Partnership Accounts

PARTNERSHIP ACCOUNTS
A partnership is a business in which two or more people work together as owners with a view of
making profits. They agree to combine their resources and share the profits or losses. The partners are
collectively known as the firm.
The need for partnership

 The capital required is more than one person can provide.
 The experience or ability required to manage the business cannot be found in one person alone.
 Many people want to share management instead of doing everything on their own.
 Very often the partners will be members of the same family.
The characteristics of a partnership

A partnership has the following characteristics:
 It is formed to make profits.
 It must obey the law as given in the Partnership Act of 1890. If there is a limited partner, it must
obey the Limited Partnership Act of 1907.
 Normally there can be minimum of two partners and maximum of 20 partners. Exception are
banks, where there cannot be more than ten partners; also there is no maximum limit for firms of
accountants, solicitors etc.
 Each partner (except for limited partners described below) must pay their share of any debts that
the partnership could not pay. If necessary, they could be forced to sell their private possession
to pay their share of the debts.
Limited partners:
 There liability is limited to the capital they have put in.
 They are not allowed to take part in the management of the business.
 All partners cannot be limited partners.
Partnership Agreement
In partnership, a written agreement between partners is essential to avoid future disagreements and
misunderstandings. A partnership agreement consists of the following terms:
 The capital contributed by each partner

 The sharing or profit and losses
 The amount of drawing allowed to each partner
 The salary, if any, to be paid to any partner
 The interests, if any, to be allowed on capital
 The interests, if any, to be charged on drawings
 Arrangements for the admission of new partners.
 Procedures to be carried out when a partner retires or dies.
WHERE NO PARTNERSHIPMENT AGREEMENT EXISTS:
 Profits and losses are to be shared equally

 There is to be no interest allowed on capital
 No interest is to be charged on drawing
 Salaries are not allowed
 Partners who put a sum of money into a partnership in excess of the capital they have agreed to
subscribe are entitled to interest at the rate of 5% per annum on such an advance.
Capital accounts in Partnership: The capital accounts in partnership may be maintained under:
(a) Fixed capital method
(b) Fluctuating capital method
(a)Fixed Capital Method: Under this method two accounts are kept for each partner. That is Capital
account and Current account. In the capital account the original capital investment onlywill be shown
every year. The current account is kept for recording Interest on capital allowed, salary allowed, share of
profit, drawings, interest on drawings etc. This account may show either a debit balance or a credit
balance. Debit balance represents drawing in excess of profits to which a partner was entitled. Credit
balance means profits undrawn.
(b) Fluctuating Capital Method: Under this method, only one account is kept in the name of each
partner i.e. Capital account. The partner’s capital contribution, share of profit, interest on capital,
salaries allowed, drawings and interest on drawings are recorded in one same capital account itself, so
that the balance in this account changes or fluctuates each year.
Capital accounts in Partnership: The capital accounts in partnership may be maintained under:
(a) Fixed capital method
(b) Fluctuating capital method
(a)Fixed Capital Method: Under this method two accounts are kept for each partner. That is Capital
account and Current account. In the capital account the original capital investment onlywill be shown
every year. The current account is kept for recording Interest on capital allowed, salary allowed, share of
profit, drawings, interest on drawings etc. This account may show either a debit balance or a credit
balance. Debit balance represents drawing in excess of profits to which a partner was entitled. Credit
balance means profits undrawn.
(b) Fluctuating Capital Method: Under this method, only one account is kept in the name of each
partner i.e. Capital account. The partner’s capital contribution, share of profit, interest on capital,
salaries allowed, drawings and interest on drawings are recorded in one same capital account itself, so
that the balance in this account changes or fluctuates each year.
Q1. T. Terry and S. Shell are in partnership for the last 10 years. Their partnership
agreement provides for the following:
a. Interest on capital shall be allowed @ 8% p.a.
b. Interest shall be charged on cash drawings @4% p.a.
c. T. Terry shall be allowed a salary of £ 12 000 p.a. and S. Shell shall be allowed a
salary of £ 6000p.a.
d. The remaining profits or losses shall be shared in the ratio of 3:2 between the
partners.
The following information is available relating to the year ended 31 st, December, 2011
T. Terry (£)S. Shell (£)
Capital accounts (1-1-2011) 60 000 40 000
Current accounts (1-1-2011) 1 000 Cr. 1 500 Cr.
Partners’ drawings
Cash 5 000 3 000
Goods 3 000 1 500
Profit for the year before appropriation was £ 45 650.
Prepare the profit and loss appropriation account and the partners’ current accounts.
Q1. T. Terry and S. Shell are in partnership for the last 10 years. Their partnership
agreement provides for the following:
e. Interest on capital shall be allowed @ 8% p.a.
f. Interest shall be charged on cash drawings @4% p.a.
g. T. Terry shall be allowed a salary of £ 12 000 p.a. and S. Shell shall be allowed a
salary of £ 6000p.a.
h. The remaining profits or losses shall be shared in the ratio of 3:2 between the
partners.
The following information is available relating to the year ended 31 st, December, 2011
T. Terry (£)S. Shell (£)
Capital accounts (1-1-2011) 60 000 40 000
Current accounts (1-1-2011) 1 000 Cr. 1 500 Cr.
Partners’ drawings
Cash 5 000 3 000
Goods 3 000 1 500
Profit for the year before appropriation was £ 45 650.
Prepare the profit and loss appropriation account and the partners’ current accounts.
Q1 Sullum and Voe are in Partnership. The following balances were extracted from the books of the
partnership on 31 October 2010:
£
Capital Accounts Sullum 20 000
Voe 14 000
Current Accounts at 1 November 2009:
Sullum 600 Cr
Voe 100 Dr
Drawings Sullum 14 000

