1. Introduction of Partnership Accounts

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

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

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. 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. Accounting Treatment

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
Cr Profit and loss appropriation

10. Profit and Loss Appropriation

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

12. Peter and John
Trading and Profit and Loss Account for the year ended 31 December 1997
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
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

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

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
Financed by:
Capital – Peter X
- John X

15. Debit balance 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
Debit balance

16. Example 1

17. Tom and David are in partnership, sharing profits and losses equally
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
Provision for depreciation
Stock as at 1 Jan
Sales
Purchases
Expenses
Capital – Tom
- David
Current – Tom
- David
Drawings – Tom
- David
Debtors
Bank
10% Loan from Tom

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

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

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

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

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

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

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. Example 2

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 $200000
31 Dec $42000
Required
Calculate the share of profits to each partner
for 1996 and 1997 are:

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