PARTNERSHIP ACCOUNT

A partnership is a relationship that exist between two or more persons carrying on a business
common with a view to making profit.
Reasons for partnership
1) Additional capital incase a sole trader or one person is not able to raise sufficient capital.
2) Incase there is need for skills or expertise in certain areas of the business.
3) To involve more persons in the business especially for a family.
Membership
A partnership has minimum membership of two (2) maximum of 100 members except for
professional firms (e.g.) lawyers, doctors, accountants etc. whose maximum membership is
twenty (20) persons.
Partnership deed
Where two or more persons wish to form a partnership, then it is recommended that they agree
on the terms upon which the partnership will be run and the relationship between each other.
This is done in writing and signed off as agreed by all the partners and therefore it becomes a
partnership deed or agreement.
Contents of partnership agreement
1) Name(s) and address(s) of both the firm and the partners
2) Capital to be contributed by each partner
3) The profit sharing ratios that may be expressed as a fraction or as a percentage.
4) Salaries to be paid to any partners who will be involved in the active management of the
business
5) Any interest to be charged on drawings made by the partners.
6) Interests to be given to the partners on their capital balances.
7) Procedures to be taken on the retirement or admission of a partner.
Accounting for partnerships.
The interest of the partners in the business is either long term or short-term.
The long-term interest is the capital contributed by each partner and the balance is expected to
remain fixed. It will only change when the partners agree or incase of any changes in the
partnership like admission of or retirement of a partner. This interest is recorded in capital
account.
(Assume a firm of 3 partners A, B and C)
CAPITAL ACCOUNT
A
B
C
A
B
C
Loss or revaluation
Xx
xx
xx
Bal b/d
xx
xx
xx
Goodwill written off
Xx
xx
xx
Additional capital
(in form of any asset)
xx
xx
xx
Gains on revaluation
xx
xx
xx
Bal c/d
Xx
xx
xx
Goodwill
xx
xx
xx
Xx
xx
xx
xx
xx
xx
Bal b/d
xx
xx
xx
The short-term interest is reflected in form of a current account which is affected by the
trading activities of the partnership (i.e.) the profits or losses and any drawings made by the
partners.
In most partnerships, both a capital and a current account are maintained and therefore the capital
account becomes a fixed capital account. When there is no distinction between a capital account
and a current account then any short- term changes are passed through the capital account
therefore the capital account becomes a fluctuating capital account.
Some of the transactions to be passed through the capital account and the current account are
shown in the following formats.
CURRENT ACCOUNT
A
B
C
A
B
C
sh
sh
Sh
sh
sh
sh
Bal b/d
xx
Bal b/d
xx
xx
Interest on drawings
xx
xx
Xx
Interest on capital
xx
xx
xx
Drawings
xx
xx
Xx
Salaries
xx
xx
xx
Share of profits
xx
xx
xx
Bal c/d
xx
xx
-
Loan interest
-
xx
-
Bal c/d
xx
xx
xx
xx
xx
xx
xx
xx
Bal b/d
xx
xx
xx
Format For Final Accounts:
Income statement (Profit and Loss Account)
The profit and loss account is exactly as the one for the sole trader and in addition to the profit
and loss account, a new section called the Appropriation account is included and this account
shows how the partners share the Net Profit for the period. (In addition to other expenses in the
profit and loss, an expense for interest on loan given by one of the partners is included and the
credit entry is made on the partner’s current account.)
The format for the Appropriation account is as follows:
sh sh
Net Profit for the year xx
Add: Interest on drawings.
A xx
B xx
C xx xx
xx
Less: Interest on capital.