Voe 12 000
inventory at 1 November 2009 15 500
Purchases 136 400
Revenue 190 000
Sales Returns 2 000
Rent and Insurance 5 400
Selling Expenses 8 800
General Expenses 9 000
Provision for Doubtful debts 900
Equipment and fittings 11 000
Trade receivables 16 400
Trade payables 12 500
Cash at Bank 7 400
The following additional information is also available:

1. Inventory at 31 October 2010 was valued at £16300.
2. The Rent and Insurance Account includes an insurance premium of £800 for the
twelve months to 31 January 2011.
3. Bad debts of £400 are to be written off.
4. The Provision for Doubtful Debts is to be adjusted to 5% of the outstanding debtors’
balances at 31 October 2010.
5. Equipment and Fitting are to be depreciated by 10%.
6. The bank statement was received on 3 November 2010. It included an entry of £200
for bank charges. This matter has not been dealt with in the partnership’s books.
7. The partnership agreement provides that:
a) Interest is to be allowed on partners’ fixed capital at the rate of 10% per annum.
b) Voe is to be credited with an annual salary of £5 000.
c) The remaining profit is to be shared between Sullum and Voe in the ration 3;2 respectively.
Required:
(a) Prepare the statement of comprehensive income for the year ended 31 October 2010
(b) Prepare partnership profit and loss appropriation account for the year ended 31 October 2010
(c) Prepare the statement of financial position at 31 October 2010
Structural changes in the ownership of a partnership
There are three main changes that can occur in the ownership of a partnership:
 A change in the profit sharing ratios
 Admission of a new partner
 A partner leaves the partnership.
In each case, there is a need to revalue the business so as to enter the appropriate entries into the
accounting records. The revaluation has two phases:
 Goodwill
 Asset revaluations
First let’s consider goodwill, what it is, how it arises and how it is treated in the partnership book of
accounts.
GOODWILL
 The excess amount that has to be paid to acquire a part or the whole of a business as a going
concern, over and above the value of the net assets owned by the business.
 Goodwill is the value/price paid for a business over and above the net value of the assets.
REASONS FOR PAYMENT OF GOODWILL
 A large number of regular customers who will continue to deal with the new owner.
 The business has a good reputation.
 It has experienced efficient and reliable employees.
 The business is situated in a good location.
 It has good contacts with suppliers.
 The possession of brand names and trademarks
Treatment of goodwill in the books of partnership
In partnerships, goodwill is created in the following cases.
(a) Existing partners decide to change profit and loss sharing ratios, or sometimes the profit and loss
sharing ratios have to be changed. Typical reasons are:
 A partner may not work as much as he/she used to do, possibly because of old age or ill-health.
 Skills and ability may have changed.
 Partner may be doing more for the business than he used to do.
(b) A new partner is introduced, or new partner may be admitted, usually for one of two reasons:
 As an extra partner, either because the firm has grown or someone is needed with different skills.
 To replace partners who are leaving the firm. This might be because of retirement or death of a
partner.
(c) A partner retires or dies

