Professional Documents
Culture Documents
Topic 8 - Partnerships
Topic 8 - Partnerships
Chapter
Partnerships
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Partnership???
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Learning
Learning Objectives
Objectives
Define partnership Prepare entries for
Identify characteristics partnership formation
of partnerships and Prepare partners
similar organizations account
Identify advantages and Dividing profit or loss
disadvantages of Preparing partnership
partnership financial statements
Definition
Definition of
of partnership
partnership
AA partnership
partnership isis an
an unincorporated
unincorporated association
association ofof two
two or
or
more
more people
people to
to pursue
pursue aa business
business for
for profit
profit as
as co-owners.
co-owners.
In
In Malaysia,
Malaysia, this
this business
business form
form is
is governed
governed under
under the
the
Partnership
Partnership Act
Act 1961.
1961.
According
According toto Para
Para II,
II, Section
Section 3(1)
3(1) of
of the
the Partnership
Partnership Act
Act
1961,
1961, aa partnership
partnership is
is defined
defined as:
as:
“the
“the relation
relation which
which subsists
subsists between
between persons
persons carrying
carrying on
on
business
business inin common
common with
with aa view
view of
of profit”.
profit”.
Characteristics
Characteristics of
of Partnership
Partnership
Voluntary
Voluntary Limited
Limited
Association
Association Partnership
Partnership Life
Life
Agreement
Agreement
Taxation
Taxation
Mutual
Mutual Unlimited
Unlimited
Agency
Agency Co-
Co- Liability
Liability
Ownership
Ownership of
of
Property
Property
Advantages
Advantages of
of Partnerships
Partnerships
Ability
Ability to
to share
share knowledge,
knowledge, expertise,
expertise, and
and experience
experience among
among co-
co-
partners
partners in
in the
the business.
business.
Easy
Easy to
to form
form the
the partnership
partnership firm
firm and
and lower
lower cost
cost of
of formation
formation as
as
compared
compared toto the
the other
other types
types of
of business
business organizations.
organizations.
Enables
Enables firm
firm to
to get
get additional
additional sources
sources of
of investment
investment capital
capital from
from
each
each partner
partner since
since more
more than
than one
one partner
partner is
is within
within the
the partnership
partnership
firm.
firm.
Advantages
Advantages of
of Partnerships
Partnerships
Possible
Possible tax tax advantages
advantages where
where aa partnership
partnership hashas the
the same
same tax tax
status
status asas aa sole
sole proprietorship
proprietorship and
and is,
is, therefore,
therefore, not
not subject
subject to
to taxes
taxes
on
on its
its income.
income.
Easy
Easy to
to manage
manage and
and decisions
decisions can
can be
be made
made with
with less
less bureaucracy
bureaucracy
since
since the
the owners
owners of
of the
the partnership
partnership firm
firm are
are usually
usually its
its managers.
managers.
Disadvantages
Disadvantages of
of Partnerships
Partnerships
The
The liability
liability is
is unlimited
unlimited where
where allall partners
partners are
are personally
personally liable
liable
for
for business
business debts
debts and
and liabilities.
liabilities.
ItIt is
is hard
hard to
to find
find suitable
suitable partners
partners where
where there
there is
is aa possibility
possibility of
of
conflict
conflict between
between partners
partners in
in the
the future.
future.
Partnership
Partnership is
is dissolved
dissolved upon
upon the
the death
death of
of aa partner.
partner.
Partnership
Partnership Agreement
Agreement
AA partnership
partnership is
is based
based on
on aa contract
contract between
between individuals.
individuals. ItIt is
is an
an
agreement
agreement among
among thethe members
members of of aa firm
firm for
for sharing
sharing the
the profits
profits of
of
the
the business
business carried
carried on
on by
by all
all or
or any
any ofof them
them acting
acting for
for all.
all.
Salary
Salary (remuneration)
(remuneration) andand commission
commission to
to partners
partners
No
No partner
partner isis entitled
entitled to
to any
any salary
salary or
or commission
commission for
for
acting
acting in
in the
the partnership
partnership business.
business.
Interest
Interest on
on capital
capital
No
No interest
interest on
on capital
capital is
is allowed
allowed to
to all
all partners.
partners.
In
In the
the Absence
Absence of
of aa Partnership
Partnership
Agreement
Agreement
Interest
Interest on
on drawings
drawings
No
No interest
interest will
will be
be charged
charged on
on any
any drawings
drawings made
made by
by the
the
partners.
partners.