A xx
B xx
C xx (xx)
xx
Less: Salaries
A xx
B xx
C xx (xx)
xx
Balance of profit to be shared in percentage ratio
A (ratio) xx
B (ratio) xx
C (ratio) xx (xx)
(Statement of financial position) Balance sheet
The balance sheet also the same as that for a sole trader but the interest of each partner in the
business should be shown separately and any loan given by a partner to the firm is also shown
separately in the non-correct liability section therefore, the format will be as follows.
sh sh sh
Net assets. xx
Capital: A xx
B xx
C xx
xx
Current account A xx
B xx
C (debit balance). (xx) xx
xx
Non-current liabilities
10% loan – B xx
10% loan – bank xx xx
xx
Example
A and B own a grocery shop. Their first financial year ended on 31 December 2019 were
extracted as follows.
Capital: A- sh60,000; B - sh48,000.
Partnership salaries: A - sh9,000; B - sh6,000.
Drawings: A - sh12,000; B - sh13,400.
The firm’s net profit for the year was sh32,840.
Interest on capital is to be allowed at 10% per year.
Profits and losses are to be shared equally.
Required
From the information above prepared the firm’s appropriation account and the partners’ current
accounts.
SOLUTION
A and B
Profit and Loss Appropriation account for the year ended 31 Dec 2019
sh sh
Net Profit for the year 32,840
Less: Interest on capital
A 6000
B 4800 (10,800)
22,040
Less: Salaries
A 9000
B 6000 (15,000)
Balance of profit to be shared in Profit Share Ratio 7,040
A ½ 3520
B ½ 3520 (7,040)
CURRENT ACCOUNT
A
B
A
B
Sh
sh
sh
Sh
Drawings
12,860
13,400
Interest on capital
6,000
4,800
Salaries
9,000
6,000
Bal c/d
5,660
920
Profit shared.
3,520
3,520
18,520
14,320
18,520
14,320
Bal b/d
5,660
920
EXAMPLE
The following information was extracted from the books of WPH Partnership for the month of
December 2019.
i. Net profits sh 30,350,000
ii. Interest to be charged on capitals: W sh2,000,000; P sh1,500.000; H sh.900,000
iii. Interest to be charged on drawings; W sh240,000; P sh180,000; H sh130,000
iv. Salaries to be credited: P sh2,000,000; H sh3,500,000.
v. Profits to be shared: W 50%; P 30%; H20%.
vi. Current accounts: balances b/f W sh1,860,000; P sh946,000; H sh717,000
vii. Capital accounts: balances b/f W sh40,000,000; P sh30,000,000; H sh18,000,000
viii. Drawings: W sh9,200,000; P sh7,100,000; H sh6,900,000.
Required
Draw up a profit and loss appropriation account for the year ended 31 December 2019 and
balance sheet extract
SOLUTIONS
W,P and H
Profit and Loss Appropriation Account for the year ended 31 December 2019
Sh000 sh000
Net profit for the year 30,350
Add: Interest on drawings
W 240
P 180
H 130 550
30,900
Less: Interest on capital
W 2,000
P 1,500
H 900 (4,400)
26,500
Less: Salaries
P 2,000
H 3,500 (5,500)
Balance of profit to be shared 21,000
W 50% 10,500
Pl 30% 6,300
H 20% 4,200 (21,000)

91% (22)

Current Account
W
P
H
W
P
H
Sh000
Sh000
Sh000
Sh000
Sh000
Sh000
Interest on
drawings
240
180
130
Bal b/d
1,860
946
717
Drawings
9,200
7,100
6,900
Interest on
capital
2,000
1,500
900
Bal c/d
Salaries
2,000
3,500
Share of profits
10,500
6,300
4,200
Bal c/d
4,920
3,466
2,287
14,360
10,746
9,317
14,360
10,746
9,317
Balance sheet (extract) as at 31 Dec 2019
Sh000 sh000
Net Assets xx
Capital W 40,000
P 30,000
H 18,000
88,000
Current Accounts
W 4,920
P 3,466
H 2,287 10,673
98,673
Example
The following list of balances as at 30 September 2020 has been extracted from the books of
Tevin and Alvin, trading partnership, sharing the balance of profits and losses in the proportions
3:2 respectively.
