandum Revaluation Method)

Example three
A and B are in partnership sharing profits and losses equally. They decided to admit C. By the
agreement goodwill was valued at Shs. 120,000 to be introduced in the books of the partnership.
C is required to provide capital equal to that of B after he has been credited with his share of
goodwill.
The new profit sharing ratio will be 4:3:3 for A, B, C respectively.
The balance sheet before the admission of C was as follows;

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 Balance sheet
Non-current asset 150,000
Bank 70,000
220,000
Capital
A 100,000
B 90,000
Current Liabilities 30,000
220,000
Required
Open up the ledger accounts to reflect the admission of C and treatment of Goodwill using;
a) Revaluation method
b) Memorandum revaluation methods of treatment goodwill
c) Bank account
d) Show the good will account and balance sheet using (a) and (b)

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 REVALUATION OF ASSETS AND LIABILITIES
A revaluation of assets and liabilities is required when a new partner is admitted or when a hold
partner retires or dies. It’s not only goodwill that is revalued but all assets and liabilities are
revalued in order to have their proper value recorded in the book so as to have proper capital
account balances maintained.
On revaluation of assets and liabilities a special account known as revaluation account is
compiled in order to determine either a profit or a loss on revaluation. In case the debit side of
the revaluation account is more than the credit side, there is a loss on revaluation otherwise there
is a profit.

Accounting entries on revaluation

i. In case there is an increase in the value of an asset on revaluation;
DR. Asset A/c
CR. Revaluation A/c with the increase
ii. In case of a decrease in the value of an asset on revaluation;
DR. Revaluation A/c
CR. Asset A/c with the decrease
iii. In case of increase in the value of a liability on revaluation;
DR. Revaluation A/c
CR. Liability A/c with the increase
iv. In case of a decrease in the value of liability on revaluation;
DR. Liability A/c
CR. Revaluation A/c with the decrease
v. Balance off the revaluation account to determine either profit or loss on revaluation;
 In case of a profit on revaluation i.e. credit side is more that debit side;
DR. Revaluation A/c
CR. Partners Current/Capital A/c
 In case of loss on revaluation i.e. debit side is more than the credit side;
DR. Partner Current/Capital A/c
CR. Revaluation A/c

Example four
Left and Right are partners and they have always shared profits and losses in the ratio of 2:1
respectively. On 31st Dec 2011 the partners agreed to admit Centre. Centre was required to bring
in his capital of Shs. 800,000 which was received and banked.
On the same date the partners revalued goodwill to Shs. 270,000. Their statement of financial
position before the admission of Centre was as follows;
Assets:
Land 900,000
Machinery 650,000

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Fixtures and Fittings 910,000
Debtors 670,000
Bank 450,000
Prepaid rent 240,000
Inventory 365,000
4,185,000
Equity and Liabilities:
Capital A/c
Left 1,200,000
Right 1,400,000
Current A/c
Left 185,000
Right 400,000
Non-Current Liabilities:
Barclays Bank Loan 650,000
Current liabilities:
A/c payables 350,000
4,185,000

On admission of Centre the following assets and liabilities were revalued;

Land 950,000
Furniture and Fitting 740,000
Machinery 410,000
Inventory 200,000
A provision for bad and doubtful debt was provided at 10% of debtors.
You are required to use memorandum revaluation for valuing goodwill assuming the partners
adopt the new profit sharing ratio of 2:2:1.
Required;
a) Prepare the relevant ledger accounts to reflect the above transactions.
b) A statement of financial position after the admission of Centre.

Example five
Charles, David and Earnest are partners and they have always shared profit and losses in the ratio
of 2:1:1 respectively. On 31st Dec 2012 Charles decided to retire and Francis is admitted to the
partnership and the new profit/loss sharing ratio agreed by the partners is 2:2:1 for David,
Earnest and Francis respectively.
On admission of Francis, the partners agreed to value goodwill at 2 times the average of the
preceding years’ profit which were Shs. 43,000,000, Shs. 55,000,000 and Shs. 52,000,000.
Francis brought in capital worth Shs. 70,000,000. The statement of the financial position of the
partners before the admission of Francis was as follows;

