Partnership Accounts

• It is quite common for two or more people to enter into a business partnership with one
another
• The nature of partnership business means there are certain accounts, concepts, issues and
techniques that are unique to them

Important things to remember when dealing with Partnerships

• While you learn more about partnerships it is important to remember the following things:
• The partnership ceases to exist when:
o death of a partner
o admission of a new partner
o When a partner leaves the partnership
o It becomes bankrupt
o or is dissolved
• Partnerships can have an oral or written agreement called a Partnership deed
• This covers issues such as:
a. The amount of Capital to be
contributed by each partner
b. The ratio used to share profit and losses
c. The amount each partner can take out as drawings
d. The interest payable on capital or current accounts if any
e. The interest chargeable on drawings if any
f. The life of the partnership
g. Arrangements to be made in the event of death of a partner or when a partner leaves
h. Procedures to be followed when settling disputes
i. Arrangements to be made when admitting a new partner
• This information is useful when preparing accounts pertaining to partnerships
• In any case this information is clearly given in examination questions pay particular
attention to it when accounting for partnerships
• All these things have to be recorded in the books
Unique partnership accounting concepts
• It is important to take note of this very important fact:
• There are no such things a partnership accounts
• The misnomer is frequently used to refer to accounting techniques that are commonplace in
Partnerships

1 Income Statements of Partnerships

• These are no different in form and content when compared to those of sole proprietors and
companies
• It is important to note that we can have a manufacturing partnership in which case the
partnership would also prepare the usual manufacturing account
• The net profit figure is then transferred to an Appropriation Account which will be looked
at
2 Capital Accounts
• These will be looked at in detail
• However, unlike those of a sole trader there are columns showing the capital contribution of
each partner
• We will examine Capital Accounts in detail here

3 Salaries and Drawings

• It is possible for partners to earn a salary
• In such cases the salary is shown in the Appropriation Account rather than in the Income
Statement
• Drawings are in separate columns for each partner

4 Other items
• Other issues such as interest on drawings
• Interest on capital etc
• Current Accounts
• Have to be dealt with these will be dealt with once we encounter them
Characteristics/Features
• A partnership is an unincorporated association of two or more individuals to carry on a
business for profit. General partnerships are usually made up of 2-20 partners. Special
partnerships such as those formed by professionals who are not allowed to form companies
e.g. Accountants, Dentists etc. can have 2 people.
• The operation of a partnership is governed by an agreement (written or oral) known as a
partnership deed.
• The partners normally have unlimited liability which means that they may lose personal
assets in settlement of business debts.
• The partnership is not usually a separate legal entity meaning that the death of anyone of the
partners will result in the dissolving of the partnership.

Partnership deed.
• An agreement between the partners in a business.
• It contains the names of the parties involved in the partnership, the duration of the
partnership, business to be conducted and name of the partnership.
• It also contains provisions on matters such as: the duties of each partner, the salaries
payable (if any) to each partner, the amount of capital each partner is supposed to contribute,
interest to be earned on capital (if any) and the partner's profit sharing ratio as well as matters
partners' voting rights and the procedure to be followed in dissolving the partnership and
admittance of new partners.

Partnership Act of 1890

• Whenever there is no partnership deed the provisions of the partnership Act of 1890 apply
according to this law:
• Partners are not entitled to a salary, the capital accounts earn no interest, Capital is to be
contributed equally by all partners, profit and losses are to be shared equally and all partners
have equal voting powers, Loans from partners earn 50/0 interest per annum.
Limited Liability Partnership
• Is a partnership, similar to a general partnership, with the exception that one of the partners
has limited liability.
• In limited liability partnerships at least one of partners must be a general partner with
unlimited liability.
• Some of the partners at accounting firms like Deloite and Touché are limited liability
partners which means that they cannot lose their private assets in settlement of partnership
debts.
Dormant partner- is a partner that does not take part in the day to day running of
the business but is still entitled to their profit share in the business.

Advantages
• Additional skills from each member can lead to specialization and division of labour e.g. in
a law firm one person specializes in tax law, another partner in family law and another in
civil law.
• Consultation between partners leads to better/quality decision making.
• More capital can be raised than in the case of sole traders.
• Losses are shared equally amongst partners cushioning the partners from heavy losses.
• Easy to set up. (It can be done using an oral agreement.)

Disadvantages
• Partners have unlimited liability. (At least one partner has unlimited liability in a limited
liability partnership.)
• Delayed decision making can result in case of disputes between partners.
• The partnership is dissolved if one partner dies or leaves.
• The partner has to share profits.
• There is a limit to the amount of capital that can be raised since the number of partners is
limited at 20 for some partnerships.
• Estate duties have to be paid upon the death of one of the partners.

