ACCOUNTING FOR

PARTNERSHIP

CPA Ansbert Kishamba

Introduction
• Partnership is an association of persons
carrying business in common with the
intention of making profit and sharing it in an
agreed ratio. (law of contract act s190(1)
• For the partnership to exist there must be
consent and all should have a common goal of
realizing profit.
• Partnership are governed by Law of Contract
Act, Cap 345
 Characteristics of a partnership
i. Partnership is voluntary
ii. There is an agreement. The agreement
should include:
Name, location and nature of Business
Name, capital, rights and duties of each
partner
Procedure for admitting a new partner
agreement should include….
Procedure for settling with a partner who
withdraws from the firm
The rate of interest, if any, to be charged on
partners’ drawings.
The salaries or commissions, if any, to be paid to
the partners.
Procedure for liquidating the partnership
agreement should include….
Method of sharing profits or losses among
the partners
Drawing of assets by the partners
The rate of interest, if any, to be paid on
capital contributed by the partners.
The rate of interest, if any, to be paid on
loans to the partnership by the partners.
Characteristics…
iii. Unlimited liability (some countries may
have limited partners)
iv. Mutual Agency
 H/W
• In absences of any written agreement
how are the rights and duties of the
partners in relation to the partnership
determined?
Capital Contribution
• Partners contribute capital to the
partnership as each partners agrees to
contribute
 Example
• Diana and Rose entered into an agreement to
establish a partnership firm, that will be known
as Dianarose. They agreed to contribute their
businesses as capital to the new partnership.
The balances of their business was as follows;
 Example…
• Diana's Investment
 Cash, Tshs1,600,000;
 inventory, Tshs8,000,000;
 Accounts payable, Tshs10,000,000 (The
current market values for these items equal
Diana’s values.)
 Computer equipment—cost, Tshs12,000,000;
accumulated depreciation, Tshs3,000,000;
current market value, Tshs6,000,000
• Rose’s Investment
Cash, Tshs6,600,000 Computer software: cost,
Tshs20,000,000; market value, Tshs18,000,000
 Dianarose
Statement of Financial Position
Computer 6,000,000
Computer software 18,000,000
Total noncurrent assets 24,000,000
Inventories 8,000,000
Cash 8,200,000
16,200,000
Trade payable (10,000,000)
Net assets 30,200,000
Capital
Diana 5,600,000
Rose 24,600,000
30,200,000
 Sharing Profits or Losses, and
Partner Drawings
• Sharing of profits or losses based on an agreed
ratio
• Sharing may be based on;
– Each partner’s investment
– Each partner’s service
– Combination of stated fractions, investments,
and service
 Interest on Capital
• It is interest earned by capital contributed
• The rate of interest is a matter of agreement
between the partners, but it should equal the
return which they would have received if they
had invested the capital elsewhere
 Interest on drawings
• Partners may agree to charge interest on
drawings made by partners
• This is to ensure more cash is left in the firm
for expansion
Partners Accounts
• Normal books of accounts have to be
maintained.
• In addition to P/L and the statement of
Financial Position, an appropriation account is
also be prepared of cater for the distribution of
the trading result during the year as per
agreement.
Partners Accounts…
• A separate account is maintained for each partner.
These account include;
a. Partner’s Capital Account
b. Partner’s current Account
– The current account will record the
appropriations of profit or losses due to the
partners.
c. Partner’s drawing Account
d. Appropriation of profit account
e. Partner’s Loan Account
Example
Zumbukuku, Zero and Zuzu are in partnership sharing profit
at 2:1:1. Capitals contributed were Tshs8,000,000,
Tshs10,000,000 and 12,000,000 respectively, and their
partnership agreement allows for interest at 10% on their
capitals to be credited to partners. They normally make
drawings in anticipation of profits. For the current year the
balance of drawings for each partner was Tshs3,000,000,
4,000,000 and 2,000,000 respectively. The agreed interest
on drawings is 8% on the annual balance. They also agreed
annual salary of Tshs1,425,000, Tshs1,330,000 and
Tshs1,215,000 respectively. The profit for the year is
Tshs18,250,000.
Required:
Write up the entries in the Profit and Loss Appropriation
Account for the year ended 31st December 2015.
Kuruthum and Mwantum have reached an
agreement to start a restaurant that will specialize
in traditional dishes and also will be delivering
food at clients homes and offices. Kuruthum
agreed to contribute the building that her departed
uncle left her, the market value of the building
was Tshs20,000,000 and cash worth
Tshs12,000,000. Mwantum agreed to contribute
her van that has a market value of Tshs16 million
and Tshs8 Million cash. Before the
commencement of the business the following
events occurred:
• Building renovation to convet it to a restaurant
worth Tshs4 million
• Purchases & installation of cookers Tshs6
million
• Purchase of utensils Tshs4 Million
• Purchase of inventories Tshs2 million
Required: Draw up the statement of financial
position at the start of partnership firm
 Partnership Capital Accounts
• There are two choices open to partnerships:
a. Fixed capital accounts plus current
accounts, and
b. Fluctuating capital accounts.
 Fixed capital accounts plus current
accounts
• The capital account for each partner remains
year by year at the figure of capital put into the
firm by the partners
• The profits, interest on capital and the salaries
to which the partner may be entitled are then
credited to a separate account (current
account) for the partner, and the drawings and
the interest on drawings are debited to it
• The balance of the current account at the end
of each financial year will then represent the
amount of undrawn (or withdrawn) profits.
• A credit balance will be undrawn profits, while
a debit balance will be drawings in excess of
the profits to which the partner was entitled.
 Fluctuating capital account
• The distribution of profits would be credited to
the capital account, and the drawings and
interest on drawings debited. Therefore the
balance on the capital account will change
each year, i.e. it will fluctuate.
 Example
• Alex bob and Carl are in a partnership, sharing
profit and loses in the ratio 4:3:3 respectively.
The partnership maintains fixed capital amounts.
Alex is entitled to a salary of Shs13,000 per
annum. The partnership agreement also provides
for the partners to receive interest on capital at
6% per annum, and to pay interest on drawings at
a rate of 9% per annum. Assume all drawings
have been made on the first day of the financial
year
 Example…
• At July 20X5 the balances on the partners’
capital and current accounts were:

