EBF1323: ACCOUNTING

Week 10

Partnership
accounts
Learning objectives
 Explain what a partnership is.
 What are the accounts involved in a
partnership.
 Understands in details the contents of a
partnership agreement.
 In the absence of partnership agreement
on sharing of profit and loss, how it could
be shared.
 Learn some of the ledger account such as
appropriation account and current account
of partners.
What is partnership
When two or more people/parties formed to
form a partnership.
Normally the size of a partner ranges from
2 to 20 people.
It is formed to make a profit.
Contents of partnership
agreement
 The capital to be contributed by each partner.
 The ratio in which profits/losses are to be
shared.
 The rate of interest to be paid on capital if any,
before the profits are shared.
 The rate of interest if any to be charged to
partners drawings.
 Salaries to be paid to partners.
 Arrangement for the admission of new partners.
 Procedures to be carried out when the partners
retire.
 Details items of partnership
 Sharing of Profit Loss of partners
Partners can agree to share profit /losses in any ratio or
any way they may wish.
It is NOT necessarily true that the sharing of profit is
based on the amount of capital being contributed.

 Interest on capital
There shall be agreement to provide interest on capital
contributed by each partner.
The interest shall be deducted from profit before it is
being distributed among the partners.

 Interest on drawing
Interest are charged to partner for cash withdrawal.
Interest charge shall be added to partnership profit before
they being are distributed among the partners.
Details items of partnership
 Partnership salary
A partner salary shall be deducted prior to
sharing the balance of the profit.

 Performance related payment to partners –

such as bonus
It may agree that commission or performance
related bonuses be payable to some or all
partners linked to their individual
performance. It shall be deducted first before
sharing the balance of profits.
Accounts in partnership
 Profit and Loss Appropriation account.
To reflect the distribution of profit among
the partners and may include items such
as partners salary and bonuses, partners
interest on drawings, partners interest on
capital.

 Partners Current account.

To reflect the effect of the distribution of
partnership profit
Accounts in partnership
Fixed capital account plus current a/c.
 The capital account for each partner
year by year at the figure of capital put
into the firm by the partner.
 The profits, interest on capital, salaries
and bonuses are credited to the
partner separate current account.
 The drawings and the interest on
drawings are debited to its current a/c.
Examples
Raslan and Ali have been in partnership for one year
sharing profits and losses in the ratio of 60:40
respectively. Both are entitled to 5 %per annum interest
on capitals, Raslan providing capital of RM20,000 and Ali
RM60,000. Ali shall have a salary of RM15,000.
Raslan withdraw cash RM15,000 and Ali withdraw
RM26,000
Interest is charged on drawings, Raslan being charged
interest RM500, and Ali interest RM1,000.
The net profit, before any distribution to the partners,
amounted to RM50,000 for the year ended 31 December
2006.

Prepare:
a)Profit and Loss Appropriation a/c
b) Current a/c for each partner.
 Raslan & Ali Appropriation a/c
for the year ended 31.12.2006
RM RM
Net Profit (From P&L) 50,000
Add: Interest on drawings
Raslan: 500
Ali : 1,000 1,500
51,500
Less: Salary
Ali: (15,000)
Less: Interest on Capital
Raslan: (1,000) --------
Ali : (3,000) (4,000) 32,500
=====
Balance of Profit shared:
Raslan (60%) 19,500
Ali (40%) 13,000 32,500
 Currents Accounts
Date Details Raslan Ali Date Details Raslan Ali

31.12 Cash Drawings 15,000 26,000 01.12 Balance b/d Nil Nil

31.12 Interest on 500 1,000 31.12 Salary Nil 15,000

drawings

31.12 Interest on capital 1,000 3,000

31.12 Balance c/d 5,000 4,000 31.12 Share of profits 19,500 13,000

20,500 31,000 20,500 31,000

Bal b/d 5,000 4,000

Illustration
Scot and Joplin are in partnership. They share profit in the ratio: Scot
70 percent; Joplin 30 percent. The following trial balance was extracted
as at 31 December 2007.
  Dr Cr
Office equipment at cost 9200 
Motor vehicles at cost 21400 
Provision for depreciation as at 31.12.2006:    
Motor vehicles   12800
Office equipment   3600
Inventory at 31 December 2006 38410 
Debtors 41940 
Creditors   32216
Cash at bank 2118 
Cash in hand 317 
Sales   180400
Purchases 136680  
Salaries 27400 
Office expenses 2130 
Discount allowed 312 
Current accounts at 31.12.2006    
Scot   7382
Joplin   7009
Capital accounts:    
Scot   50000
Joplin   20000
Drawings:    
Scot 17500 
Joplin 16000 
  313,407 313,407
Required:
Draw up a set of financial statements for the year ending
31 December 2007 for the partnership. The following notes
are applicable at 31 December 2007

a. Inventory, 31 December 2007 RM41,312

b. Office expenses owing RM240
c. Depreciation: motor 25 percent of cost; office equipment
20 percent of cost
d. Charge interest on capital at 5%
e. Charge interest on drawings: Scot RM300; Joplin RM200