Partnerships generally are associated with the practice of law, medicine, public accounting and other professions, and also with small business enterprises

1. 1
Introduction of Partnership
Accounts

2. 2
Characteristics of Partnership
 2 – 20 owners
 Governed by the Partnership Ordinance
 A partnership agreement can be drawn up to
define the rights and obligations of the
partners. If no agreement, the Partnership
Ordinance applies
 A partnership has no separate legal identity
except for the limited partners
 A limited partnership may also be formed,
which means that at least one unlimited
partner

3. 3
Partnership Agreement
 Not all partnership have agreements.
 However, a written partnership
agreement will help prevent problems
and solve dispute between the partners

4. 4
Terms of agreement
 Amount of capital to be contributed by each
partners
 Ratio in which profits and loss to be shared
between partners
 Rate of interest, if any to be allowed on
partners’ capital
 Rate of interest, if any, to be charged on
partners’ drawings
 Rate of interest, if any, to be allowed on
partners’ loans to firm
 Salaries to be paid to the partners

5. 5
 In the absence of partnership agreement,
the Partnership Ordinance applies which
states:
1. All partners may contribute capital equally
2. Profits and losses are to be share by
partners equally
3. No interest is to be paid on capital
4. No interest is to be charged on partners’
drawings
5. Partners are entitled to interest of 5% per
annum on loans to the firm
6. No salaries are allowed to partners

6. 6
Features of Partnership
Accounts
 Profit and Loss Appropriation Account
 It is drawn under the trading and profit and
loss account
 It shows the distribution of profits among
the partners
 Capital Accounts
 These accounts record the amount of
capital by each partners

7. 7
 Current Accounts
 As the partnership makes profit/loss, and the
partners take the firm’s resources for private
uses, there will be fluctuation in the partners’
capital balances. A current account is set up
to maintain constant capital balances of the
partners as stated in the agreement.
 Current account is to record:

Share of profit /loss

Interest on capital

Interest on drawings

Interest on loans

Drawings

Partners’ salaries

8. 8
Accounting Treatment
Items Accounting Entries
Capital contributed in cash Dr. Cash
Cr. Partners’ Capital Accounts
Share of profits Dr. Profit and Loss Appropriation
Cr. Partners’ Current Accounts
Share of losses Dr. Partners’ Current Accounts
Cr. Profit and Loss Appropriation
Interest on capital Dr. Profit and Loss Appropriation
Cr. Partners’ Current Accounts
Partners’ salaries Dr. Profit and Loss Appropriation
Cr. Partners’ Current Account

9. 9
Items Accounting entries
Interest on partners’ loan Dr Profit and loss
appropriation
Cr Partners’ current
Partners’ drawings Dr Partners’ current
Cr Partners Drawings
Interest on drawings Dr Partners’ current
Cr Profit and loss
appropriation

10. 10
Profit and Loss Appropriation

11. 11
Peter and John
Profit and Loss Appropriation Account for the year ended 31 December 1997
Partners’ Salaries
Peter X
John X X
Net Profit b/f X
Interest on Drawings
Peter X
John X XInterest on Capital
Peter X
John X X
Share of Profit
Peter X
John X X
X X
T- Form

12. 12
Peter and John
Trading and Profit and Loss Account for the year ended 31 December 1997
Net Profit X
Add: Interest on Drawings
Peter X
John (%*drawings) X X
Less: Partners’ Salaries
Peter X
John X X
Interest on Capital
Peter X
John (%* capital) X X
Share of Profit
Peter (1/2) X
John (1/2) X X
Sales X
Less: Cost of goods sold
Opening stock X
Add: Purchases X
Less: Closing stock X X
Gross profit X
Less: Expenses
Rent X
Lighting X X

13. 13
Capital account
Peter John Peter John
Bal b/f X X
Current account
Peter John Peter John
Bal b/f X
Share of profit X X
Interest on capital X X
Partners’ salaries X X
Bal c/f X
X X
Bal b/f X
Interest on drawings X X
Drawings X X
Bal c/f X
X X
Debit balance

14. 14
Peter and John
Balance Sheet as at 31 Dec 1997
Fixed assets Cost Dep. Net
Buildings X X X
Furniture X X X
X X X
Current assets
Stock X
Debtors X
Bank X
X
Less: Current liabilities
Creditors X
Working capital X
X
Financed by:
Capital – Peter X
- John X
X

