PARTNERSHIP ACCOUNTS

(Illustrations to be done in class)

Some definitions from the Kenyan Partnerships Act No. 16 of 2012

“partnership” means the relationship which exists between persons who carry on business in common
with a view to making a profit; “partnership agreement” means an agreement between, persons carrying
on business in common with a view to making a profit;

It is instructive to note that most law firms are formed as partnerships hence the need to pay keen
attention to this subtopic.

Some provisions

12. Share of profits and losses

(1) A partner is entitled to share equally in the profits of the partnership and is liable to contribute equally
towards the losses incurred by the partnership in equal proportions.

(2) A partner is not entitled to a share in the profits of the partnership, and is not liable to contribute to
any losses incurred by the partnership, before he became a partner.

(3) The estate of a partner who dies is liable for debts and obligations incurred by the partnership after
becoming partner.

13. Remuneration, expenses, personal liabilities

(1) A partner is not entitled to remuneration from the partnership for acting in the business of the
partnership.

(2) A partnership shall indemnify a partner in respect of payments made by the partner— (a) in the
ordinary and proper conduct of the partnership business, or in connection with anything done for the
preservation of the partnership business or property; or (b) to discharge the whole or a part of the
partner’s personal liability for a partnership obligation.

(3) An indemnity under subsection (2) shall not affect any claim, which the partnership or another partner
may have against the partner.

(4) Where the partnership fails to indemnify a partner under subsection (2), the partner shall be entitled
to contribution from any partner in the partnership on the same basis as if the amount unpaid were a
debt for which each of the partners was a co-guarantor in the same proportion as they would be liable to
bear any partnership loss.

(5) Where a partnership fails to pay a partner any other amount for which it is liable to account to the
partner under section 10(2), the partner shall be entitled to contributions from the other partners in the
same proportions as if the amount were a partnership loss.

14. Capital contribution by partner

(1) A partner may only— (a) contribute capital to the partnership; or (b) vary the amount of the partner’s
capital contribution to the partnership, where all partners in the partnership agree.

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(2) A partner who contributes to the capital of a partnership is not entitled to interest on the contribution.

(3) A partner who makes an advance to a partnership of an amount beyond his contribution to the capital
of the partnership is entitled to receive interest from the partnership at the rate of three percent per
annum with effect from the date of the advance where prevailing economic circumstances permit.

For more information refer to the Kenyan Partnerships Act :

http://kenyalaw.org/kl/fileadmin/pdfdownloads/Acts/PartnershipsAct_No16of2012.pdf

Partnership Deed

A partnership is formed by an agreement. This agreement may be written or oral. Though the law does
not expressly require that there should be an agreement in writing but the absence of a written agreement
may be a source of trouble in managing the affairs of the partnership firm. Therefore, a partnership deed
should be written, assented and signed by all the partners.

Contents of a partnership deed

The partnership deed usually contains the following particulars:

• Name of the firm;

• Names and addresses of all partners;
• Nature and place of the business;
• Date of commencement of partnership;
• Duration of partnership, if any
• Amount of capital contributed or to be contributed by each partner;
• Rules regarding operation of bank accounts;
• Ratio in which profits are to be shared;
• Interest, if any, on partners' capital and drawings;
• Interest on loan by the partners(s) to the firm;
• Salaries, commissions, etc. if payable to any partner(s);
• The safe custody of the books of accounts and other documents of the firm;
• Mode of auditor's appointment, if any;
• Rules to be followed in case of admission, retirement, death, of a partner;
• Settlement of accounts on dissolution of the firm; and
• Mode of settlement of disputes among the partners.

Provisions Affecting Accounting Treatment

Normally, a partnership deed covers all matters relating to the mutual relationship amongst the partners.
But if the deed is silent on certain matters or in the absence of any deed or an express agreement, the
relevant provisions of the Partnership Act shall become applicable. It is, therefore, necessary to know the
provisions of the Act, which have a direct bearing on the accounting treatment of certain items. These are
as follows:

1. Profit Sharing: The partners shall share the profits of the firm equally irrespective of their capital
contribution.

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2. Interest on Capital: No interest is allowed to partners on the capital contributed by them. Where,
however, the agreement provides for interest on capital, such interest is payable only out of the profits
of the business. In other words, if there are losses, interest on capital will not be allowed even if the
agreement so provides.

3. Interest on Loan: If any partner, apart from his share of capital, advances money to the firm as a loan,
he is entitled to interest on such amount at the rate of 6 per cent per annum. Such interest shall be paid
even out of the assets of the firm. This means that interest on loan shall be paid even if there are losses.
Implying, thereby, that it is a charge against the revenues.

4. Interest on Drawings: No interest will be charged on drawings made by the partners.

5. Remuneration to Partners: No partner is entitled to any salary or commission for participating in the
business of the firm.

It should be remembered that the above rules are applicable only in the absence of any provision to the
contrary in the partnership agreement.

Accounting treatment in a partnership business

• The statement of profit or loss is prepared like any other ordinary business.
• After the net profit for the year, an appropriation account is then prepared. The appropriation
account is as follows:

XYZ Partnership
Appropriation account for the year ended 31 December 20X6
Kshs. Kshs.
Net profit for the year XX
Add: Interest on drawings:
Partner A XX
Partner B XX XX
XX
Appropriated as follows:
Partners' salaries
Partner A XX
Partner B XX (XX)
XX
Commission to partners
Partner A XX
Partner B XX (XX)
XX
Interest on capital
Partner A XX
Partner B XX (XX)
XX
Profit Share (as per the ratio)

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 Partner A XX
Partner B XX (XX)
Nil

• The statement of financial position is the same as that of any other ordinary business, except that
under “Equity and Liabilities”, the “Equity” section will have the balances from partners’ capital
and current accounts.

Partners’ current account

This is an account maintained by the Partnership business reflecting the amounts relating to partners.

The items that usually appear on the debit and the credit side of the Partners' current account are:

Credit Side: 1. opening balances; 2. Interest on capital, if any; 3: commissions to partners, if any, 4. Salary
to the partners, if any; 5. Bonus to the partners; 6. Share of profit.

Debit Side 1. Drawings made during the year, if any; 2. Interest on drawings, if any; 3. Share of loss, if any;
4. Closing Balance

Structure

Partners’ Current Account

Dr. Cr
Partner A Partner B Partner A Partner B
Drawings xx xx Balance b/d xx xx
Interest on drawings xx xx Interest on capital xx xx
Commissions xx xx
Partners salary xx xx
Bonus xx xx
Profit share xx xx
xxx xxx xxx xxx