Capital accounts Current accounts Shs

Shs

Alex 325,000 99,800

Bob 200,000 45,990
Carl 100,000 32,100
 Example…
• On 1 January 20x6, Carl introduced a further Shs100,000
of capital and increased involvement in the business. It
was agreed that he should be paid a salary of Shs10,000
per annum from that date. During the year the partners
withdrew Shs18,000 each.
• The profit for the year to 30 June 20X6 has been
calculated to be 128,900. you should note that this
includes deductions for partners’ salaries
• Required
• Show the statement of division of profit and the partners’
current accounts for the year
 Goodwill in Partnership
• Goodwill may be defined as established
reputation of the business which is treated as
an asset of that business
• Goodwill is defined in IFRS 3 as the excess of
acquirer’s interest in the net fair value of
Acquiree’s identifiable assets, liabilities and
contingent liabilities over cost.
 Goodwill in partnerships accounts
• Goodwill is not recognized in the books except
to the extent that cash or other assets of the
firm have been used to pay for it
• Although goodwill is not normally entered in
the financial statements unless it has been
purchased, sometimes it is necessary where
partnerships are concerned.
 Goodwill in partnerships accounts…
• Unless it has been agreed differently, partners
own a share in the goodwill in the same ratio
in which they share profits.
• This is true even if there is no goodwill
account.
 Goodwill in partnerships accounts…
• When;
a. Existing partners decide to change profit
and loss sharing ratio,
b. Admit a new partner or;
c. A partner withdraw from the partnership
or dies
Change in profit sharing ratios of existing
partners
• Sometimes the profit or loss sharing ratios
have to be changed. Typical reasons are:
a. A partner may now not work as much as in the past,
possibly because of old age or ill-health.
b. A partner’s skills and ability may have changed, perhaps
after attending a course or following an illness.
c. A partner may now be doing much more for the business
than in the past.
Change in profit sharing ratios of existing
partners…
• If the partners decide to change their profit
sharing ratios, an adjustment will be needed
• Consider the following illustration
a. A, B and C are in partnership, sharing profits
or losses equally.
b. On 31 December 20X5 they decide to change
this to A one-half, B one-quarter and C one-
quarter.
c. On 31 December 20X5 the goodwill, which
had never been shown in the books, was
valued at £60,000. If, just before the profit-
sharing change, the firm had been sold and
£60,000 received for goodwill, then each
partner would have received £20,000 as they
shared profits equally.
d. At any time after 31 December 20X5, once the
profit sharing has changed, their ownership of
goodwill is worth A £30,000, B £15,000 and C
£15,000. If goodwill is sold for that amount
then those figures will be received by the
partners for goodwill
e. If, when (b) above happened, there had been no
change made to A by B and C, or no other form
of adjustment, then B and C would each have
given away a £5,000 share of the goodwill for
nothing. This would not be sensible.
Therefore adjustment to accounts are necessary
 Example
• E, F and G have been in business for ten years.
They have always shared profits equally. No
goodwill account has ever existed in the books. On
31 December 20X6 they agree that G will take only
a one-fifth share of the profits as from 1 January
20X7, because he will be devoting less of his time
to the business in the future. E and F will each take