Advance/loan
Advance/loan to to the
the business
business
A
A partner(s)
partner(s) is
is entitled
entitled to
to an
an interest
interest of
of 8%
8% per
per annum
annum
for
for any
any advance
advance made
made toto the
the business
business beyond
beyond the
the amount
amount
of
of capital
capital subscribed.
subscribed.
Participation
Participation in
in business
business
Every
Every partner
partner may
may take
take part
part in
in the
the management
management of
of the
the
partnership
partnership business.
business.
In
In the
the Absence
Absence of
of aa Partnership
Partnership
Agreement
Agreement
Admission
Admission of of new
new partner(s)
partner(s)
No
No admission
admission ofof new
new partners
partners into
into the
the business
business except
except
that
that all
all partners
partners agree
agree to
to it.
it.
Books
Books ofof accounts
accounts
All
All books
books ofof accounts
accounts ofof the
the partnership
partnership shall
shall be
be kept
kept at
at
the
the place
place of
of the
the partnership’s
partnership’s business.
business. Each
Each partner
partner is
is
entitled
entitled to
to access
access to
to all
all of
of them.
them.
Organizing
Organizing aa Partnership
Partnership
When
When partners
partners investinvest inin aa partnership,
partnership, their
their capital
capital accounts
accounts areare
credited
credited for
for the
the invested
invested amounts.
amounts.
Each
Each partner’s
partner’s investment
investment is is recorded
recorded at
at an
an agreed-on
agreed-on value,
value, normally
normally
the
the market
market values
values of of the
the contributed
contributed assets
assets and
and liabilities
liabilities at
at the
the date
date of
of
contribution.
contribution.
Journal
Journal entry
entry is:
is:
Cash/
Cash/ Bank/
Bank/ Assets
Assets Accounts
Accounts XX
XX
Partner’s
Partner’s Capital
Capital Accounts
Accounts XX
XX
Organizing
Organizing aa Partnership
Partnership
Kayla
Kayla Zayn
Zayn and
and Hector
Hector Perez
Perez organize
organize aa partnership
partnership called
called BOARDS
BOARDS
that
that offers
offers year-round
year-round facilities
facilities for
for skateboarding
skateboarding and
and snowboarding.
snowboarding.
Zayn’s
Zayn’s initial
initial investment
investment in in BOARDS
BOARDS is is $30,000,
$30,000, made
made up up ofof cash
cash
($7,000),
($7,000), boarding
boarding facilities
facilities ($33,000),
($33,000), aa note
note payable
payable reflecting
reflecting aa
bank
bank loan
loan for
for the
the new
new business
business ($10,000).
($10,000). Perez’s
Perez’s initial
initial investment
investment isis
cash
cash of
of $10,000.
$10,000.
Zayn’s investment
Cash 7,000
Boarding facilities 33,000
Note payable 10,000
K. Zayn, Capital 30,000
Perez’s investment
Cash 10,000
H. Perez, Capital 10,000
Partner’s
Partner’s Capital
Capital Account
Account
The capital accounts of partners can be maintained
based on two methods, namely:
• Fixed Capital Method, and
• Fluctuating Capital Method
(1)
(1) Fixed
Fixed Capital
Capital Method
Method
Under this method, the amount of capital of the partners
remains fixed unless there is some additional capital
brought in or there is any capital withdrawn by the partners
during the period. This method requires two types of
accounts to be opened. These accounts are:
• Capital Account, and
• Current Account
Any accounts that reflect the changes in the partners’
capital accounts such as additional capital (increase
capital) and drawings of capital (decrease capital) will be
shown in the partner’s capital account as below:
(1)
(1) Fixed
Fixed Capital
Capital Method
Method (Cont…)
(Cont…)
Partner’s Capital Account
$ XXX $ XXX
* balancing figure
Note: Separate capital account is kept for each partner in the business.
(1)
(1) Fixed
Fixed Capital
Capital Method
Method (Cont…)
(Cont…)
Partner’s Current Account
Date Description Ref Amount Date Description Ref Amount
$ XXX $ XXX
* balancing figure
Note: In Partners' Current Account, beginning balance and ending balance can be either debit or credit
side.
Example:
Example:
On 1 July 2019, Aidiel and Fitrie commenced a
partnership where they contributed RM60,000 and
RM45,000 each. P/L sharing ratio is 2:1.
Additional information:
i) Salary for Aidiel and Fitrie RM10,000 per annum and
RM 8,000 per annum respectively and the interest
for the capital was 8% per year.
ii) Aidiel and Fitrie also made a withdrawal of RM 3,000
and RM6,000 respectively.
iii) The profit of the firm after providing Aidiel and
Fitrie’s salary as well as interest of capital was
RM16,500.
