Partnership - Principles of Accounting

Partnership - Principles Of Accounting
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PARTNERSHIP ACCOUNTS Definition: A partnership (in this context) is the relationship between two or more persons carrying on business together with a view to make profit. A firm in which two or more people are working together as owners with a view of making profits is known as a partnership. The current (i.e. at the time of writing) legal situation in the UK is that a partnership can be created merely by a verbal agreement, although in practice many partners prefer to have important aspects of the agreement written down in a deed of partnership. Types of partnerships Joint Venture A joint venture is different from a general or limited partnership. It has the following characteristics: It has no common name under which the partners work and therefore cannot be identified by third persons. It is not subject to the Act respecting the legal publicity of sole proprietorships, partnerships and legal persons. It has no head office or corporate name. It does not have the capacity to exercise legal rights.
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General partnership Partners who wish to carry on a business and share in the profits may form a general partnership. In this type of partnership, all the partners participate in the administration and management of the business, unless they designate one partner to take on this role. The partners are each personally liable for certain debts and obligations of the business, regardless of their respective share of the business. Limited partnership A limited partnership is a partnership whose members include two types of partners: general partners and limited partners. General partners contribute their work, experience and expertise. They are the only persons authorized to administer and represent the partnership, and their liability for the debts and obligations of the partnership is unlimited. Limited partners provide capital or assets, and are not liable for the partnerships debts beyond their capital contribution. A limited partnership must include at least one limited partner and at least one general partner. Whether the partners are natural persons or legal persons, they all work under the same name. Public investment partnership A public partnership of which all or substantially all of the FMV (fair market value) of the property it holds is related to units of public trusts; interests in public partnerships shares of the capital stock of public corporations; or any combination of the above-mentioned property. Nature of a Partnership A partnership has the following characteristics
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2. Contractual relation There must be an agreement between persons desirous of forming a partnership. 3. Earning of profit
1. Association of at least two persons At least two persons must joint together to form a partnership.
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The agreement must be to share profit/loss of a business. 4. Mutual agency The business of partnership may be carried on by all the partners or by any of them acting for all. Thus every partner is an agent of other partners and at the same time of the firm. Partnership Deed or Agreement It is compulsory that in order to form a partnership there must be an agreement among the partners. This agreement may be in writing or oral. But is must be in writing for the settlement of disputes among the partners. It is most important document of the partnership, which includes the terms and conditions relating to the partnership and the regulations governing its internal management and organization. Partnership agreement in writing is called partnership deed. This is the document in which the rights and duties of the partners of the partnership are written. It should be stamped according to the law. All the partners must sign it. Each partner should have a copy of the deed. Need and Importance of Partnership Deed.
1. 2. 3. 4. It It It It forms the basis of formation of the partnership. defines the mutual rights, duties and liabilities of the partners. helps in minimizing the areas of disputes among the partners. serves as guidepost for the conduct of firm business.
It has been observed that partners start bickering and quarrelling after (he firm has worked for some time. It is, therefore, advisable that the articles of partnership should be drawn up through the lawyer. A partnership deed on stamp paper is considered to be valid in the court against any dispute. The importance of partnership deed can be judged from the following facts.
Contents of the Deed of Partnership The deed will often contain some or all of the following clauses: 1. The capital to be contributed by each partner 2. The rate of interest to be allowed on partners capitals 3. The rate of interest to be charged on partners drawings 4. Any salaries payable to partners 5. The ratio in which the remaining profit / loss is to be shared Advantages: 1. Business risks are spread among more that one person 2. Individual partners can develop specialist skills upon which the other partners can rely. 3. Certain partners may be able to inject more capital resources.
4. Less formal than setting up a company, which requires the issue of shares and the appointment of directors. If the partners wish to dissolve the business, that is easier to achieve by a partnership than by a company. Disadvantages: 1. Effect of disputes between partners. 2. Joint and several liability for the debts of the partnership in some but not all countries). This means that id one partner is being sued in relation to the business of the partnership, the other partners share in the responsibility 3. In a company the share holders may be protected from the creditors of the company as regards the payment of outstanding debts.
