ACCOUNTING FOR A

PARTNERSHIP
Chapter 5
 A partnership is an agreement in which you
and one or more people combine resources in
a business with a view to making a profit.
 The first requirement that must be fulfilled to

form partnership is to have agreement among

partners.
 Their agreement is known as a partnership

agreement or articles of a partnership or

partnership deed.
 The articles of partnership should make the following points
clear;
i. Name, location, and nature of the business
ii. Name, capital investment, and duties of each partner
iii. Method of sharing profits and losses among the partners
iv. Withdrawals of assets allowed to the partners
v. Procedures for admitting new partners and withdraws from
the firm
vi. Procedures for liquidating the partnership - selling the
assets, paying the liabilities, and disbursing remaining cash
to the partners
 Characteristics of partnership
1. Voluntary Association
 A person cannot be forced to join a partnership, and

partners cannot be forced to accept another person as a

partner.
2. Limited Life
 Because a partnership is formed by the consent of two

or more partners, it has a limited life.

 This means that, anything that ends the contract

dissolves the partnership when a new partner is

admitted or a partner withdraws, retires, dies or
becomes bankrupt.
3. Mutual Agency
 Each partner is an agent of the partnership within the scope of the

business.
 This means that a partner’s act to any contract is binding the

remaining partners as long as it is within the scope of the business’

operations and become the obligations of all partners.
4. Unlimited liability
 Each partner is liable for all the debts of the partnership.

 When and if the partnership fails to pay its debts, creditors can seize

(take) each partner’s personal assets to satisfy their claims.

 Therefore, partnership’s creditor claims are not limited to the assets of

the business, but is extends to the personal property of the partners.

5. Co- ownership of partnership property
 The property invested in a partnership by a partner becomes the joint
property of all the partners.
 The partner who invested the asset is no longer its sole owner.
6. No partnership income taxes
 A partnership pays no income tax on its business income. Instead, the net
income of the partnership becomes the taxable income of the partners.
 The firm would pay no income tax as a business entity.
7. Partners’ owner’s equity accounts
 A partnership has more than one owner, so every partner in the business
has an individual owner’s equity account.
 Often these accounts carry the name of the particular partner and the word
capital. Similarly, each partner has a withdrawal account.
 Accounting for partnership
 Accounting for partnership involves recording and
reporting of;
1. Formation of partnership
2. Determine net income or loss and share among
partners
3. Dissolution and
4. Liquidation of partnership
 Formation of partnership

 Each partner invests cash, other assets, or both in the

partnership according to the partnership agreement.
 Noncash assets valued and recorded at an agreed upon
value between partners or current market value on the
date transferred to the partnership.
 The assets invested by a partner are debited to the
proper account, and the total amount is credited to the
partner’s Capital account.
Illustration 1: Recording Initial Investment of Partners
 Assume that Alemu & Biya, who are sole owners of competing hardware stores;

agree to combine their business in a partnership named as Alemu & Biya

partnership business. Each partner is contributed the following assets and
liabilities:
Alemu Biya
Book Market Book Market
Cash Br. 16,000 Br 16,000 Br 15,000 Br 15,000
Accounts Receivable 7,000 7,000 7,000 7,000
Merchandise inventory 4,000 4,500 6,000 5,000
Store equipment 5,000 4,000 7,000 6,500
AFDA (500) (500) (300) (300)
Accounts Payable (3.000) (3,000) (4,000) (4,000)
Required: Prepare journal entry to record the investments.