15. 15
Current account Peter John Total
Opening balance X (X)
add: Share of profit X X
Partners’ salaries X X
Interest on capital X X
X X
Less: Drawings X X
Interest on drawings X X
X X X
X
Long term liabilities
15% Loan X
X
Debit balance

16. 16
Example 1

17. 17
Tom and David are in partnership, sharing profits and losses equally. The
Following is their trial balance as at 31 December 1997.
Dr Cr
Fixed assets 400000
Provision for depreciation 40000
Stock as at 1 Jan 1997 10000
Sales 290000
Purchases 150000
Expenses 30000
Capital – Tom 197000
- David 197000
Current – Tom 8000
- David 2000
Drawings – Tom 5000
- David 5000
Debtors 70000
Bank 80000
10% Loan from Tom 20000
752000 752000

18. 18
 Additional information:
1. Stock in hand as at 31 December has been
valued at cost at $30000
2. Depreciation is to be provided at 10% per
annum on the straight line bases
3. Pat interest on capital at 1% and charge
interest on drawings at 5%
4. Partners’ salaries are $10000 to Tom and
$5000 to David

19. 19
Tom and David
Trading and Profit and Loss Account for the year ended 31 December
1997
Opening Stock 10,000
Purchases 150,000
160,000
Less: Closing Stock 30,000
Cost of Goods Sold 130,000
Gross Profit 160,000
290,000
Expenses 30,000
Depreciation 40,000
Interest on Loan
(20,000 X 10%) 2,000
Net Profit 88,000
Sales 290,000
Gross Profit 160,000
160,000 160,000
290,000
Example 1

20. 20
Tom and David
Trading and Profit and Loss Account for the year ended 31 December
1997
Partners’ Salaries
Tom 10,000
Interest on Capital
Tom 1,970
David 1,970 3,940
Net Profit 88,000
David 5,000 15,000
Share of Profit
Tom (1/2) 34,780
David (1/2) 34,780 69,560
Interest on Drawings
Tom 250
David 250 500
88,500 88,500

21. 21
Tom and David
1997
Current Account
Tom David 1997 Tom David
Jan 1 Bal. b/f 2,000
Dec31 P&L Appropriation
-Int. on
Drawings 250 250
31 Drawings 5,000 5,000
31 Bal. c/f 51,500 34,500
Jan 1 Bal. b/f 8,000
Dec 31 Profit and Loss Appropriation
- Int. on Capital 1,970 1,970
- Profits 34,780 34,780
- Salaries 10,000 5,000
31 Profit and Loss
- Int. on Loan 2,000
56,750 41,750 56,750 41,750

22. 22
Tom and David
Fixed Assets 400,000
Less: Provision for Dep. 80,000
Current Assets
Stock 30,000
Debtors 70,000
Capital Accounts
Tom 197,000
David 197,000 394,000
Current Accounts
Balance Sheet as at 31 December 1997
320,000
Bank 80,000 180,000
Tom 51,500
David 34,500 86,000
Long-term Liabilities
Loan from Tom 20,000
500,000 500,000

23. 23
Net profit 88,000
Interest on Drawings 500
88,500
Partners’ salary Tom 10,000
David 5,000
Interest on capital Tom 1,970
David 1,970 18,940
69,560
Share of profit Tom 34,780
David 34,780 69,560

24. 24
Minimum Share of Profits
 Sometime, one of the partners is
guaranteed a minimum profit. If the
amount of profits shared according to
the normal profit-sharing ratio is smaller
than the minimum share, that partner
will get his/her minimum share first,
while the balance of the profits is to be
shared between the other partners

25. 25
Example 2

26. 26
 Paul, Betty and Rose are in partnership
sharing profits in the ratio of 5:3:2. Rose is
guaranteed a minimum share of profits of
$10000.
Profits for the years ended
31 Dec 1996 $200000
31 Dec 1997 $42000
Required
Calculate the share of profits to each partner
for 1996 and 1997 are:

27. 27
Paul, Betty and Rose
Profit and Loss Appropriation Account for the year ended 31 December 1997
Share of Profit:
Paul (5/10) 100,000
Net Profit 200,000
Betty (3/10) 60,000
Rose (2/10) 40,000 200,000
200,000 200,000
Paul, Betty and Rose
Profit and Loss Appropriation Account for the year ended 31 December 1997
Share of Profit:
Paul (5/10 X 32,000) 20,000
Net Profit 42,000
Betty (3/10 X 32,000) 12,000
Rose (guaranteed) 10,000 42,000
42,000 42,000