two-fifths of the profits. The summarised balance
sheet of the business on 31 December 20X6
appears as follows:
 Example…
Balance Sheet as at 31 December 20X6
Net assets
Net assets 70,000
Capital
E 30,000
F 18,000
G 22,000
70,000
 Example
• The partners agree that the goodwill should be
valued at £30,000.
• Required:
1. shows the solution when a goodwill
account is opened.
2. Show the solution when a goodwill
account is not opened.
 Admission of a new partner
• Admitting a new partner dissolves the old
partnership and begins a new one.
• Any time the partner mix changes, the old
partnership ceases to exist and a new
partnership begins.
 Admission…
• A new partner can be admitted by :
i. Buying interest from the existing
partners
ii. Buying interest from the firm
 Revaluation
• Revaluations are required for all types of
assets, as Fixed assets, Current Assets as also
intangible assets.
• Actual position of liabilities should also be
scrutinized as against liabilities as per balance
Sheet.
• Revaluations are given effect to in books
through Revaluation Account
 Revaluation…
• Revaluation account will be debited with
 Increase in Liabilities
 Decrease in Assets
 Revaluation Costs
 Revaluation…
• Revaluation account will be Credited with;
 Increase in Assets
 Decrease in Liabilities
• The difference in Revaluation Account is net
profit or loss on revaluation and is transferred
to Partners’ Capital Accounts according to
their prevailing profit or loss sharing ratio.
Example
 • A and B are partners sharing profits or losses as
3:2. C Comes in and profit sharing ratio
becomes 3:2:1. The partners balance sheet
before C’s admission is as follows:
Balance Sheet of AB &Co.
Assets Capital & Liabilities
Land & building 15,000 A,s Capital 50,000
Machinery 20,000 B’s Capital 40,000
Stock 30,000 Sundry Creditor 15,000
Debtors 40,000 Expenses payable 5,000
Cash 5,000
110,000 110,000
• Land and buildings are valued at 25,000/=.
Machinery is valued 10% above book value.
Stock is valued 5% less. Debtors are to be
valued 7½% below. One contingent liability for
expenses 1,000/= has matured and is not
recorded in the books.
• Required: Pass necessary adjustment entries
before C’s admission, prepare Revaluation
Account and balance sheet before C’s
admission.
 Discussion question
• Provided below is a statement of Financial
position of the firm of Aye and Bee whose
profit sharing ratio is 2:1
 Aye and Bee in Partnership
Statement of Financial Position as at 30.6.20X6
Non Current Assets Shs Shs
Buildings 15,750
Machinery 9,225
24,975
Current assets
Stock 13,500
Debtors 8,550
Cash at bank 900
23,950
Total Assets 47,925
Capital Accounts And Libilities
Capital
Aye 25,500
Bee 10,500
36,000
Creditors 11,925
47,925
• Chris is admitted into the partnership, to fifth
share of profit. Chris introduces one quarter of
the combined capitals of Aye and Bee after
adjustment for goodwill. At this date, the value of
unrecorded goodwill was shs12,000/=. The new
profit sharing ratio will be 8:4:3
Required
• Assume Chris brings in the required amount of
cash and that goodwill account is maintained;
show the relevant journal entries and the
Statement of Financial position after Chris’s
admission
 Admission…
• A partner who Buys interest from the firm can
be admitted at:
» Book value
» Above the book value (Goodwill)
» Below the book value (Negative goodwill)
Admission – Buying interest of the existing
partner
A person can become a partner by purchasing an
existing partner’s interest. First, however, the
new person must gain the approval of the other
partners.