Accounting records required The way to prepare the accounts of partnerships is similar to that of other trading concerns. However, in partnerships, separate capital accounts, current accounts and advance (loan) accounts should be kept. These accounts can be prepared in columnar form for examination purposes. Also, when preparing the final accounts, an appropriation account is required to show the rights and interests of the various partners immediately after the preparation of the trading and profit and loss account. (1) Capital accounts A separate capital account is required for each partner. This is to show the agreed amount of capital to be contributed by each of them. The amount should be kept fixed until further agreement is reached. (2) Current accounts A separate current account for each partner. This shows the various amounts due to/from partners. Fluctuating Capital Accounts Since the capital account balances changes (fluctuates) with the regular transactions relating to capital, the Capitals accounts maintained under this method are known as Fluctuating Capital Accounts. Fixed Capital Accounts Under this method, partners capital amount remains fixed. The transactions relating to the partners are classified as capital and current natured. In recording the transactions which are of current nature, a separate account by name (Partners) Current a/c is used instead of the (Partners) Capital a/c. it avoids the partners to make drawings beyond their earnings during a financial year. Admission of a new partner
For admission of a new partner, a new partnership deed should be drawn up to state the rights and obligations of each partner with their respective profit and loss sharing ratio.
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When a prospective partner is admitted into an existing partnership, the partnership assets including goodwill will be revalued. Key points In the absence of a partnership agreement: The partners shall share the profits & losses equally. 5% interest shall be allowed on amount advanced by partners as loan. No salary or commission will be allowed. Interest on partners drawings is debited in the partners current account and credited in
method, one capital account and one current account are maintained. Both cash and goods drawings are shown on the debit side of the current account.
the profit & loss appropriation account.
All appropriations are to be shown on the debit side of the profit & loss appropriation account. Share of loss is transferred to the partners current account debiting current account and crediting profit & loss appropriation account. Salary allowed to partners is credited in their current account. Debit balance in the current account means profit overdrawn and credit balance in the current account means profit undrawn. Under fluctuating capital method only one capital account is maintained. But under fixed capital
If the salary allowed to the partner is given on monthly basis, then multiply by 12 to get annual salary. Interest on partners loan is debited to profit & loss account as an expense. Format of Profit and Loss appropriation A/c:
Format of Partners Current Accounts:
Format of Balance sheet extract:
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Partnership Account MCQ
1. Where capital Accounts of partners remain fixed, their share of profit is : Debited to their capital Accounts 1. Credited to their capital Accounts 2. Debited to their current Accounts 3. Credited to their current Accounts 1. Interest charged on a partners Drawings Account should be :
1. Debited to the profit and loss Account 2. Credited to the profit and loss Account 3. Debited to the Appropriation Account 4. Credited to the Appropriation Account 1. A firm in which two or more persons are working together as owners with a view to making profits is called : Private company 1. Partnership 2. Public company 3. Limited company 1. In a partnership, a separate current Account is maintained for each partner. Interest on loan given by the partner to the firm is treated as :
1. Dr Profit & Loss Account 2. Dr Profit & Loss Account 3. Dr Profit & Loss Appropriation Account 4. Dr Profit & Loss Appropriation Account
Cr Current Account Cr Capital Account Cr Capital Account Cr Current Account
A. Seema $0 B. Seema $15,000 C. Seema $18,000 D. Seema $30,000 Kalo $30,000 Kalo $15,000 Kalo $15,000 Kalo $0 1. The current Account of a partner of a business is prepared from the following information 2001 January 1 balance b/d $200 Dr December 31 share of profit $20,000 December 31 interest on drawings $800 December 31 Drawings $18,000
5. In the absence of a partnership agreement, Seema and Kalo entered into a partnership contributing $60,000 and $40,000 as capital respectively. The firm suffered a loss of $30,000 as a result of Kalos poor decision in a business deal. Seema was consulted on the deal. How Tte loss should be divided between Seema and Kalo?
What is the balance of the account on 31 December?
1. $3000 Cr 2. $2600 Cr 3. $1000 Cr 4. $1000 Dr
1. Information from a partnerships account is shown
Interest on capital accounts Drawings15,000
Net profit before interest Interest on partners loan to the firm
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1,000 2,000 10,000
Which profit figure is to be appropriated between the partners?
1. $ 3,000 2. $13,000 3. $12,000
9. A partner receives interest on capital. What are the book keeping entries? Debit A B C D Current Account Current Account Credit Profit and loss Account Profit and loss Appropriation Account Profit and loss Account Current Account Profit and loss Appropriation AccountCurrent Account
4. $15,000
What will be the total interest on capital allowed for the year?
