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Topic 4 Patnership Accounts

A partnership is defined as a relationship between two or more individuals who collaborate to generate and share profits, typically consisting of 2 to 20 partners for professionals and up to 50 for non-professionals. Key accounting clauses in a partnership deed include capital contributions, profit or loss sharing ratios, partner salaries, interest on drawings, and interest on capital. The profit and loss statement format for a partnership is similar to that of a sole proprietor, with profits distributed to partners through an appropriation account.

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32 views4 pages

Topic 4 Patnership Accounts

A partnership is defined as a relationship between two or more individuals who collaborate to generate and share profits, typically consisting of 2 to 20 partners for professionals and up to 50 for non-professionals. Key accounting clauses in a partnership deed include capital contributions, profit or loss sharing ratios, partner salaries, interest on drawings, and interest on capital. The profit and loss statement format for a partnership is similar to that of a sole proprietor, with profits distributed to partners through an appropriation account.

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firdaushussain56
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We take content rights seriously. If you suspect this is your content, claim it here.
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TOPIC 1: ACCOUNTING FOR A PARTNERSHIP

1.4.1 Definition of partnership

Partnership is a relationship that subsists between two or more people who come together for the
purpose of making and sharing profits. Partnership organizations normally constitute between 2
to 20 partners for professionals’ e.g. lawyers, accountants, and doctors’ e.tc and between two to
fifty for non- professional bodies.

1.4.5 Clauses in the partnership deed used for accounting purposes

i. Capital contribution clause


There is non requirement for equal capital contrition to the partnership business. Partners are
therefore required to contribute capital according to their ability. The agreement must however
state clearly the amount contributed by each partner.
ii. Profit or loss sharing ratio
Partnership agreement must indicate how the profit or loss realized from the partnership has to be
shared or suffered. The ration can be based on experience of the partners, capital contributed by
the partners, partner(s) involvement in the day- today activities in the organization e.t.c.
iii. Salaries to partners
Salaries to partners are not treated as ordinary salary expenses in an organization. It is taken as a
method of distributing profits made from the business. This is because the partner’s salaries are
not an arm’s length transaction.
iv. Interest on drawings
As seen from drawings, there is high likelihood that partners may tend to overdraw for the
partnership business resulting into failure for the operations of the partnership. To minimize this,
partners who draw from the partnership are charged interest on the drawings so as to limit the
level of drawings from the partnership.

v. Interest on capital
Partners may also agree to pay themselves some interest on the capital contributed especially
where they have not contributed same amounts. This interest on capital is there to compensate the
partners who contribute more capital to the partnership.

Note that – The format of the statement of profit and loss for a partnership does not differ from that
of a sole proprietor. After the partnership has determined its loss or profit for the period. It has to be
distributed to the partners using the Appropriation account shown below. And then posted to each
partner’s current account to find the closing balances on partner’s current account to be shown in the
statement of financial position.
Illustration one
X, Y and Z are partners sharing profits and losses in the ration of 2:3:4 respectively, for the year
ended 31st December 2019. The following represents their capital and current accounts Capital
accounts
Partner X 100,000
Partner Y 80,000
Partner Z 60,000
Current accounts
Partner X 60,000
Partner Y 40,000
Partner Z 20,000
Their partnership agreement allows for a 6% interest on capital contributed and 5% on drawings.
Additional information is provided below:
i. Y and Z received a salary of Sh. 30,000and Sh. 18,000 respectively ii. The net profit for the
partnership for the year ending 31st December 2019 was Sh.187,000. iii. Drawings for X, Y
and Z were Sh. 10,000, Sh. 8,000 and Sh. 6,000 respectively. All adjustments are posted to
current accounts.

Required:
The appropriation account for the partnership for the year ended 31st December 2019 The current
and the capital account for the partnership.

Suggested solution X, Y and Z Ltd partnership Appropriation account For the year ended 31
December 2019

Net profit SH. 187,000


Add: Interest on drawings
Partner x 5% x10,000 500
Partner y 5% x 8,000 400
Partner z 5% x 6,000 300 1,200
Available for appropriation 188,200
Less: Interest on capital
Partner x 6% x 100,000 6,000
Partner y 6% x 80,000 4,800
Partner z 6% x 60,000 3,600 (14,400)
Available for appropriation 173,800
Less: Salaries
Partner y 30,000
Partner z 18,000 (48,000)
Residual profit share 125,800
Profit shared
Partner x 2/9 x 125,800 27,956
Partner y 3/9 x 125,800 41,933
Partner z 4/9 x 125,800 55,911 (125,800)
BALANCE 0
The statement of financial position/ balance sheet of a partnership business does not look quite different from
that of a sole proprietor. The only difference is at the capital section. We show the Capital accounts of each
partners and the closing balances on the current accounts.

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