Partnership

An agreement between two or more people to carry on a business in order to make a profit. A
partnership can have a minimum of two partners and a maximum of twenty partners. The
partners must obey the law as given in the Partnership Act 1890.

Each partner (except for limited partners, described below) must pay their share of any debts
that the partnership could not pay. If necessary, they could be forced to sell all their private
possessions to pay their share of the debts. This can be said to be unlimited liability. Partners
who are not limited partners are known as general partners.

Advantages:
a. Raise more capital
b. More skills & knowledge
c. Share the work
2. Disadvantages
a. Profits must now be shared
b. Disagreements can occur
c. Partners cannot act independently
Limited Partnerships
Limited partnerships are partnerships containing one or more limited partners. Limited
partnerships must be registered with the Registrar of Companies. Limited partners are not liable
for the debts of the partnership. Their liability for the debts of the partnership is limited to the
capital they have put in. They can lose that capital, but they cannot be asked for any more
money to pay the debts unless they contravene the regulations relating to their involvement in
the partnership. They are not allowed to take out or receive back any part of their contribution to
the partnership during its lifetime. They are not allowed to take part in the management of the
partnership or to have the power to make the partnership take a decision. All the partners
cannot be limited partners, so there must be at least one general partner with unlimited liability.

According to the Partnership Act 1890, in the absence of a partnership agreement:

a. All partners contribute equal capital
b. Partners are not entitled to interest on capital or salaries
c. Partners will not be charged interest on drawings
d. Profits or losses will be shared equally
e. Partners are entitled to 5% interest on a loan they make to the partnership.

Contents of A Partnership Agreement.

The written agreement can contain as much, or as little, as the partners want. The law does not
say what it must contain. The usual accounting contents are:
1 the capital to be contributed by each partner;
2 the ratio in which profits (or losses) are to be shared;
3 the rate of interest, if any, to be paid on capital before the profits are shared;
4 the rate of interest, if any, to be charged on partners' drawings;
5 salaries to be paid to partners;
6 arrangements for the admission of new partners;
7 procedures to be carried out when a partner retires or dies
Example

Taylor and Clarke have been in partnership for one year sharing profits and losses in the ratio of Taylor 3
/5, Clarke 2 /5- They are entitled to 5 per cent per annum interest on capitals, Taylor having £20,000
capital and Clarke £60,000. Clarke is to have a salary of £15,000. They charge interest on drawings,
Taylor being charged £500 and Clarke £1,000. The net profit, before any distributions to the partners,
amounted to £50,000 for the year ended 31 December 2017. Taylor withdrew $15 000 and Clarke $26
000.
41.1
Gow, Short and Hill are partners. They share profits and losses in the ratios of 3/11,4/11
and 4/11 respectively.
For the year ending 31 July 2016, their capital accounts remained fixed at the following
amounts:
$
Gow 120,000
Short 80,000
Hill 50,000
They have agreed to give each other 4 per cent interest per annum on their capital accounts.
In addition to the above, partnership salaries of $70,000 for Short and $40,000 for Hill are to be
charged.
The net profit of the partnership, before taking any of the above into account was $230,000.
You are required to draw up the appropriation account of the partnership for the year ending 31
July 2016.

Answer
Grow, Short and Hill -Appropriation Account for the Year ending 31st July 2016
Net Profit 230 000
Less Salaries
Short 70 000
Hill 40 000 110 000
Interest on Capital (120+80+50) =250 000x0.04 % =10 000
Gow (120/250 = 0.48*10 000) 4800
Short (80/250=0.32*10 000) 3200
Hill (50/250=0.20*10 000) 2000 10 000 (120 000)
Balance of Profit 110 000
Sharing of Profit
Gow (3/11*110 ) 30 000
Short ( 4/11*110) 40 000
Hill (4/11*110) 40 000 110 000
41.3
Dunn and Outram sell toys. Their individual investments in the business on 1st January 2018
were Dunn $ 160 000, and Outram $ 70 000
For the year to 31st December 2018, the Net Profit was $ 90 000 and the partners drawings
were ; Dunn $ 26 000 and Outram $ 32 000.
For 2018 ( their first year), the partners agreed to share profits and losses equally, but they
decided that from 1st January 2019:
1.The partners should be entitled to annual salaries of Dunn $ 20 000 and Outram $ 30 000.
2. Interest should be allowed on capital at 5% per annum.
3. The profit remaining should be shared equally as should be losses.

Net Trading Profit before dealing with partners items Drawings

Dunn Outram
2019 $ 110 000 $ 24 000 $28 000
2020 $ 50 000 $ 22 000 $34 000

Required
Prepare the profit and Loss Appropriation accounts and the partners current accounts for the 3
years.
Answer
Profit and Loss Appropriation Account 2018
Net Profit $ 90 000
Profit Shared
Dunn (1/2 of 90 000) 45 000
Outram (1/2 of 90 000 45 000
90 000
Profit and Loss Appropriation Account 2019
Net Profit $ 110 000
Less Salaries
Dunn 20 000
Outram 30 000 50 000
Interest on Capital = (0.05 *230 000 (160 +70) =11 500
Dunn (160/230 * 11500) 8, 000
Outram (70/230*11 500) 3500 11 500 (61500)
Balance of Profit 48 500
Profit Shared equally
Dunn 24 250
Outram 24 250
48 500

Profit and Loss Appropriation Account 2020

Net Profit 50 000
Less Salaries
Dunn 20 000
Outram 30 000 50 000
Interest on Capital = (0.05 * (160 +70) =11 500
Dunn (170/230 * 11500) 8, 000
Outram (70/230*11 500) 3 500 11 500 61 500

Loss to be Shares (11500)

Loss Shared equally
Dunn *50%* 11 500 (5750)
Outram *50%* 11 500 (57 50)
11 500
 Current Account Dunn

2018 2018
Drawings 26 000 Profit Share 45 000
Balance c/d 19 000
45 000 45 000

2019 2019
Drawings 24 000 Balance b/d 19 000
Balance c/d 47 250 Salary 20 000
Interest on Capital 8 000
Profit Share 24 250
71 250 71 250

2020 2020
Loss Share 5 750 Balance b/d 47 250
Drawings 22 000 Salary 20
Balance c/d 47 500 000
75 250 Interest on Capital 8000
75 250
2021
Balance b/d 47 500
Undrawn Profits

Current Account Outram

2018 2018
Drawings 32 000 Profit Share 45 000
Balance c/d 13 000
45 000 45 000

2019 2019
Drawings 28 000 Balance b/d 13 000
Balance c/d 42 750 Salary 30 000
Interest on Capital 3 500
Profit Share 24 250
70 750 70 750

2020 2020
Loss Share 5 750 Balance b/d 42 750
Drawings 34 000 Salary 30 000
Balance c/d 36 500 Interest on Capital 3 500
76 250 76 250

2021
Balance b/d 36, 500
Undrawn Profits