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Assets:
Freehold premises 40,000,000
Furniture 25,000,000
Delivery Van 20,000,000
Inventory 8,000,000
Bank 110,000,000
Total Assets 203,000,000
Capital and Liabilities:
Capital
Charles 50,000,000
David 50,000,000
Earnest 80,000,000
Current A/c
Charles 10,000,000
David 5,000,000
Earnest 5,000,000
Current liabilities
Creditors 3,000,000
203,000,000
On admission of Francis and retirement of Charles respectively, the following assets were
revalued as followed;
Freehold premises 45,000,000
Furniture 20,000,000
Inventory 4,500,000
Delivery Van 17,000,000
On retirement of Charles (31/12/2011) he went with one of the delivery Vans valued at Shs.
3,000,000 and decided to leave a loan to the partnership of Shs. 2,000,000.
You are required to use the memorandum revaluation method for valuing goodwill.
Required;
a) Prepare the relevant ledger accounts to reflect the above transactions.
b) A statement of financial position after the admission of Francis and the retirement of Charles
respectively.

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DISSOLUTION OF PARTNERSHIP
After a certain time a partnership business can be wound up and this may be due to the following
reasons.
 By mutual agreement
 When the partnership business is no longer making profits
 Forceful circumstance e.g. death of a partner and government intervention like failing to
meet government demands/regulation.
 Where the partnership business has expanded to the point where it’s necessary to convert
it into a limited company.
 When there is disagreement amongst partners on how to operate partnership.

On dissolution, the partnership may be sold as a going concern, it may be converted into a
limited company or its assets may be sold individually and thus the business is wound up. The
proceeds from dissolution are used to settle partnership obligations including amounts due to the
partners.

The accounting entries on dissolution includes the followings

1. Realization account is opened to which all assets are debited (excluding cash and bank) while
the corresponding credit entries are made to the respective asset account i.e.
DR. Realization A/c
CR. Individual asset A/c
The provision account like provision for bad debts are closed down and transferred to the
realization account.
DR. Provision A/c
CR. Realization A/c
2. When liabilities are settled or paid
DR. Liabilities A/c
CR. Cash/Bank A/c (with the actual amount paid)
3. For any reduction in the value of assets for example discount allowed
DR. Realization A/c
CR. Individual asset A/c
4. For reduction in the value of liabilities for example discount received from suppliers
DR. Individual liability A/c
CR. Realization A/c
5. When partner takes over an asset
DR. Partners’ capital A/c
CR. Realization A/c (with the agreed takeover price)
6. When liability is taken over by a partner
DR. Individual liability A/c
CR. Individual partners’ capital A/c

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7. When assets are sold for cash
DR. Cash /Bank A/c
CR. Realization A/c
8. When expenses are paid on dissolution
DR. Realization A/c
CR. Cash/Bank A/c
9. On balancing off the realization account you either get a profit or loss on realization which
must be shared amongst partners.
 In case of a profit
DR. Realization A/c
CR. Individual capital A/c
 In case of a loss
DR. Individual capital A/c
CR. Realization A/c
10. In case partners’ current account was maintained it must be closed off to the capital account
i.e. the balance on the current account must be transferred to the capital account.
If there is credit balances on the current account;
DR. Partners’ Current A/c
CR. Capital A/c
In case of a debit balance on current account
DR. Capital A/c
CR. Partners’ Current A/c
11. On balancing off partners’ capital account if a partner has a debit balance he must bring
money to clear his account.
If the partner is to bring in money
DR. Cash/Bank A/c
CR. Partners’ capital A/c
The bank A/c should then have enough money to pay balances in their capital account.

Example six
Bosco, Mary and John decided to wind up their partnership on July 1st, 2011 after their
partnership business became unprofitable for three consecutive years. The balance sheet of the
partnership as at 30th June 2011 was as follows;

NCA
Furniture 20,000
Motor Vehicle 16,000
Current Assets:
Investment 21,000
Debtors 37,000

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Bank 3,000 61,000
Total Assets 97,000

Capital and Liabilities:

Capital A/c
Bosco 21,000
Mary 21,000
John 10,000 52,000
Current A/c
Bosco 5,750
Mary 2,450
John 2,500 10,700
Liabilities
Loan 15,000
A/c payables 19,300 34,300
97,000
Additional information;
i) The loan was paid
ii) The furniture were sold for Shs. 18,200 and John took over a Motor vehicle which had a
written down value of Shs. 5,000 at Shs.6,000. The other vehicles were sold for Shs.
13,450 after repair had been done.
iii) Account receivable realized only Shs. 34,800.
iv) Account payables were settled for Shs. 17,600 after being given a discount while
investment realized Shs. 22,300.
v) Expenses incurred during the exercise amounted to Shs. 750.
vi) Bosco, Mary and John share profit and losses in the ratio of 2:1:1.
Required;
a) Realization A/c
b) Capital A/c
c) Current A/c
d) Bank A/c
e) Other relevant ledger A/c

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CONVERSATION OF PARTNERSHIP INTO A LIMITED COMPANY
As another way of dissolution, a partnership may be sold as a going concern to either a new
company or an existing company. The amount paid for the purchase of partnership assets and
liabilities is called the purchase consideration or purchase price.
The purchase consideration may be in many forms such as; share capital, debentures, cash/bank,
share premium or combination of the above. These are called discharging items.

