POA SECTION 8

ACCOUNTING FOR PARTNERSHIPS

THEORY
 WHAT IS A PARTNERSHIP?

According to Section 1 of the Partnership Act 1890, a Partnership is

a relationship that subsists between 2 –20 persons carrying on a
business with a common view to profit.
 HOW IS IT FORMED?

• Partnerships are generally formed through verbal

agreements, or they may be formed via a contractual
arrangement called a Deed of Partnership or Partnership
Agreement.
THE PARTNERSHIP AGREEMENT
 PARTNERSHIP ACT 1890

When no Partnership Agreement exists, expressed or implied, Section 24 of

the Partnership Act states that inter alia

• Profits and losses are to be shared equally irrespective of the amount of capital
contributed by partners.
• No interest on capital and drawings.
• No salaries.
• All loans by partners are to be paid an interest of 5% per annum.
 CHARACTERISTICS OF A PARTNERSHIP

❖Mutual Agency- Each partner is an agent with the authority to bind the partnership
contracts.
❖Unlimited liability – Owners/ Partners are responsible for all debts (i.e., there is no
limit to their liability). Owners/ partners may have to use personal assets to settle
business debts.
❖Limited Life.
❖Source of Capital – each partner contributes (usually equal in value)
❖Co-ownership of Property- individual partners no longer separately own the assets
invested in the firm.
 Advantages
1. More capital can be raised because of
a number of partners.
2. Specialized Management- each
partner can work in the area for which
he /she is best qualified.
3. Partners can take long breaks or
holidays.
4. The burden of losses is shared
Disadvantages
1. Many partnerships end in
disagreements.
2. Decision making process can be
slower because of consultation among
partners.
3. Unlimited liability
4. Profits are shared among partners
ACCOUNTS PREPARED BY A
PARTNERSHIP
 ACCOUNTS PREPARED BY A PARTNERSHIP

Accounting for Capital Invested – Journal Entries

• Since each partner is an owner of the Partnership, they must make an initial
investment to commence business.
• This investment can take many forms, depending on the each partner’s
personal assets.
• Once each partner declares their investment, all assets are accumulated and
a journal entry is done to record opening capital invested.

Remember that all assets are jointly owned by the partners.

 ACCOUNTING FOR CAPITAL INVESTED

Name of Partnership
General Journal

Date Details Debit $ Credit $

Year
Month, Day List all the Assets
List all Liabilities (if any)
Partner A Capital
Partner B Capital
Partner C Capital
To record the investments made by Partner
A, B and C into the Partnership
 ACCOUNTS PREPARED BY A PARTNERSHIP

Ledger Accounts
• Once the journal entry is recorded, Accounts for each asset and each
Liability (if any) are opened and the information is recorded.
• In addition, each partner will have SEPARATE Capital accounts based of their
total individual investments in the Partnership as well as SEPARATE
Drawings Accounts to record individual withdrawals for personal or private
use.
• A Current Account is also created to recorded changes in capital. This will be
discussed below.
 ACCOUNTS PREPARED BY A PARTNERSHIP

Financial Statements – Income Statement

• The Income Statement (Trading, Profit and Loss Account) for a
Partnership is the same as the Income Statement of a Sole
Proprietorship. However salaries to partners will not be recorded
as an Expense.
 ACCOUNTS PREPARED BY A PARTNERSHIP

Financial Statements – Appropriation Account

• The main purpose of this account is to show how Net Profit or Net Loss is
distributed (shared) among the partners in accordance to Partnership
Agreement.
• It can be prepared as an extension of the Income Statement or on its own.
• This account shows the relationship between the Partnership and each
partner/owner from the partnership’s point of view. It documents the
following category of items
 ACCOUNTS PREPARED BY A PARTNERSHIP

Financial Statements – Appropriation Account

1. Items that the Partnership receives from the each partners
(Items that represent Income earned to the Partnership)

2. Items that the Partnership had to pay to each partner (Items that
represent Expenses incurred by the partnership that are
relating to the partners)
ACCOUNTS PREPARED BY A PARTNERSHIP