JOURNAL ENTRIES:
When goodwill is created:
THE JOURNAL
Date Details Debit £ Credit £
Goodwill account xxx
Partner capital account

A xxx
B xxx
(Goodwill created in partners old profit sharing ratio)
When goodwill is written off:

THE JOURNAL

A xxx
B xxx
(Goodwill written off in existing partners new profit sharing ratio)
JOURNAL ENTRIES:
When goodwill is created:
THE JOURNAL

A xxx
B xxx
(Goodwill created in partners old profit sharing ratio)
When goodwill is written off:

THE JOURNAL

A xxx
B xxx
(Goodwill written off in existing partners new profit sharing ratio)

Q1 The partners have always shared their profits in the ratios of X 4: Y3: Z 1. They are to alter their
profit ratios to X 3: Y 5 : Z 2. The last balance sheet before the changes was:
Statement of Financial Position as at 31 December 2009
£
Net assets (not including goodwill) 14 000
Capitals:
X 6 000
Y 4 800
Z 3 200
14 000
The partners agree to bring in goodwill, being valued at £12 000 on the change.
Show the statement of financial position on 1 January 2010 after goodwill has been take into account if:
(a) Goodwill account is opened.
(b) Goodwill account is not opened.
Q2 The partners are to change their profit ratios as shown:

Partners Old ratio New ratio
A 2 3
B 3 4
C 4 3
D 1 2
They decide to bring in a goodwill amount of £18 000 on the change. The last financial position before
any element of goodwill has been introduced was:
Financial position as at 31 December 2009
£
Net assets (not including goodwill)
18 000
Capitals:
A 7 000
B 3 000
C 5 000
D 3 000
18 000
Show the balance sheets on 1 January 2010 after necessary adjustments have been made if:
(a) Goodwill account is opened.
(b) Goodwill account is not opened.
Q3 X and Y are in partnership, sharing profits and losses equally. They decide to admit Z. by
agreement, goodwill valued at £6 000 is to be introduced into the business books. Z is required to
provide capital equal to that of Y after he has been credited with his share of goodwill. The new
partnership ratio is to be 4: 3: 3 respectively for X, Y and Z.
The balance sheet before admission of Z showed:
£ £
Non-current and current assets 15 000

Cash 2 000
17 000
Capital X 8 000
Y 4 000
Current liabilities 5 000 17 000
Show:
(a) Journal entries for admission of Z.
(b) Opening balance sheet of new business.
(c) Journal entries for writing off the goodwill which the new partners decided to do soon after the start
of the new business.
Q3 X and Y are in partnership, sharing profits and losses equally. They decide to admit Z. by
agreement, goodwill valued at £6 000 is to be introduced into the business books. Z is required to
provide capital equal to that of Y after he has been credited with his share of goodwill. The new
partnership ratio is to be 4: 3: 3 respectively for X, Y and Z.
The balance sheet before admission of Z showed:
£ £
Non-current and current assets 15 000

