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Introduction of PartnershipAccounts
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Characteristics of Partnership 220 owners
Governed by the Partnership Ordinance
A partnership agreement can be drawn upto define the rights and obligations of thepartners. If no agreement, the PartnershipOrdinance applies
A partnership has no separate legal identityexcept for the limited partners
A limited partnership may also be formed,which means that at least one unlimited
partner
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Partnership Agreement Not all partnership have agreements.
However, a written partnershipagreement will help prevent problemsand solve dispute between the partners
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Terms of agreement Amount of capital to be contributed by each
partners
Ratio in which profits and loss to be sharedbetween partners
Rate of interest, if any to be allowed onpartners capital
Rate of interest, if any, to be charged onpartners drawings
Rate of interest, if any, to be allowed onpartners loans to firm
Salaries to be paid to the partners
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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 bypartners equally
3. No interest is to be paid on capital4. No interest is to be charged on partners
drawings
5.
Partners are entitled to interest of 5% perannum on loans to the firm
6. No salaries are allowed to partners
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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 amongthe partners
Capital Accounts These accounts record the amount of
capital by each partners
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Current AccountsAs the partnership makes profit/loss, and the
partners take the firms resources for privateuses, there will be fluctuation in the partnerscapital balances. A current account is set upto 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
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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
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Items Accounting entries
Interest on partners loan Dr Profit and lossappropriation
Cr Partners current
Partners drawings Dr Partners current
Cr Partners Drawings
Interest on drawings Dr Partners current
Cr Profit and lossappropriation
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Profit and Loss Appropriation
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Peter and John
Profit and Loss Appropriation Account for the year ended 31 December 1997
Partners Salaries
Peter XJohn X X
Net Profit b/f X
Interest on DrawingsPeter X
John X XInterest on Capital
Peter X
John X X
Share of Profit
Peter X
John X X
X X
T- Form
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Peter and JohnTrading and Profit and Loss Account for the year ended 31 December 1997
Net Profit XAdd: Interest on Drawings
Peter XJohn (%*drawings) X X
Less: Partners SalariesPeter XJohn X X
Interest on CapitalPeter XJohn (%* capital) X X
Share of ProfitPeter (1/2) XJohn (1/2) X X
Sales X
Less: Cost of goods soldOpening stock X
Add: Purchases X
Less: Closing stock X X
Gross profit X
Less: Expenses
Rent X
Lighting X X
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Capital account
Peter John Peter JohnBal b/f X X
Current accountPeter John Peter John
Bal b/f XShare of profit X XInterest on capital X XPartners salaries X X
Bal c/f XX X
Bal b/f XInterest on drawings X XDrawings X XBal c/f X
X X
Debit balance
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Peter and JohnBalance Sheet as at 31 Dec 1997
Fixed assets Cost Dep. NetBuildings X X X
Furniture X X XX X X
Current assetsStock XDebtors X
Bank XX
Less: Current liabilitiesCreditors X
Working capital X
XFinanced by:CapitalPeter X
- John XX
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Current account Peter John TotalOpening balance X (X)add: Share of profit X X
Partners salaries X XInterest on capital X X
X XLess: Drawings X X
Interest on drawings X X
X X XXLong term liabilities
15% Loan XX
Debit balance
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Example 1
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Tom and David are in partnership, sharing profits and losses equally. TheFollowing is their trial balance as at 31 December 1997.
Dr CrFixed assets 400000Provision for depreciation 40000Stock as at 1 Jan 1997 10000Sales 290000Purchases 150000Expenses 30000
CapitalTom 197000- David 197000
CurrentTom 8000- David 2000
Drawings Tom 5000
- David 5000Debtors 70000Bank 8000010% Loan from Tom 20000
752000 752000
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Additional information:
1. Stock in hand as at 31 December has been
valued at cost at $300002. 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
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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%) 2,000Net Profit 88,000
Sales 290,000
Gross Profit 160,000
160,000 160,000
290,000
Example 1
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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 ProfitTom (1/2) 34,780David (1/2) 34,780 69,560
Interest on Drawings
Tom 250
David 250 500
88,500 88,500
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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 5,00031 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 2,00056,750 41,750 56,750 41,750
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Tom and David
Fixed Assets 400,000
Less: Provision for Dep. 80,000
Current Assets
Stock 30,000
Debtors 70,000
Capital AccountsTom 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 20,000500,000 500,000
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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
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Minimum Share of Profits Sometime, one of the partners is
guaranteed a minimum profit. If the
amount of profits shared according tothe normal profit-sharing ratio is smallerthan the minimum share, that partner
will get his/her minimum share first,while the balance of the profits is to beshared between the other partners
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Example 2
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Paul, Betty and Rose are in partnershipsharing profits in the ratio of 5:3:2. Rose isguaranteed a minimum share of profits of
$10000.Profits for the years ended
31 Dec 1996 $200000
31 Dec 1997 $42000Required
Calculate the share of profits to each partner
for 1996 and 1997 are:
l d
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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) 60,000Rose (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) 12,000Rose (guaranteed) 10,000 42,000
42,000 42,000