Financial Statements – Appropriation Account

Items Added to Net Profit/ Net Loss Items Subtracted from Net Profit/
Net Loss
• Interest received from each • Interest paid to each partner as a
partner from withdraws for return on their investment (Capital)
personal use (Drawings) • Yearly Salaries paid to the partners
for being employed in the
Partnership
• Interest paid on Loan given to the
Partnership by the Partners
 ACCOUNTS PREPARED BY A PARTNERSHIP

Financial Statements – Appropriation Account

• Income earned by the partnership relating to the partners will be credited (added) to
Net Profit/Loss and Expenses incurred by the Partnership relating to the partners will
be debited (subtracted) from net Profit/Loss as Appropriations.
• The residual balance will be shared among the partners according to the Profit
Sharing Ratio which is stipulated by the Partnership Agreement. There are three main
ways of sharing profits

1. Capital Ratio – Sharing profits according to the capital invested

2. Fixed percentage – each partner agreed to a percentage of profit
3. Equal Share – Profits are shared equally among partners
 ACCOUNTS PREPARED BY A PARTNERSHIP
Partners Current Account
• Since the Capital account of each partner remains fixed, a Current
Account is created. This subsidiary account also shows the
relationship between the Partnership and each partner BUT from
the partners’ point of view.

• It is used to record items that the increase (Add to) the partners’
Capital and decrease (subtract from) the partners’ capital so that
the capital accounts of partners remain fixed.
 ACCOUNTS PREPARED BY A PARTNERSHIP
Partners Current Account
• Items that each partners receive from the partnership will cause an
increase in the each partner’s capital resulting in a Credit (addition)
to the Current Account.

• Items that the partners pay to the partnership and take away from
the partnership for personal use will cause a decrease in the
partner’s capital resulting in a Debit (subtraction) to the Current
Account
 ACCOUNTS PREPARED BY A PARTNERSHIP
Partners Current Account
Items that decrease each partner’s
capital
(Debit to the Current Account)
• Withdrawals for personal/ private
use (Drawings)
• Interest paid by each partner from
withdraws for personal use
(Drawings)
Items the increase each partner’s
capital
(Credit to the Current Account)
• Interest received by each partner as a
return on their investment (Capital)
• Yearly Salaries received by the
partners for being employed in the
Partnership
• Interest received on Loan given to the
Partnership by the Partners
• Share of the residual income to each
partner
 ACCOUNTS PREPARED BY A PARTNERSHIP
Partners Current Account
Name of Partnership
Current Account
Details $A $B $C Details $A $B $C
Balance b/d X Balance b/d X X
Drawings X X X Interest on Capital X X X
Interest on Drawings X X X Salary of Partners X X
Share of losses Share of Profits X X X
Balance c/d X X X
XXX XXX XXX XXX XXX XXX

Balance b/d X X X
 ACCOUNTS PREPARED BY A PARTNERSHIP
Partners Current Account
Balance in the Current Account.

• Generally, the current a/c has credit balances. A credit balance means that the
partnership OWES the partner the value of the balance. This will represent the
addition to the partner’s capital.

• The opposite holds through, i.e. a debit balance means that the partner OWES
the partnership the value of the balance. This will represent the total
subtraction from the partner’s capital.
 ACCOUNTS PREPARED BY A PARTNERSHIP

• Financial Statements – The Balance Sheet

• The Balance Sheet of a Partnership is similar to that of a Sole Trader.
However, the “Financed By Section” will include the Separate
Capital Account Balances of each Partner and the Separate Current
Account Balances
 ACCOUNTS PREPARED BY A PARTNERSHIP

• Financial Statements – The Balance Sheet

Name of Partnership
Balance Sheet (Capital Section ONLY) as at (Day, Month, Year)
$ $ $
Financed by:
OPENING CAPITAL
A Capital xxx
B Capital xxx
C Capital xxx
xxx
CURRENT ACCOUNT
A xxx
B xxx
C xxx
xxx
XXX
What have you learnt?

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