Partnerships: Capital and Current Accounts

• As we will continue to emphasize throughout the topic
• You ought to pay attention to the requirements of the question and follow these
• Where there are no guidelines or the question is silent remember the following provisions:
o Profits and losses are to be shared equally
o There is to be no interest allowed on capital
o No interest is to be charged on drawings
o Partners are not entitled to salaries
o Partners who put a sum of money into a partnership in excess of the capital they
have agreed to subscribe are entitled to interest at the rate of 5 per cent per year on such an
advance
• Also, wherever possible use columnar Capital Accounts and Current
Accounts it saves time and is more convenient
• Always use current accounts and capital accounts instead of fluctuating interest at the rate
of 5 per cent per year on such an advance
• Also, wherever possible use columnar Capital Accounts and Current Accounts it saves time
and is more convenient
• Always use current accounts and capital accounts instead of fluctuating capital accounts
unless otherwise instructed
• Like some normal business partnerships are formed when their owners (partners) inject
capital into the business
• While the principles of recording capital are the same as those of a Sole Trader business
• There are certain differences that need to be borne in mind
• One of these is the fact that the capital contribution of each member has to be clearly shown
• One way to do this is to create a capital account for each partner and showing the
appropriate entries therein
• However, another more common technique is to create a single capital account with
columns showing the entries pertaining to each partner
• Both methods are identical in nature and you can settle on either
• Where space allows the column, method is used in our examples and solutions
• please note this is just a way of displaying the accounts, it does not affect entries
• For example: K Rombe and C Choto

Fixed Capital and Fluctuating Capital Accounts

• Remember that the amount of capital (Equity) within the business is:
o Increased by profits every year or decreased by net losses each year
o Affected by further injections or withdrawals of capital
o Reduced by drawings
• To show these changes there are two options:
a. A fixed capital account and current account to record fluctuations throughout the
duration of the partnership
b. Fluctuating capital accounts
c.
1 Fixed capital accounts plus current accounts
• The capital account of each partner only shows the capital contributions of the relevant
partner for the duration of the partnership and nothing else
• The profits, interest on capital and salaries to which partner a partner is entitled are credited
to that partner's current account
• Drawings and interest on drawings are debited this same current account
• The balance at the end of each financial period represents the amount of drawn/undrawn
profits
• A credit balance will show the amount of undrawn profits while
• A debit balance shows the drawings in excess of profits to which a partner was entitled i.e. a
partner took more in drawings that they were entitled
• Again, the current account partner can be shown desperately as with capital accounts shown
above or • As we prefer, can be shown as columns in one Current Account
 Preston’s Current Account
Date Details Dr $ Date Details Cr $
2000 2000
Jan 1 Drawings xx Jan 1 Balance b/d xx
Interest on drawings x Interest on capital xx
Salaries xx
Dec 31 Balance c/d xx Share of profits xx
xxx xxx
2001
Jan 1 Balance b/d xx

Preston’s Capital Account

Date Details Dr $ Date Details Cr $
2000 2000
Jan 1 Balance b/d xxx
Dec 31 Balance c/d xx Current accounts xx
xxx xxx

You are required to draw guidance on how to compute the figures from the question and your
knowledge of partnerships
2 Fluctuating capital accounts
• Here all entries that would normally be shown in the current account are recorded in the
capital accounts of each partner and no current accounts are maintained
• For this reason, capital account balances will change each financial period
• Hence the name of the method fluctuating (changing) account balances
• Each partner's share of profit and drawings and interest on drawings are debited to the
relevant partner's capital account

Preston’s Capital Account

Date Details Dr $ Date Details Cr $
2000 2000
Jan 1 Drawings xx Jan 1 Balance b/d xxx
Interest on drawings x Interest on capital xx
Salaries xx
Dec 31 Balance c/d xx Share of profits xx
xxx xxx

NB:
• The above example is different from the one showing current accounts. The two are just
illustrations Always prefer the Fixed Account and Current Account balances
• You are to always use current accounts as shown in method one
• Never ever use the fluctuating capital balance method unless the question explicitly asks
you to do so
• We will however contend you will never be asked to do this never be asked to do this
• As a result, always use method 1, indeed in these notes we will only ever use method 1

Appropriation Account
• Apart from a few nuances partnerships prepare normal financial statements
• These are almost indistinguishable from those of Sole Traders
• They include the usual Income Statement (Trading and Profit and Loss Account) and the
Statement of Financial Position
• If this is a manufacturing partnership the Manufacturing Account is also prepared
• In addition to these and Appropriation account also prepared
• It is usually prepared after or as part of the Income Statement
• If you prepare it as part of the Income statement remember to include it in the heading
• For example:
A’s Income Statement and Appropriation Account for the year ended 20X8

