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Partnership Solutions

Partnership is a business agreement where two or more individuals share profits and losses, with advantages including shared risks and resources, but also potential disputes and unlimited liability. A partnership agreement outlines the terms of the partnership, including profit-sharing, salaries, and interest on capital and loans. Various scenarios illustrate the allocation of profits and losses among partners based on specific agreements.

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33 views4 pages

Partnership Solutions

Partnership is a business agreement where two or more individuals share profits and losses, with advantages including shared risks and resources, but also potential disputes and unlimited liability. A partnership agreement outlines the terms of the partnership, including profit-sharing, salaries, and interest on capital and loans. Various scenarios illustrate the allocation of profits and losses among partners based on specific agreements.

Uploaded by

kurian010
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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PARTNERSHIP 2023

Definition:
Partnership is an agreement between two or more persons, who have agreed to share the
profit/loss of a business, carried on by all or any one of them, acting for all.

Advantages of Partnership:
• A partnership shares business risk between more than one persons.
• Each partner can develop special skills upon which the other partners can rely.
• Greater resources will be available since more individuals will be contributing to the business.
• Continuation of the business if one partner retires or dies.

Disadvantages of a Partnership:
 There may be disputes in the running of the business.
 Due to discussion amongst partners, it may take longer to make business decisions.
 Partners are jointly and severally liable for their partners. Thus, if one partner is being sued in relation to
the business, all partners share the responsibility and potential liability.
 The personal liability of each partner for the firm’s liability is unlimited, so an individual’s personal
assets may be used to meet any partnership liabilities in the event of partnership bankruptcy.

The Partnership Agreement:


A partnership agreement, which need not necessarily be in written form, will govern the relationships
between the partners. The partnership agreement is likely to specify:

 Name of firm, the type of business, and duration if any


 Capital to be introduced by partners

 Any salaries to be paid to partners:


Partners can agree credit one or more partners with fixed salaries. This can be a means of
compensating a partner for particularly valuable services rendered, especially if his share of profit is
otherwise small. Salaries are an appropriation of profit, not a charge against profit.

 Interest to be paid on any loan made to the partnership by a partner:


When an existing or previous partner makes a loan to the partnership he becomes account payable of
the partnership. In the statement of financial position a loan is shown separately as a non-current
liability.
Interest on loan account represents an expense charged against profit.

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PARTNERSHIP 2023

 Interest to be paid on partners’ capital account balances:


Partners can agree to credit themselves with interest on capital account balances. This means of
compensating partners for funds tied up in the business that could be earning interest if invested
elsewhere.
Interest on capital accounts are an appropriation of profit, not a charge against profit.

 Interest to be charged on partners drawings:


Partners will need to draw money out of the business in order to cover living expenses. Sometimes the
partnership agreement requires that interest is charged on any drawings made by partners before the
year end. Therefore those partners who draw out more cash than their colleagues in the early part of
an accounting period suffer a cost. This interest is dealt with in the appropriation statement. It is
charged to the relevant partners and added to the profit available to share per the partnership
agreement.

 The proportion in which any residual profit is to be allocated between the partners.

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PARTNERSHIP 2023

Q.1: Pike and Scar are in partnership and have the following profit-sharing agreements:

 Interest on capital is to provide at a rate of 8% per annum.


 Pike and Scar are to receive salaries of $6,000 and $ 8,000 per annum respectively.
 The balance of profit or loss is to be divided between Pike and Scar in the ratio of 3:2.

Net profit for the year amounts $20,000 and capital account balances are Pike $12,000 and Scar $9,000.

Required: Prepare a statement showing the appropriation of profit between the partners.

Q.2: P and Q run a business selling home-made lotion. They have been very successful in their first year of
trading and have made a profit of $48,000. Their partnership agreement makes the following provisions:

 P is to be allocated a salary of $11,000


 Interest of capital is to be provided at 7% per annum.
 The balance of profits is to be split equally

When they set the business up, P injected capital of $8,000 and Q $12,000.

Required: How much profit is to be allocated to P and Q?

Q.3: B, J and C are in partnership selling CDs and DVDs via their website. They haven’t been very successful in
the past year and in the year ended 30th June 20X6, recorded a loss of $120,000. Their partnership agreement
states the following:

 Interest on capital is to be provided at 4% per annum


 C to be allocated a salary of $25,000 and J $14,000
 No interest to be charged on drawings
 Balance of profit to be shared in the ratio of 4:3:1

Capital balance at the start of the year stood as follows:

B: $35,000 J: $26,000 C: $40,000

Required: How much profit/(loss) is to be allocated to B, J and C?

3
PARTNERSHIP 2023

Q.4: H and C started a business making and distributing burgers on 1st January 20X6. H invested $20,000 in
the business and C $14,000. In the first year of trade, the business made $25,000 profit. The partnership
agreement says the following:

 Neither partner receives a salary


 Interest on capital is to be provided at 4%
 Interest on drawings to be charged at 2%
 The balance of profit is to be split in the ratio of 3:2

Both H and C drew $5,000 each from the business on 1st July 20X6 to pay for their annual fishing holidays.

Required: Show how this information appears in the partners’ capital and current accounts in the balance
sheet.

GUARANTEED MINIMUM PROFIT SHARE:


In certain partnership agreements a partner may be guaranteed a minimum share of profits. The
appropriation of profit is calculated in the normal way. If the result shows that the relevant partner has less
than the guaranteed minimum, the deficit will be made good by the other partners (normally in profit-sharing
ratio).

Q.5: A partnership has four partners – P, W, E & C. In the year to 30th June 20X5 the partnership made a profit
of $106,250.

P invested $100,000 in the business and withdrew $30,000 from the business on 1 st July 20X4.
W invested $ 20,000 in the business and withdrew $30,000 from the business on 30 th June 20X5.
E invested $50,000 in the business and withdrew $25,000 from the business on 1 st July 20X4.
C invested $50,000 in the business and withdrew $30,000 from the business on 1 st July 20X4.

Their partnership agreement states the following:

 Interest on capital at 5% pa
 W to receive $5,000 salary
 Interest on drawings at 10% pa
 Profit share ratio 2:1:3:4
 Guaranteed minimum share of profit $42,500 for C

Required: Allocate the profit of the business in accordance with the partnership agreement

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