Cash 2 000
17 000
Capital X 8 000
Y 4 000
Current liabilities 5 000 17 000
Show:
(a) Journal entries for admission of Z.
(b) Opening balance sheet of new business.
(c) Journal entries for writing off the goodwill which the new partners decided to do soon after the start
of the new business.
Q4 L, M and S are in partnership. They shared profits in the ratio 2: 5: 3. It is decided to admit R. it is
agreed that goodwill was worth £10 000, but that this is not to be brought into the business records. R
will bring £4 000 cash into the business for capital. The new profit sharing ratio is to be L3: M4: S2: R1.
The balance sheet before admission of R showed:
£ £
Assets (other than in cash) 11 000
Cash 2 500
13 500
Capital L 3 000
M 5 000
S 4 000
Trade payables 1 500 13 500
Show:
(a) The entries in the capital accounts of L, M, S and R, the accounts to be in columnar form.
(b) The balance sheet after R has been introduced.
£ £
Cash 2 500
13 500
Capital L 3 000
M 5 000
S 4 000
Show:
(a) The entries in the capital accounts of L, M, S and R, the accounts to be in columnar form.
£ £
Cash 2 500
13 500
Capital L 3 000
M 5 000
S 4 000
Show:
(c) The entries in the capital accounts of L, M, S and R, the accounts to be in columnar form.
(d) The balance sheet after R has been introduced.
Q9 T, U and V are in partnership. They shared profits in the ratio 4: 5: 1. It is decided to admit W. it is
agreed that goodwill was worth £30 000, that it was to be brought into the business records. W will
bring £20 000 cash into the business for capital. The new profit sharing ratio is to be T63: U7: V2: W5.
The balance sheet before W was introduced was as follows:
£ £
Cash 6 000
40 600
Capital T 14 000
U 18 000
V 5 000
40 600
Show:
(a) The entries in the capital accounts of T, U, V and W, the accounts to be in columnar form.
bring £20 000 cash into the business for capital. The new profit sharing ratio is to be T63: U7: V2: W5.
£ £
Cash 6 000
40 600
Capital T 14 000
U 18 000
V +
5 000
40 600
Show:
(a) The entries in the capital accounts of T, U, V and W, the accounts to be in columnar form.
bring 20 000 cash into the business for capital. The new profit sharing ratio is to be T63: U7: V2: W5.
£ £
Cash 6 000
40 600
Capital L 14 000
M 18 000
S 5 000
Show:
(c) The entries in the capital accounts of L, M, S and R, the accounts to be in columnar form.
(d) The balance sheet after R has been introduced.
bring 20 000 cash into the business for capital. The new profit sharing ratio is to be T63: U7: V2: W5.
£ £
Cash 6 000
40 600
Capital L 14 000
M 18 000
S 5 000
Show:
(e) The entries in the capital accounts of L, M, S and R, the accounts to be in columnar form.
(f) The balance sheet after R has been introduced.
Partnership dissolution
Reason for dissolution include the following:
 The partnership is no longer profitable, and there is no longer any reason to carry
on trading.
 The partners cannot agree between themselves how to operate the business. They
therefore decide to finish the business.
 Factors such as ill health or old age may bring about the close of the partnership.
What happen upon dissolution?

Upon dissolution the partnership firms stops trading or operating. Then, in accordance
with Partnership Act 1890:
 The assets are disposed of;
 The liabilities of the firms are paid to everyone other than partners;
 The partners are repaid their advances and current balances- advances are the
amounts they have put in above and beyond the capital.
 The partners are paid the final amounts due to them on their capital accounts.
Any profit or loss on dissolution would be shared by all partners in their profit and loss
sharing ratios. If a partner final balance on his/her capital or current account is in
deficit, he or she will have to pay that amount into the partnership bank account.
Realisation account
The main account around which dissolution entries are made is known as the realisation
account. It is this account in which it is calculated whether the realisation of the asset is
at a profit or at a loss.
Accounting entries
Transfer book value of all assets to the realisation account:
Debit realisation account
Credit asset account
Amounts received from disposal of assets:

Debit bank account
Credit realisation account
Values of assets taken over by partners without paying for them

Debit partners capital account
Creditors paid:
Debit creditors account
Credit bank account
Costs of dissolution:
Debit realisation account
Credit bank account
Profit or loss on realisation:
If a profit: Debit realisation account
Credit partners’ capital account in their profit and loss sharing ratios.
If a loss: Debit partners’ capital account in their profit and loss sharing ratios.
Pay to the partners their final balances on their capital account:

Debit capital account
Credit bank account
The extra information is:

