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Definition
of Partnership
This
is a form of business where two or more persons carry on business together
for the purpose of making profits. A partnership usually is a progression
from a sole trader.
Legal
Status of Partnership
- In
some countries a partnership is not a corporate entity. It does not
exist separately from its owners. In others it is a legal entity
separate from partners.
- However, for accounting purposes the
partnership will be treated as a separate legal person from partners.
Types
of Partners in a Partnership Relationship
In
a partnership one may find limited partners and general or unlimited partner.
1.
Limited Partners
> These are partners with limited liability. They are only liable
or limited to the amount of capital they have provided. Such partners usually
do not participate in management of the business.
2.
General Partners
> Sometimes called unlimited or ordinary partners. These have
unlimited liability. The debts of the business are beyond their capital
contribution in the business. As such they are responsible for the day to day
affairs of the business.
> Therefore, in any partnership at least there must be a general
partner.
Partnership
Administration
Before
a partnership can be operational, partners must agree on how the business will
be organized and run. The law does not state the contents of the partnership
deed or agreement but may contain the following:
1.
The capital contribution
by each partner.
2.
How profits and losses
will be shared i.e. profit sharing ratio.
3.
If capitals will attract
interest. If yes, how much in percentage terms.
4.
Are partners going to be
allowed drawings and will the drawings attract interest.
5.
If partners will be
working in the business, are they going to be entitled to a salary?
6.
Should a new partner be
admitted or old an partner
retires what will be the arrangements and procedures to be followed.
7.
Name of firm, the type of
business.
8.
Settling disputes
9.
Preparation and audit
accounts
Partnership
Act of 1890
1.
Partners are to share
profits or losses equally.
2.
Interest shall not be
charged on partnership capital.
3.
Interest shall not be
charged on drawings.
(refer
to a text book on business law for more information)
EXERCISE
1
Banda and Bwalya have been in partnership
just for one year.
o
They are sharing profits and losses equally.
- They are entitled to 10% on capitals
per annum. Banda and Bwalya have K100,000 and K200,000 as capitals
respectively
- Banda is entitled to a salary of K3,000,
and Bwalya K5,000.
- Interest is charged on partners
drawings. Banda is charged K2,000 and Bwalya
K1,500.
- Drawings during the year were Banda K6,000
and Bwalya K5,000.
- The net profit before the distribution as at 31.12.20X4
amounted to K70,000 i.e. after preparing the
income statement which is same as sole trader.
EXERCISE
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Banda and Bwalya
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Income Statement for the Year ended
31.12.20x4
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K
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K
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K
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Net Profit
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70,000.00
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Add interest on drawings
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Banda
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2000.00
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Bwalya
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1500.00
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73,500
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Less Appropriations:
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Salaries:
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Banda
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3,000.00
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Bwalya
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5,000.00
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(8,000.00)
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Interest on Capitals
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Banda
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10,000.00
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Bwalya
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20,000.00
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(30,000.00)
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35,000.00
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Share of Profits:
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========
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Banda ½ %
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17,500.00
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Bwalya ½ %
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17,500.00
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35,000.00
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========
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Capital Accounts
When
a partnership is being set at the beginning, partners have to agree the
amount of capital contribution to introduce. This could be in form of cash or
other assets. Double entry would be:
o
DR.
Asset account (whatever asset)
o
CR.
Capital account of each partner separately
Current
Accounts
Current
accounts are used to deal with regular transactions between the partners and the
firm. These are matters that may not be dealt with in capital accounts. These
may include:
o
Share of profits
o
Interest on capital
o
Drawings
o
Interest on drawings
o
Partners salaries
Double
Entry
For
entitlements such as salaries, interest on capital and share of profits,
Double entry is:
o
DR. Income Statement (Appropriation account)
o
CR.Current Accounts
of partners
Current
Accounts
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Dr.
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Banda
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Bwalya
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Cr.
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Banda
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Bwalya
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Drawings
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6,000
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5,000
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Interest on
Drawings
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2,000
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1,500
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Interest on
Capital
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10,000
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20,000
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Balances c/d
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22,750
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36,250
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Share of Profit
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30,750
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42,750
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Balances b/d
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22,750
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36,250
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The
balance of the current accounts at the end of each financial year will then represent
the amount of undrawn or withdrawn profits (Dr) or
what is due to the partner (Cr).
Balance
Sheet (Extract)
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Balance Sheet as at 31.12.20x4
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Financed
by:
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Capitals:
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Banda
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100,000
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Bwalya
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200,000
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300,000
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Current
Accounts:
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Banda
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22,750
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Bwalya
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26,250
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59,000
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359,000
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If
one partner had finished with a debit balance in current account, the balance
will be shown in brackets in balance meaning it should be deducted.
EXERCISE
X, Y and Z are in partnership business
sharing profits and losses, 4:1:3 respectively. The firms trial balance as at
31 December 20X1, was as follows:
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Dr.
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Cr.
