ACCOUNTANCY FORM 6 – PARTNERSHIP ACCOUNTING

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A. PARTNERSHIP
WHAT IS IT?

Is a relationship between persons who have agreed to share profit and loss of the business carried by all with a profit meditative.

Partners: Are persons making an agreement to carry business for a common purpose/intention.

  • Individual – these are partners (Persons by nature).
  • Collectively – This is a firm (legal persons).

    MAIN FEATURES OF PARTNERSHIP;

 

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  1. Two or more persons.
  2. There must be an agreement between partners.
  3. Lawful business.
  4.  Profit Motive.                                                                   
  5. Principal to agent relationship.
  6. Unlimited liabilities.

 

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B.
CAPITAL ACCOUNTS

Capital can be contributed

(a) In kind

Anything equivalent to cash e.g. A house, a car etc

   ENTRIES
   DR ; Motor car A/c
   CR ; Capital A/c
    b) In cash
   – It is in cash
   ENTRIES
    DR ; Cash A/c
    CR ; Capital A/c
 c) Both cash and in kind
– Partner brought part in cash and part in kind.

 

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TYPES OF CAPITAL ACCOUNTS

There are two types of Capital Account

(a)     Fluctuating capital Account

  • Also it is known as floating capital account.
  • This system partners capital account do not remain intact (as its original balance but fluctuates quite frequently)
  • It means the capital account changes with all items concerning partners e.g. Interest on drawings, interest on capital, Partners salaries, commission, Drawings, Properties brought in, Profit and less nglish-swahili/distribution” target=”_blank”>distribution.

 

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(b)     Fixed Capital Account

Under this system the original capital invested by the partners remain unaltered unless additional capital is invested or capital itself is withdrawn by mutual agreement.

(c)     Partner’s Current Account

It is an account that carries all items concerning Partners e.g. Interest on capital, Interest on drawings, Drawings, Partner’s salaries and wages/ commission to partner.

(d)    Profit and Loss Appropriation Account

This is an extension of usual profit and loss Account, it Is prepared for adjusting transaction relating to the partnership deed.

Contents

  • Interest on partner’s capital.
  • Interest on partner’s drawings.
  • Interest on partner’s loans.
  • Partners salaries.
  • Partner’s commission.

 

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NOTE

These transactions are treated separately without mixing up with general trading transaction.

                                             ENTRIES

    DR CR
1 Interest on Partner’s Capital    
  DR; Interest or past Capital   a/c xx  
  CR; Partner’s capital (current a/c   xx
  Transfer (fx)    
  DR; Profit and loss appropriation a/c xx  
  CR; Interest on Partner’s capital   xx
     
2 Interest on drawings    
  DR; Partner’s Capital/Current     a/c xx  
  CR; Interest on Partner’s Drawings   xx
  Transfer (fx)    
  DR; Interest on Partner’s Drawings       a/c xx  
  CR; Profit and loss Appropriation         a/c   xx
     
3 Interest on Partner’s Loans    
  DR; Interest on Partner’s Loan xx  
  CR; Partners capital   a/c   Xx
  Transfer (fx)    
  DR; Interest on partner’s Loan xx  
  CR;   Xx
4 Partner’s salaries/Commissions    
  DR; Partner’s salaries/commission xx  
  CR; Partner’s capital   a/c   Xx
  Transfer (fx)    
  DR; Profit and loss appropriation   a/c xx  
  CR; Partner’s salaries/commission   Xx
       

 

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EXERCISE 1

Amake and Babake started a partnership on 1st January, 2010. Both agreed in the partnership did the following;

  1. To contribute Shs.100, 000 each as capital.
  2. To share Profit and loss equally.
  3. Interest on capital at a rate of 5%.
  4. Interest on drawings at a rate of 10%.
  5. Partner’s salary Shs.50, 000 per month each.