1. $ 800 2. $1,000 3. $1,200 4. $2,000
11. What does a credit balance on partners Current Account represent to Business?
1. Current assets 2. Current liability 3. Long- term liability 4. Part of the Capital 12. X and Y are in partnership sharing profits and losses equally, after X is paid a salary of $15,000. The net profit for the year is $55,000. Drawings for the year are X 12,000 and Y $16,000. What will be Ys share of the profit? 1. $20,000 2. $27,500 3. $34,000 4. $36,000
Exercises 1.Asif and Lqbal are in partnership providing business services. They share profits in proportion to their capital account balances and do not use current accounts. The following list of balance was extracted from the accounts of Asif and Lqbal on 30 April 2005.
$ Fee income Advertising Expenses Heat and Light Motor Expenses Rent Paid Official Expenses Motor Vehicles Equipment 77, 800 12, 400 1, 060 7, 300 12, 800 12, 240 40, 000 12, 000
Capital-Asif 18, 000 Cr Capital- Lqbal 12, 000 Cr 8, 000 Drawings-Asif
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Drawings- Lqbal
2, 000
Required: a) b) Prepare the Trial Balance for the partnership as at 30 April 2005 Prepare the profit and loss Account for the partnership for the year
ended 30 April 2005. c) Prepare the Appropriation Account for the partnership for the year
ended 30 April 2005.
Q 2. `a. Sunny to receive a salary of $ 12 000 p.a. b Interest on capital is allowed @ 6% p.a. c. Interest on drawings shall be charged @ 5% p.a. d. Any remaining profits are to be shared between Sunny and Thomas in the ratio of 2:1 On 1st January, 2003 the following balances appeared in their books: Sunny ($) Capital accounts Current accounts Thomas ($) 20 000 400 Cr. 25 000 300 Cr.
d)
Draw up the capital account of each partner at 30 April 2005.
Sunny and Thomas are in partnership. Their partnership agreement provides for the following:
During the year Sunny and Thomas have withdrawn $ 6 000 and $ 5 000 respectively. The net profit before the adjustments for the year ended 31st December, 2003 was $ 12 000. Prepare the partners accounts under fluctuating capital method and fixed capital methods.
Q 3.
Anees and Ameer are in partnership for the last 5 years. Their partnership agreement provides
a. Anees to receive a salary of $ 1 000 p.m. b. Interest on capital shall be allowed @ 10% p.a. c. Interest on drawings shall be charged @ 5% p.a. d. Any remaining profits are to be shared between Anees and Ameer in the ratio of 2:1 On 1-1- 2003, the balances in the partnership books were as follows: Anees ($) Capital accounts Current accounts During the year ended 31st Ameer ($) 24 000 300 Cr. 30 000 150 Cr. December, 2003 partners drawings were:
for the following:
Anees $ 16 000 and Ameer $ 8 000. The net profit for the year ended 31st December, 2003 was $ 27 600 Prepare the profit and loss appropriation account and the partners current accounts.
Q 4.
Allen and Susan are in partnership. Their partnership agreement provides for the following:
a. Allen to receive a salary of $ 14 000 p.a. b. Interest on capital to be paid @ 10 % p.a. c. Interest on drawings to be charged @ 5% p.a. d. Any remaining profits are to be shared between Allen and Susan in the ratio of 4:2 During the year ended 31st December, 2003:Allen $ Capital accounts Current accounts (1-1-2003) Susan $ 30 000 400 (Cr) 40 000 300 (Dr)
The net profit for the year ended 31st December,2003 was $ 33 100. You are required to prepare the profit and loss appropriation account for the year ended 31st December,
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2003 and the partners current account.
Q 5.
Graeme and Mendez are in partnership for several years. The terms of their partnership includes:
a. Interest on capital to be paid @ 10% p.a. b. The profits are to be shared in the ratio of 2:1. c. Mendez to receive an annual salary of $ 8 000. The following information is available relating to their business during the year 2003: Graeme ($) Capital accounts Mendez ($) 10 000 12 000 230
Current accounts Drawings: Cash Goods (150) 5 750 400
st
8 580 1 000 December, 2003 amounted to $ 19 350(before appropriation)
The net profits during the year ended 31 Required to:
a. Prepare the profit and loss appropriation account for the year ended 31st b. Partners current accounts. Q 6.