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Sales
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334,618
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o
Returns forward
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10,200
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o
Purchases
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196.230
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o
Carriage Inwards
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3,100
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o
Inventory 1.Jan.20x1
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68,127
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o
Discount Allowed
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190
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o
Salaries and Wages
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54,117
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o
Bad debts
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1,620
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o
Provision for doubtful debts
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o
1 January 20X1 950
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o
General expenses
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1,017
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o
Business rates
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2,900
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o
Postage
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845
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o
Computers at cost
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8,400
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o
Office equipment at cost
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5,700
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o
Provision for depreciation at
1 January 20x1
Computers
Office Equipment
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3,600
2,900
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o
Payables
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36,480
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o
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o
Receivables
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51,320
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o
Cash at Bank
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5,214
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o
Drawings:
X
Y
Z
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39,000
16,000
28,000
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o
Current Accounts:
X
Y
Z
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5,940
2,117
60,000
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o
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494,106
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Required
Draw
up a set of financial statements for the year ended 31 December 20X1.
SOLUTION
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•
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XYZ
Income statement for the year ended 31 December 20X1
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•
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K
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K
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•
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Sales
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334,618
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•
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Less:
Returns Inwards
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(10,200)
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•
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324,418
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•
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Cost
of sales:
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•
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Opening
inventory
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68,127
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•
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Purchases
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196,239
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•
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Carriage
inwards
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3,100
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•
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267,466
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•
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Less:
closing inventory
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(74,223)
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•
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(193,243)
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•
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Gross
profit
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131,175
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- PROFIT AND LOSS ACCOUNT
- Less: Expenses
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•
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Discounts
allowed
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190
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•
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Salaries
& wages
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54,117
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•
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Bad
debts (1620 + 450)
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2,070
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•
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General
expenses
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1,017
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•
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Business
rates (2,900 – 200)
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2,700
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•
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Postage
(845 – 68)
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777
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•
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Depreciation:
computers
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2,800
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•
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Office
equipment
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1,100
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•
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(64,771)
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•
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Net
profit
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66,404
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APPROPRIATION ACCOUNT
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•
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Net
profit
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66,404
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•
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Interest
on drawings:
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X
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300
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•
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Y
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200
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•
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Z
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240
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•
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740
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•
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67,144
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•
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Less:
appropriations:
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•
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Salaries
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Y
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18,000
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•
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Z
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14,000
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•
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(32,000)
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•
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Interest
on capital:
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X
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4,800
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•
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Y
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800
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•
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Z
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2,400
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•
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(8,000)
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•
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27144
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•
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Share
of profits:
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X
4/5
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14,022
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•
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Y
1/8
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3,506
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•
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Z
3/8
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10,516
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•
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(27,144)
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CURRENT
ACCOUNT
•
•
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•
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Balance
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-
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2,117
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-
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Balances
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5,940
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-
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9,618
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•
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Drawings
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39,000
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16,000
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28,000
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Salaries
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-
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18,000
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14,000
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•
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Interest on
|
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Interest
on
|
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•
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Drawings
|
300
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200
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240
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capital
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4,800
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800
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2,400
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•
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Balances c/d
|
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3,876
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7,957
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Share
of profits
|
13,572
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|
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3,393
|
10,179
|
|
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•
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Balances
c/d
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14,988
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-
|
-
|
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|
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•
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|
39,300
|
22,193
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36,197
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39,300
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22,193
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36,197
|
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•
|
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|
|
|
|
|
|
|
|
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|
•
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Balance b/d
|
14,988
|
-
|
-
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|
Balance
b/d
|
-
|
3,876
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|
7,957
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|
|
|
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- XYZ
- Balance sheet as at 31 December 20X1
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•
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Non current
assets
|
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Cost
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Dep.
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N.B.V.
|
|
•
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|
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|
K
|
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K
|
K
|
|
|
|
|
|
|
•
|
Computers
|
8,400
|
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|
6,400
|
2,000
|
|
•
|
Office
equipment
|
|
5,700
|
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4,000
|
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|
1,700
|
|
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|
|
|
|
|
|
|
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|
•
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14,100
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10,400
|
3,700
|
|
•
|
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• Inventory 31.12.20X1 (74,223 + 68)
|
74,291
|
|
•
|
Receivables
(51,320 – 1,400)
|
49,920
|
|
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•
|
Prepayments
|
200
|
|
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•
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Cash
at bank
|
5,214
|
|
|
|
|
129,625
|
|
•
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Total
assets
|
133,325
|
|
•
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Capital
accounts:
|
X
|
60,000
|
|
|
•
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Y
|
10,000
|
|
|
•
|
|
Z
|
|
30,000
|
|
|
•
|
|
|
100,000
|
|
•
|
Current
accounts:
|
X
|
(14,988)
|
|
|
|
•
|
|
Y
|
3,876
|
|
|
|
|
•
|
|
Z
|
|
7,957
|
|
|
|
|
•
|
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(3,155)
|
|
|
|
|
|
|
|
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• Payables
|
36,480
|
|
|
•
|
133,325
|
|
•
|
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