The Bright & Gonzalez partnership has these

balances at December 31, 2013:
 Admission – Buying interest of the existing
partner
Assets Liabilities
$ $
Cash 40,000 Accounts payable 70,000

Inventory 76000 Bright capital 48100

Computer equipment's 44000 Gonzales Capital 53900

Computer Software, 12000

net
Total 172000 Total liabilities and 172000
owner's Equity
Admission – investing in the partnership: at
book value
• Cheryl Kaska wants into the Bright &
Gonzalez partnership on January 1, 2014.
• Kaska can invest land with a market value of
$51,000. Bright and Gonzalez agree to
dissolve their partnership and start up a new
one, giving Kaska a 1/3 interest in the new
partnership for her $51,000 investment, as
follows:
Partnership capital before Kaska is admitted ($48,100 + $102,000
$53,900)
Kaska’s investment in the partnership $51,000

Partnership capital after Kaska is admitted $153,000

Kaska’s capital in the new partnership ($153,000 1/3) $ 51,000

 Withdraw a partner
• A partner may leave the business for many
reasons, including retirement, death, or a
dispute.
• The withdrawal of a partner dissolves the old
partnership.
• The agreement should specify how to settle
up with a withdrawing partner.
• A partner retiring from the partnership or the
representative of the deceased partner usually
receives cash or other assets including
goodwill directly from the partnership
• A partner may withdraw from the firm at:
» Book value
» Above the book value
» Below the book value
 Dissolution of partnership
• The process of bringing to an end a
partnership business in known as a dissolution
of partnership
• Section 212 of cap 345 provides the circumstances under
which the partnership can be dissolved. These are:
a. Expiring of the agreed terms for which partnership
was entered into
b. If entered into for a single adventure or undertaking,
by the completion of the venture
c. Death or retirement of the partner subject to the
partnership deed;
d. By happening of any event which make the
partnership unlawful
e. One partner giving notice to the other on the
intention to dissolve the firm
f. The bankruptcy of the partner
 Dissolution…
• A partnership may be terminated by selling the
assets, paying the creditors, and distributing
the remaining cash to the partners.
• Section 224 of Cap 345 provides the rule that
has to be observed on the application of the
proceeds obtained from the sold assets of the
firm.
• Pay all debts and liabilities (outsiders other than
advances by the partners)
• Pay rateably the amounts advances as loans
(not capital) by partners
• Pay for amounts due to each partner in terms of
their capital and current accounts\the ultimate
residue, if any shall be divided amount the
partners in the proportion in which profits were
divisible.
 Dissolution…
• The sequence of events when the business does not
continue and the partnership ceases to exist is:
a. All asset (except cash) and liabilities are
transferred to a realization account at their book
value.
b. Each Partner’s current account is cleared to his
capital account, as the distinction between the two
is irrelevant at this stage.
c. As the assets are sold and liabilities are settled, double
entry is made between the realization account and the
cash account. Any realization expense are debited to the
realization account. If partners take over assets this fact is
recorded in their accounts.
 d. When all assets are disposed of and all
liabilities met, the balance on the realization
account is transferred to the partners’
accounts, in their profit sharing ratio. A credit
balance on the realization account represents a
profit on dissolution, a debit a loss.
e. At this stage the total amount due to the
partners should equal the cash balance. The
cash is distributed and the partnership is over.
 PIECEMEAL REALIZATION
• It rarely happens in practice that all partnership assets
are sold on or about the date set for the dissolution of