sh
Printing, stationery and postage 3,500
Sales 322,100
Inventory in hand at 1 October 2019 23,000
Purchases 208,200
Rent and rates 10,300
Heat and light 8,700
Staff salaries 36,100
Telephone charges 2,900
Motor vehicle running costs 5,620
Discounts allowable 950
Discount receivable 370
Sales returns 2,100
Purchases returns 6,100
Carriage inwards 1,700
Carriage outwards 2,400
Fixtures and fittings: at cost 26,000
Provision for depreciation 11,200
Motor vehicles: at cost 46,000
Provision for depreciation 25,000
Provision for doubtful debts 300
Drawings: Tevin 24,000
Alvin 11,000
Current account balances
At 1 October 2019:
Tevin 3,600 credit
Alvin 2,400 credit
Capital account balances
At 1 October 2019:
Tevin 33,000
Alvin 17,000
Trade receivables 9,300
Trade payables 8,400
Balance at bank 7,700
Additional information
1. Sh10,000 is to be transferred from Tevin’s capital account to a newly opened Tevin Loan
Account on 1 July 2020.
2. Interest at 10 per cent per annum on the loan is to be credited to Tevin.
3. Alvin is to be credited with a salary at the rate of sh12,000 per annum from 1 April 2020.
4. Stock in hand at 30 September 2020 has been valued at cost at sh32,000.
5. Telephone charges accrued due at 30 September 2020 amounted to sh400 and rent of sh600
prepaid at that date.
6. During the year ended 30 September 2020 Alvin has taken goods costing sh1,000 for his own
use.
7. Depreciation is to be provided at the following annual rates on the straight line basis:
Fixtures and fittings 10%
Motor vehicles 20%
Required:
(a) Prepare a trading and profit loss account for the year ended 30 September 2020.
(b) Prepare a balance sheet as at 30 September 2020 which should include summaries of the
partners’ capital and current accounts for the year ended on that date.
SOLUTION
TRADING AND PROFIT LOSS ACCOUNT FOR THE YEAR ENDED 30 SEPTEMBER
2019
sh sh
Sales 322,100
Less: Sales returns 2,100
320,000
less cost of sales
Opening Stock 23,000
Purchases (adjustment) 207,200
Add: Carriage inwards 1,700
208,900
Less: Purchases returns (6,100) 202,800
225,800
Less: Closing Stock (32,000) (193,800)
Gross profit 126,200
Discount receivable 370
Less Expenses
Telephone charges (adjustment)) 3,300
Printing and stationery and postage 3,500
Rent and rages (adjustment) 9,700
Heat and light 8,700
Staff salaries 36,100
Motor vehicle running expense 5,620
Discount allowable 950
Carriage outwards 2,400
Depreciation on fixtures and fittings 2,600
Depreciation on motor vehicles 9,200
Interest on loan (adjustment) 250 (82,320)
Net profit 44,250
Less: Salaries Alvin(adjustment) (6,000)
Balance of profit to be shared 38,250
Tevin 22,950
Alvin 15,300 (38,250
Statement of financial position as at 30 September 2020
Non current Asset sh
Fixtures and fittings (26000 -11200 -2600) 12,200
Motor vehicles (46000 -25000 -9200) 11,800
24,000
Current Asset
Inventory 32,000
Debtors 9,300
Less: Provision (300) 9,000
Payments 600
Cash at bank 7,700
73,300
Non-Current Liabilities
10% loan – Tevin 10,000
Current Liabilities
Trade payable 8,400
Accruals 400
18800
Capital
Tevin (33000-10000) 23,000
Alvin 17,000
Current:
Tevin 2,800
Alvin 11,700
73300
Current Account
Tevin
Alvin
Tevin
Alvin
sh
Sh
sh
Sh
Drawings
24,000
12,000
(adj)
Bal b/d
3,600
2,400
Interest on loan
250
Bal c/d
2,800
11,700
Salaries.
6,000
Share profits
22,950
15,300
26,800
26,800
26,800
23,700