(1)
(1) Fixed
Fixed Capital
Capital Method
Method (Cont…)
(Cont…)
Partner’s Capital Account (Aidiel)
60,000 60,000
* balancing figure
Note: Separate capital account is kept for each partner in the business.
(1)
(1) Fixed
Fixed Capital
Capital Method
Method (Cont…)
(Cont…)
Partner’s Current Account (Aidiel)
Date Description Ref Amount Date Description Ref Amount
Beginning balance -
25,800 25,800
* balancing figure
Note: In Partners' Current Account, beginning balance and ending balance can be either debit or credit
side.
(2)
(2) Fluctuating
Fluctuating Capital
Capital Method
Method
This method is not similar to the fixed capital method.
Only one capital account for each partner will be opened.
Any items that reflect the partner’s account such as
interest on capital, drawings, interest on drawings,
salary/remuneration, commission, and share of profits or
losses of partners for the period will be recorded in the
partner’s capital account.
(2)
(2) Fluctuating
Fluctuating Capital
Capital Method
Method (Cont…)
(Cont…)
Partner’s Capital Account
Date Description Ref Amount Date Description Ref Amount
Drawings $ XX Beginning balance $ XX
Interest on drawings XX Additional capital XX
Share of loss – P & L XX Interest on capital XX
Appropriation
Salary to partners XX
Commission/bonus XX
Ending balance * XX Share of profit – P & L XX
Appropriation
$ XXX $ XXX
* balancing figure
Note: A Partners' Capital Account usually shows a credit balance. However, under certain situations, it
can show a debit balance, such as over withdrawal or insolvency of the partner.
On 1 July 2019, Aidiel and Fitrie commenced a
partnership where they contributed RM60,000 and
RM45,000 each. P/L sharing ratio is 2:1.
Additional information:
i) Salary for Aidiel and Fitrie RM10,000 per annum and
RM 8,000 per annum respectively and the interest
for the capital was 8% per year.
ii) Aidiel and Fitrie also made a withdrawal of RM 3,000
and RM6,000 respectively.
iii) The profit of the firm after providing Aidiel and
Fitrie’s salary as well as interest of capital was
RM16,500.
(2)
(2) Fluctuating
Fluctuating Capital
Capital Method
Method (Cont…)
(Cont…)
Partner’s Capital Account (Aidiel)
85,800 85,800
* balancing figure
Note: A Partners' Capital Account usually shows a credit balance. However, under certain situations, it
can show a debit balance, such as over withdrawal or insolvency of the partner.
Date Description Debit Credit Balance
Cash 30,000
Drawing 1,000
Interest on drawing 50
Salary 6,000
1. Interest on Capital
Partners can agree to allocate “interest allowance (or interest on
capital)” based on the amounts invested by each partner.Expense
partner. to
partnership firm but gain for partners.
2. Drawings
Similar to other business types of organizations, the partners in the
partnership firm can make a withdrawal of cash or goods from the
business. -NO EFFECT ON PROFIT AND LOSS APPROPRIATION-
Dividing
Dividing Profit
Profit or
or Loss
Loss (Cont…)
(Cont…)
3. Interest on Drawings
Gain to the partnership firm
4. Partner's Salary/Remuneration
Gain to partners but an expense to the partnership firm.
5. Partner's Commission
Any commission paid to the partners is a gain to partners but an
expense to the partnership firm.
Dividing
Dividing Profit
Profit or
or Loss
Loss (Cont…)
(Cont…)
6. Transfer to Reserve
Reduction of profit to the partnership firm.
7.
7. Share
Share of
of Profits
Profits or
or Losses
Losses
Partners
Partners can
can agree
agree toto any
any method
method of
of dividing
dividing profits
profits or
or losses.
losses.
In
In the
the absence
absence of of an
an agreement,
agreement, the
the law
law says
says that
that the
the partners
partners
share
share profits
profits or
or losses
losses of
of aa partnership
partnership equally.
equally.
Example
Example of
of Profit
Profit and
and Loss
Loss
Appropriation
Appropriation
Farid and Fariq are in partnership named Waja Ent. since 1st January
2019, sharing profit for the ratio 2:1. For the year ended 31 December
2019, Waja Ent. managed to obtained a profit of RM16,855. The
partners entitled to interest on capital and drawings at 10% and 5%
per annum respectively based on their agreement. Farid is also
entitled to receive a salary of RM 200 per month.
Additional info:
i) Farid and Fariq contributed capital of RM78,000 and RM48,000
respectively.
ii) Farid withdrawn RM4,800 while Fariq RM 3,600.
iii) Farid also received a commission of RM 1,000 from the partnership.