December, 2003
Kate and Mate are partners sharing profits in the ratio of 3:2. Their partnership agreement
provides for the following: a. Interest on capital is allowed on their fixed capitals @ 10%p.a. b. Interest on cash drawings is charged @ 3%p.a. The following information is available from their books for the year ended 31st December, 2003: Kate ($) Capital account Mate ($) 60 000 40 000
Current account Cash drawings 1 000 Cr. 1 200 Cr. 10 000 8 000 Goods drawings Salary allowed during the year Commission on sales 2 100 1 000 p.m. 2 000 1 500 8 000 p.a. 1 500 The net profit for the year ended 31st December, 2003 was $ 50 360. You are required to prepare the profit and loss appropriation account and the partners current accounts. Q 7. Ash and Dash are in partnership for many years. Their partnership agreement provides for the following: a. Interest on capital to be allowed @ 10% p.a. b. A salary of $ 12 000 p.a. is to be allowed to Ash. c. The balance of profits are to be shared between Ash and Dash equally. d. Interest is charged on cash drawings @ 5% p.a. The following information is available from the books of their firm for the year ended 31st December, 2003: Ash ($) Capital account Current account Drawings: Cash Goods 5 000 700
st
Dash ($) 25 000 1 200 Cr. 30 000 1 000 Cr.
7 000 500
The net profit for the year ended 31
December, 2003 before appropriation was $ 35 000.
Prepare the profit and loss appropriation account and partners current account.
a)
Q 8. Albin and Robbin are in partnership business sharing profits & losses in the ratio of 2:1. Their partnership agreement provides for the following: Albin will get a monthly salary of $ 1 000 and Robbin, an annual salary of $ 10 000.
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b) c)
5% interest is charged on partners cash drawings 10% interest is allowed on partners fixed capitals Albin 30 000 1 000 Cr $ Robbin $ 20 000 800 Dr
On 01.01.2000 the balances were:Capital account Current account On 31.12.2000 the balances were:Capital account Current account Cash drawings
30 000 12 100 Cr 8 000
20 000 6 800 Cr 6 000 600
Goods drawings 500 You are required to prepare: 1. The partners current accounts to calculate the share of profit and 2. The profit & loss appropriation a/c, clearly showing the net profit before appropriation. Q 9. Blue & Yellow are partners in business for several years and their partnership agreement includes the following: 1. Interest on fixed capital to be paid @ 10% p.a. 2. Profits & losses to be shared between Blue & Yellow in the ratio of 2:1. 3. Yellow shall receive an annual salary of $ 10 000. Balances on 01.01.1999:Capital accounts Current accounts Balances on 31.12.1999:Capital accounts Current accounts Cash drawings 20 000 1 250 Cr 4 900 15 000 1 700 Cr 9 700 Blue 20 000 500 Cr $ Yellow 15 000 800 Dr $
Goods drawings 350 1 300 Interest on drawings 1 000 500 You are required to prepare: 1. The partners current accounts to calculate the share of profit and 2. The profit & loss appropriation a/c , clearly showing the net profit before appropriation. Q 10. The following information is obtained from the partnership business f Kate and Rita for the year ended 31st Dec 2002. Current account balances on 1-1-2002 Current account balances on 31-12 2002 Salary allowed during the year Interest on capital allowed Kate $ 400(Cr) $ 8 650(Cr) $ 500 p.m 10% on $ 30 000 fixed capital Rita $ 200(Cr) $ 6 450(Cr) $ 4 000 p.a 10% on $ 25 000 fixed capital
Drawings during the year $ 4 000 $ 3 500 A total commission of, 2% on total sales during the year $ 7 500, was allowed to both the partners according to their profit sharing ratio. Required to:1. Calculate the partners share of profit for the year ended 31st Dec 2002. 2. Calculate the profit before appropriation. Incoming search terms: partnership accounting format accounting for partnerships and partner loan accounts partnership current account format partnership deed accounting adjustments under fluctuating capital method partnership final accounts fluctuating capital method partnership format
principle of accounting (partnership) principles of accounting partnership the nature and forms of partnership for accounting what is a partnership current account
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