the firm.
• Usually the disposal of assets and the payment of
creditors take place over a period of time, and
partners often wishes to withdraw some cash as soon
as it is available for distribution, rather than wait until
all the assets have been sold.
PIECEMEAL REALIZATION…
• In such circumstances it is important to limit
individual withdrawals so that no partner receives
more than would be his entitlement should the
remaining assets prove to be worthless or impossible
to realize.
• This is a wise precaution, because if a partner
becomes insolvent during the course of the
dissolution the other partner does not then have the
problem of retrieving funds from his estate.
PIECEMEAL REALIZATION…
• As assets are realized the funds must be used as
follows.
• Step 1. Pay off outside creditors.
• Step 2 Repay partners’ advances over
and above their fixed capital
• Step 3 Pay amounts due to partners on
their capital and current accounts
• A straightforward technique may be adopted to
determine the payment due to each partner as
and when funds become available for
distribution (once liabilities have been paid).
• A distribution schedule is prepared,
commencing with the balances on the partners’
accounts
• To find the distribution payment due:
a. Calculate the notional loss, which would
arise if all the remaining unsold assets were
worthless.
b. Divide this maximum potential loss
between the partners in the normal profit
and loss sharing ratio.
• The balances show the amount of cash to be
paid to each of the partner, and when the
payments are made and entered in the partners’
accounts, the procedure can be operated (with
the new balances) for the next distribution
• Should a partner’s account become notionally
in debit when the maximum potential loss is
apportioned to him, the debit balance must be
borne by the other partners.
• The debit balance is divided between the other
partners in their respective profit and loss
sharing ratios. This ensures that their accounts
are brought into the profit sharing ratio as soon
as possible during the piecemeal realization.
 THE CONVERSION OF A PARTNERSHIP
TO A LIMITED COMPANY
• When a partnership is completely dissolved, its
assets are dispersed and it ceases to exist both as a
trading and a legal entity.
• A partnership may, however, be sold to another
firm which continues the partnership trading
activities but under a different legal umbrella. The
new firm may be another partnership, or a sole
trader, or as often happens (both in practice and in
the examination) a limited company.
• The acquisition of the partnership business
•
may be achieved in one of two ways:-
a. A completely independent limited
company taking over the firm for cash
consideration. The partners sell up and,
having no further interest in the activities
of their old business, close off the
partnership books.
b. A limited company formed especially for the
purpose of acquiring the business of the
partnership. This may occur when a
successful partnership (or sole trader) has
reached the stage where incorporation is
desirable because of:
i. The benefits of limited liability.
ii. The need to obtain capital through issues
of equity (ordinary) shares to outsiders.
iii. Possible taxation advantages.
• The accounting entries for the ‘sale’ of the
partnership to the limited company record:
a. The cessation of the partnership and the
realization of its net assets.
b. The ‘purchase’ by the newly created
company of the business and net assets of
the partnership.
• The sale price, normally referred to as the
purchase consideration, is usually paid to the
partners in the form of:
a. shares in the limited company; and/or
b. debentures in the limited company.
• If the company has already been in existence or
has incurred outside borrowings, cash may
form part of the purchase consideration, if any
to settle any balances due to the partners.
End of Topic
One