 Any provision such as bad debts or depreciation is to be transferred to the credit
of the asset account.
 Discount on trade payables (creditors) – to balance the creditors’ account,
transfer the discounts on creditors to the credit of the realisation account.
 Transfer the balances on the partners’ current accounts to their capital accounts.
 A partner who owes the firms money because his capital account is in deficit
must now pay the money owing.
Q1 Moore and Stephens, who share profits and losses, decide to dissolve their
partnership as at 31 March 2009. Their balance sheet on that date was as follow.
£ £
Building 800
Tools and fixtures 850
Cash 1 800
6 250
Capital accounts
Moore 2 000
Stephens 1 500
6 250
The trade receivables realised 2 700, the building 400 and the tools and fixtures 950.
The expenses of dissolution were 100 and discounts totaling 200 were received from
trade payables.
Required:
Prepare the accounts necessary to show the result of the realisation and of disposal of
the cash.
2. Aysha, Bashu and Christine are in partnership retailing electrical goods. They share profits
and losses in the ratio 2:2:1. Christine is entitled to a salary of £7 000 per annum. No interest
is paid on capital. Interest is charged at the rate of 5% per annum on the drawings for the
year. The following trial balance was extracted from the books for the year ended 31 March
2012:
Dr Cr
£ £
Goodwill 30 000
Inventory 1 April 2011 40 000
Salaries and wages 29 500
Sundry expenses 8 500
Rent and rates 9 000
Bank loan interest paid 3 000
Cash 4 200
5% Bank loan – Payable 31 March 2020 80 000
Non-current assets at cost:
Land and buildings 70 000
Delivery vehicles 20 000
Fixtures and fittings 8 000
Provisions for depreciation:
Delivery vehicles 9 000
Fixtures and fittings 6 400
Provision for doubtful debts 900
Revenue 265 100
Purchases 191 000
Capital accounts at 1 April 2011:
Aysha 30 000
Bashu 20 000
Christine 10 000
Current accounts at 1 April 2011:
Aysha 3 500
Bashu 4 300
Christine 700
Drawings:
Aysha 4 000
Bashu 4 000
Christine 2 000
452 400 452 400
Additional information at 31 March 2012:
(i) Inventory £31 000
(ii) Goodwill is no longer to be recorded in the books.
(iii) Salaries and wages contains the £7 000 salary already paid to Christine.
(iv) Sundry expenses prepaid £750.
(v) Rent and rates owing £3 000.
(vi) The 5% Bank loan was taken out on 1 April 2011.
(vii) Depreciation is to be charged as follows:
No depreciation is charged on the land and buildings
Delivery vehicles – 20% per annum using the reducing balance method
Fixtures and fittings – 10% per annum using the straight line method.
(viii) Trade receivables of £3 500 are considered irrecoverable. The provision for doubtful
debts is to be maintained at 5% of the remaining trade receivables.
Required:
(a) Prepare the:
(i) statement of comprehensive income including the appropriation of profit/loss for the year
ended 31 March 2012
(17)
(ii) statement of financial position at 31 March 2012.
(13)
(b) Prepare for the year ended 31 March 2012 the:
(i) capital account of Christine
(4)
(ii) current account of Christine.
(6)
(c) Evaluate the partners’ decision to not record goodwill in the books.
(8)

Partnership Accounts

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PARTNERSHIP ACCOUNTS

The need for partnership

The characteristics of a partnership

 The capital contributed by each partner

WHERE NO PARTNERSHIPMENT AGREEMENT EXISTS:

 Profits and losses are to be shared equally

Drawings Sullum 14 000

The following additional information is also available:

REASONS FOR PAYMENT OF GOODWILL

Treatment of goodwill in the books of partnership

In partnerships, goodwill is created in the following cases.

(c) A partner retires or dies

Date Details Debit £ Credit £

Goodwill account xxx

Partner capital account

When goodwill is written off:

Date Details Debit £ Credit £

Partner capital account

(Goodwill written off in existing partners new profit sharing ratio)

Date Details Debit £ Credit £

Goodwill account xxx

Partner capital account

When goodwill is written off:

Date Details Debit £ Credit £

Partner capital account

(Goodwill written off in existing partners new profit sharing ratio)

Q2 The partners are to change their profit ratios as shown:

Non-current and current assets 15 000

Non-current and current assets 15 000

What happen upon dissolution?

Amounts received from disposal of assets:

Values of assets taken over by partners without paying for them

Pay to the partners their final balances on their capital account:

The extra information is:

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