Name of business’
Income statement and appropriation Account for the year ended 31 December 2000
Net profit xx
Add interest on drawings:
A x
B x
xx
xxx
Less appropriations
Salaries A xx
Interest on capital:
A xx
B x
xx
[xx]
Profit available for sharing xx
Share of profits:
A x
B xx
xx

• The Appropriation account is used to show the share of profits, any interest on capital,
salaries, interest on drawings etc that are attributable to each of the partners
• The corresponding entries are shown in the Current Account/Capital Account (in instances
where a fluctuating capital balance is used)
Partnerships: Partnership Financial Statements

Preston’s Current Account

Date Details Dr $ Date Details Cr $
2000 2000
Jan 1 Drawings xx Jan 1 Balance b/d xx
Interest on drawings x Interest on capital xx
Salaries xx
Dec 31 Balance c/d xx Share of profits xx
xxx xxx
2001
Jan 1 Balance b/d xx

The proforma that is to follow does not include the current account inside but is prepared
separately
Proforma
Preston’s Statement of financial position as at 31 Dec 19—
NON- CURRENT LIABILITIES AT COST DEP NBV
Premises at cost xxx xx xx
machinery xx x x
Motor vehicles xx x x
Fixtures and fittings xx x x
xxxx xx xx
CURRENT ASSETS
Inventory xx
Receivables xx
Bank xx
Cash xx
Prepayments x
xxx
CURRENT LIABILITIES
Payables xx
Accruals xx
xx
Working capital xx
xxxx
Financed by:
Capital:
A xx
B xx
xxx
Current accounts:
A x
B xx
xx
xxxx
The proforma that is to follow does includes the current account inside and is not prepared
separately
Proforma
Preston’s Statement of financial position as at 31 Dec 19—
NON- CURRENT LIABILITIES AT COST DEP NBV
Premises at cost xxx xx xx
machinery xx x x
Motor vehicles xx x x
Fixtures and fittings xx x x
xxxx xx xx
CURRENT ASSETS
Inventory xx
Receivables xx
Bank xx
Cash xx
Prepayments x
xxx
CURRENT LIABILITIES
Payables xx
Accruals xx
xx
Working capital xx
xxxx
Financed by:
Capital: A B Total
xx xx xxx
Current accounts:
Interest on capital xx x
salaries x xx
Share of profits x x
xx xx
Less:
drawings [x] [x]
Interest on drawings [x] [x]
xx xx
xx
xxxx

The concept of goodwill

➢ It is not unusual for a business to be bought or sold as a going concern i.e.
➢ The entire business (or business unit) and its related assets and liabilities
✓ Purchase consideration is the price which is paid by the purchasing company
▪ Net Assets = Assets – Liabilities
▪ Goodwill = Purchase Consideration- Net Assets
➢ Goodwill, often called purchased goodwill is the excess of the purchase price over
the net assets of the business
➢ Goodwill is considered to be an intangible asset
 ➢ It only exists if the purchase price i.e. the price at which a business was sold is
higher than its net assets
➢ Generally this only happens when the purchased b had a good reputation
➢ Goodwill can be therefore seen as representing that general reputation of the
business
Reasons for payment of goodwill
➢ There are advantages to buying a business which is already a going concern and
therefore pay goodwill. These advantages include:
✓ Existing customers who will continue to deal with the new business
✓ The reputation which the business had cultivated over time
✓ Experienced and reliable employees that already work for the business
✓ The business might be already located on a good/popular/prime location
✓ It is good contacts/relationship with suppliers
✓ The business might have valuable brands whose value was difficult to
ascertain and therefore not included as part of its assets
➢ None of this things would exit in a completely new business
➢ To cultivate t new business would have to expend time and money
➢ For this reason most buyers are willing to spend more than a business is actually
worth on paper
Negative Goodwill
➢ Where the price paid in buying a business (purchase consideration) is less than the net
assets of the business
➢ The difference is known as negative goodwill
➢ Negative goodwill is treated as a profit in the Income Profit and loss account in the
year it is realized
➢ Negative goodwill normally occurs when a business is bought at a bargain normally
because:
✓ The business has an inefficient workforce
✓ Has a bad reputation etc.
Determining the value of goodwill:
➢ Prudence, measurement concept, historical concept and other accounting regulations
forbid the recording of goodwill in accounting records before it is actually realised A
➢ Goodwill should only be recorded in partnership changes or when a business is
bought or sold business is bought or sold
➢ A business cannot estimate goodwill and record it as an asset before this happens
➢ During the actual sale it is up to the buyer and seller how they want to calculate
goodwill
➢ Common methods include using profit, sales and opportunity cost
➢ Goodwill can also be recorded when a sole trader acquires another business