 

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Transactions for the Month of January, 2010

1st January,2010 Invested required capital as per deed  
Purchased goods from RTC 700000
Purchased goods from Ally cash 100000
Babake inject additional funds in cash 200000
Amake took 50,000 shs from the firm to pay school fees for his son  
31st January 2010 Sold goods to NMC worth 2,000,000
  Sold goods to NMC by cash 500,000
  Goods counted physically worth 100,000
  Paid rent 10,000
  Rent received 100,000
  Paid to partner’s January salaries  
  Paid salaries 2000
  Paid productive wages 5000

 

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Required

-Journal Proper to record all the transaction (No narration needed)

-Prepare ledger a/c’s to record all transactions relating to the months 1/2010

-Prepare trading profit and loss a/c and appropriation account for the period in a  question.

-Show by extracting financial position of the A and B partnership (Amake and Babake).

       PROFIT AND LOSS APPROPRIATION ACCOUNT

Commission xxx Net profit b/d Xxx
Net loss xxx interest on drawings  
partner’s salaries   A- xx                                  A – xx  
                            B – xx xxx                                B   – xx Xxx
Bonus to partner’s    
Interest on loan   xx    
general reserve   xx    
Residual profit    
                           A – xx    
                           B – xx xxx  
  xxxx xxxx
       

 

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PROFIT APPORTIONMENT BASIS

We are having two Basis of Apportioning residual profits

  1. Time Basis Apportionment.
  2. Profit analysis basis.

    TIME BASIS APPORTIONMENT

 

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In this method profit is apportioned between the various periods. That is to say the profit is accrued evenly.

Example

A and B are in partnership with share profit of .3:2 respectively on 1st January their capital stood at 500,000 and 400000 respectively. They decided to admit C as a new partner on 1st October, 2010, their new share profit ratio is 2.2.1. During the year the following Transaction took place.

  Tshs  
Purchases were 1,000,000  
Sales were 2,500,000  
Partner’s salaries 600,000  
     
C brought 100,000 as capital
Interest on capital 10% p.a    
Electricity 100,000  
Salaries and wages 200,000  

 

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Required;

     -Prepare Profit and loss appropriation on time basis for A and B partnership and ABC partnership. Financial year ended 31st Dec. 2010:

Workings (W).

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A AND B

PROFIT AND LOSS APPROPRIATION ACCOUNT FOR THE PERIOD ENDED

                                           30TH SEPTEMBER, 2010

(Trading) (shs)    
Purchases 750,000.00 sales 1,875,000.00
gross profit c/d 1,125,000.00  
  1,875,000.00 1,875,000.00
electricity 75,000.00 gross profit b/d 1,125,000.00
salaries and wages 150,000.00  
net profit c/d 900,000.00  
  1,125,000.00 1,125,000.00
interest on capital   Net profit b/d 900,000.00
                           A – 45,000    
                           B – 30,000 75,000.00  
Partner’s salary 450,000.00  
residual     profit    
                           A –   225,000    
                           B –   150,000 375,000.00  
  900,000.00 900,000.00
       

 

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Working ; – W2purchases (A, B & C)

                   Total 1,000,000 x 9/12   = 250,000

                   Sales (A, B & C)

                   Total 2,500,000 x   9/12 = 625,000

                   Electricity (A, B &C)

                   Total 100,000 x   9/12 = 25,000

                   Salaries and wages (A, B & C)

                   Total 200,000 x 9/12= 50

Interest on capital (A, B & C)

Total A – 600,000 x10/100 x9/12 = 15,000

         B – 400,000 x10/100 x 9/12= 10,000

         C – 100,000 x x = 2500

Partner’s salaries (A, B & C)

Total 600,000 x = 50,000

Residual value

For A; Total 123,500 x = 49,400

For B; Total 123,500 x = 49,400

For c; Total 123,500 x = 24,700

A, B & C PROFIT AND LOSS APPROPRIATION ACCOUNT FOR THE PERIOD END 30TH SEPT.

(Trading) shs    
purchases 250,000 sales 625,000
gross profit c/d 375,000  
  625,000 625,000
electricity 25,000 gross profit b/d 375,000
salaries and wages 50,000  
net profit c/d 300,000  
  375,000 375,000
    net profit b/d 300,000
interest on capital    
           A – 15,000    
           B – 10,000    
           C – 2500 27500  
Partner salary 150,000  
residual profit    
               A – 49,400    
               B – 49,400    
                 C – 24,700 123,500  
  300,000 300,000
       

 

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