On disposing of the partnership, the transaction must be reflected in both the books of the
partnership (the vendor) and the company (the buyer).

In the books of the partnership- the vendor, the following accounting entries will be made;

 Assets taken over

DR. Realization A/c
CR. Asset A/c with the book value of the asset
 Liabilities taken over e.g. Loan and Account Payables
DR. Liability A/c
CR. Realization with the value of the liability
 Reduction in the value of liability for discount received from suppliers
DR. Liability A/c
CR. Realization with the value of reduction
 When the purchase consideration is received
DR. New company’s A/c or A/c in the name of the company
CR. Realization A/c
 The discharging of the purchase consideration to reflect forms in which it is received
DR. Discharging items e.g. share capital, debentures, cash share premium,
bank/cash.
CR. Company’s A/c or A/c in the name of the company
The discharging items (except cash/bank) must be written off to the partner’s capital account
using the profit and loss sharing ratio that is;
DR. Capital A/c
CR. Discharging items accounts

In the books of the company

After the acquisition of the partnership assets and liabilities the books of the company will
change to reflect the element of the purchase consideration.

In the books of the company, the business purchase account is opened.

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Entries
 Asset acquired
DR. Individual assets A/c
CR. Business Purchase A/c
 Liabilities acquired
DR. Business purchase A/c
CR. Individual liability A/c e.g. Account payables, accruals
 When the purchase consideration passes the business purchase A/c is debited and the
respective discharging items are credited.
That is;
DR. Business purchase A/c
CR. Discharging item component e.g. share capital, share premium, debentures
and cash.
 When the purchase consideration exceeds the book value of Asset the excess is regarded
as the goodwill.
Otherwise if the net book value of asset exceeds the purchase consideration. The excess is
referred to as the capital reserve.
In case of goodwill
DR. Goodwill A/c
CR. Business purchase A/c
In case of capital reserves
DR. Business purchase A/c
CR. Capital reserves A/c
NB. The capital reserves and goodwill are the balancing figure in the business purchase A/c on
either side.

Example seven
Alex, Bob and Charles were partners in Royal enterprises sharing profits and losses in the ratio
2:2:1 respectively. The partnership balance sheet as at 31st Dec 2001 was as follows:

Balance sheet
Non-current Assets
Freehold land and building 180,000,000
Plant and Machinery 120,000,000
Motor Vehicles 30,000,000

Current Assets
Inventory 110,000,000

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Receivables 140,000,000
Bank 90,000,000
670,000,000
Capital and Liabilities
Capital accounts
Alex 220,000,000
Bob 180,000,000
Charles 100,000,000
Long term liability
Loan Alex 70,000,000
Current liabilities
Payables 100,000,000
670,000,000
On January 1, 2002 the partners incorporated Royal Traders Ltd. And agreed to dispose off the
partnership business to the newly incorporated company under the following terms
(i) The company to acquire the goodwill, fixed assets and Inventory at a price of Shs.
580,000.000. The purchase consideration to be discharged by a payment of Shs.
100,000,000 in cash and issue of 120,000 preference shares of Shs. 1,000 each at par, and
the balance by the issue of ordinary shares of Shs. 1,000 each at Shs. 1,250 each to the
partners.
(ii) The partnership business to settle amounts owing to suppliers and also to collect amounts
owed by accounts receivable. The purchase consideration payments and allotments of
shares to the partners were completed on 2nd Jan 2002. The accounts payables were paid
off on January 1, 2002 with a cash discount of 1,900,000. Also accounts receivable paid
amount owing by January 2, 2002 except for bad debts amounting to Shs. 8,000,000.
Discounts allowed to customers amounted Shs. 4,000,000.

Required:
a) Ledger accounts to close the partnership books
b) Ledger accounts in the new company books immediately on completion of the above
transactions.

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