PARTNERSHIP by MikeJenny

VIEWS: 22 PAGES: 27

									Introduction of Partnership
         Accounts




                              1
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                                      2
Partnership Agreement
   Not all partnership have agreements.
   However, a written partnership
    agreement will help prevent problems
    and solve dispute between the partners




                                        3
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          4
    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 by
     partners equally
3.   No interest is to be paid on capital
4.   No interest is to be charged on partners’
     drawings
5.   Partners are entitled to interest of 5% per
     annum on loans to the firm
6.   No salaries are allowed to partners


                                                   5
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

                                                   6
   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
                                                     7
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



                                                                    8
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         Dr Partners’ current
                             Cr Profit and loss
                             appropriation
                                                    9
Profit and Loss Appropriation




                                10
 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




                                                                            11
                               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
                                                                            12
                         Capital account
               Peter      John                  Peter      John
                                 Bal b/f          X         X



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



                                                                  13
                             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
                                                            X
Financed by:
Capital – Peter                                             X
         - John                                             X
                                                            X

                                                                  14
Current account                   Peter   John    Total
        Opening balance             X      (X)
        add: Share of profit        X       X    Debit balance
             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
                                                  X




                                                           15
Example 1




            16
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                                      400000
Provision for depreciation                                       40000
Stock as at 1 Jan 1997                            10000
Sales                                                            290000
Purchases                                         150000
Expenses                                          30000
Capital – Tom                                                    197000
        - David                                                  197000
Current – Tom                                                    8000
         - David                                  2000
Drawings – Tom                                    5000
           - David                                5000
Debtors                                           70000
Bank                                              80000
10% Loan from Tom                                                20000
                                                  752000         752000

                                                                        17
    Additional information:
1.   Stock in hand as at 31 December has been
     valued at cost at $30000
2.   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

                                            18
Example 1                  Tom and David
 Trading and Profit and Loss Account for the year ended 31 December 1997
Opening Stock            10,000    Sales                             290,000
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




                                                                           19
                          Tom and David
Trading and Profit and Loss Account for the year ended 31 December 1997
Partners’ Salaries                   Net Profit                     88,000
 Tom               10,000            Interest on Drawings
                                      Tom                   250
 David              5,000   15,000
                                      David                 250           500
Interest on Capital
 Tom                1,970
 David              1,970  3,940
Share of Profit
 Tom (1/2)         34,780
 David (1/2)       34,780 69,560
                          88,500                                    88,500




                                                                             20
                        Tom and David
                        Current Account
                  Tom   David     1997                     Tom    David
1997
Jan 1 Bal. b/f           2,000   Jan 1 Bal. b/f            8,000
Dec31 P&L Appropriation          Dec 31 Profit and Loss Appropriation
      -Int. on                           - Int. on Capital 1,970 1,970
        Drawings 250      250            - Profits         34,780 34,780
   31 Drawings 5,000 5,000               - Salaries        10,000 5,000
   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




                                                                           21
                          Tom and David
                  Balance Sheet as at 31 December 1997

Fixed Assets            400,000 Capital Accounts
Less: Provision for Dep. 80,000  Tom                  197,000
                                 David                197,000   394,000
                        320,000
                                Current Accounts
Current Assets                   Tom                   51,500
Stock            30,000          David                 34,500    86,000
Debtors          70,000         Long-term Liabilities
Bank             80,000 180,000 Loan from Tom                    20,000
                        500,000                                 500,000




                                                                      22
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

                                                      23
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

                                           24
Example 2




            25
 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 1996              $200000
      31 Dec 1997              $42000
Required
Calculate the share of profits to each partner
for 1996 and 1997 are:
                                                   26
                          Paul, Betty and Rose
Profit and Loss Appropriation Account for the year ended 31 December 1997
Share of Profit:                          Net Profit                  200,000
 Paul (5/10)       100,000
 Betty (3/10)       60,000
 Rose (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:                          Net Profit                   42,000
  Paul (5/10 X 32,000) 20,000
  Betty (3/10 X 32,000) 12,000
  Rose (guaranteed)     10,000   42,000
                                 42,000                                 42,000


                                                                              27

								
To top