BOOK KEEPING FORM FOUR – PARTNERSHIP ACCOUNT

Partnership may be defined as relationship between persons carrying on a business in common with a view of profit.

In a business partnership two or more persons jointly run a business.

Partnership may be defined as an association of two to twenty persons carrying on business in common with the view profit.

PARTNERSHIP   AGREEMENT (ARTICLES   OF   PARTNERSHIP )

The   points   usually   covered   by   such   agreement   are   as follows

1. The   duration   of the partnership
2. The name   of the partnership
3. The sum   to be   contributed   as   capital   by each partner
4. The ratio   of profit   or losses   should   be noticed   or stated
5. The rate   of   interest   if   any     to be allowed   on capital (interest   on capital )
6. The rate   of   interest   on drawings  
7. Address   or place   of the     business
8. The date   of starting   the   business

 

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  IN THE   ABSENCE   OF ANY   PARTNERSHIP   AGREEMENT

 a)      All profit  or losses   are   to   be shared   equally   between   the   partners.

 b)      All   partners     entitled   to share   equality   in the   capital (equal   contribution   of capital).

 c)      No partner   is entitled   to interest   on   capital   on his   capital   before   profit   are ascertained.

 THE USUALLY ACCOUNTING REQUIREMENT:-

 (i)The capital to be contributed by each partnership.

 (ii)The rate of interest, if any to be given on capital.

 (iii)The ratio in which profit or loss to be shared.

 (iv)The rate of interest, if any to be charged on partners to Drawings.

 (v)   Salaries to be paid to partners.

 INTEREST OF CAPITAL

It is a reward to the partners for investing their private capital in the business.  Since the partner investing the most is taking the greatest risk.

INTEREST ON DRAWING:

Act as a penalty to the partner to deter them from taking out more money from partnership in anticipation of profit than necessary.

The main purpose of this interest is to disnglish-swahili/courage” target=”_blank”>courage the partners to withdraw money unnecessarily.

SALARIES:-

Are given for investing more time for management in partnership.  A partner may responsible to perform some extra duties as compared to the other partners, Then the only one partners works in the firm he/she may received salary allocated from profit.

PROFIT:-

Profit can be shared according:-

–         To the capital which is contributed.

–          Profit can be shared Equally

–          Can be shared according to partner’s agreement (deed) E.g.; 2:3:1: etc

This means A, B and C will be given two sixth, three sixth and one sixth.

CURRENT ACCOUNT

For each partner credited with profits interest on capital and salaries and Debited with drawing and interest on drawings.  The balance of this A/C at the end of financial year will represented the amount of undraw (credit balance) or withdraw profit (Debited balance).

The debit balance of current A/C shows Assets while credit balance shows liabilities.

RESERVES:-

This is voluntary appropriation in order to strength the financial position of the business.

The amount settled for reserve can be debited to profit & loss appropriation A/C.

THE ACCOUNT ENTRIES

PROFIT & LOSS APPROPRIATION A/C

(i)  Net profit:  DR: Profit & Loss A/c

               CR: Appreciation of P + L A/C

(ii)Interest of capital:  DR:  Appropriation  A/C

  CR:  Current A/c

(iii)Interest salaries:    DR: Current A/c

  CR:  Appropriation a/c

(iv)Partners Salaries:   DR:  Appropriation  a/c

  CR:  Current A/c

NOTE:  If salaries have already been paid then cash A/C had a ready been credited.

Means:      DR:  Appropriation A/C

CR:  Cash A/c

(v)Share of profit:-

DR:  Appropriation a/c

CR:  Current A/c

(vi)Share of loss (if any)

DR:  Current   a/c

CR:  Appropriation A/c

(vii)Drawing:-

DR:  Current   a/c

CR:  Drawing A/c for each partner

EXAMPLE:-

Karim and Rashid are in partnership sharing P & L on the ratio of 3:2.
They are entitled to 5% interest on capital.

Karim’s capital……………………………… 40,000/=

Rashid’s capital………………………………120,000/=

Karim receives a salary of 5,000, Interest on drawing:-

Karim                  1,000

Rashid                 2,000

Net profit                     100,000

Required. Show up (a) Profit & Loss Appropriation A/C

      (a)  Partners current A/C

Solution:-

    DR           PROFIT & LOSS APPROPRIATION A/C              CR

        DR.                 PARTNERS CURRENT    A/C                  CR

EXERCISE

Ally and Bakari are in Partnership sharing profit & Loss equally. They are entitled 6% interest on capital and 10% interest on Drawings.

Capital:  Ally 500,000, Bakari 700,000

Drawing: – Ally 250,000, Bakari 300,000

Bakari receives salaries of 150,000

The net profit was 400,000

Required: –       (a)  Partners current   A/C

(b)  Partners capital A/C

(c)  Profit and loss Appropriation A/C

                                                                                         DR.                       PARTNERS CURRENT    A/C                    CR

                                                                                                       DR.    PARTNERS CURRENT    A/C                                  CR

                                                                                                DR                 PROFIT & LOSS APPROPRIATION A/C        CR

METHOD OF CAPITAL IN PARTNERSHIP A/C

Partner’s capital account can be maintained either in:-

(i)    Fixed capital method

       (ii)   Fluctuating capital method

(i)         FIXED CAPITAL METHOD:-

In case of fixed capital method there are two accounts:-

–          Partners capital  A/C

–          Partners current A/C

In this method the capital A/c for each partner remains by year at the figure of capital put into the firm by the partner.

The profit, interest on capital and salaries to which the partner may entitle are then credited to the separate current A/C for the partner and drawings and interest on drawings are debited to it.

EXAMPLE:-

Twalib and Kassim have been in partnership for one year sharing profit and loss in the ratio of Twalib 3/5, of Kassim 2/5, they entitled 5% interest on capital, Twalib having 200,000 capitals and 600,000 Kassim.

Kassim is to have salary of 50,000

They are charged interest on drawing, Twalib being charged 5,000 and Kassim 10,000.

The net profit before any nglish-swahili/distribution” target=”_blank”>distribution to the partners amounted to 500,000 for the ended 31^st Dec 2012.

NB:  Drawing of 200,000 for each will appear.

Required:  Show the necessary entries use the fixed capital method.

           DR.               PARTNERS CAPITAL     A/C                  CR

DR             PROFIT & LOSS APPROPRIATION A/C                CR

   DR.                      PARTNERS CURRENT     ACCOUNT                      CR

 (ii)       FLUCTUATING CAPITAL METHOD:-

In case of fluctuating capital method there is only one account is termed as capital A/C.  The nglish-swahili/distribution” target=”_blank”>distribution of profit would be credited to the capital account and the drawings and interest on drawings debited.

Therefore the balance on the capital A/C will charge each year. I.e. it will be fluctuate the system is therefore called fluctuating capital method.

EXAMPLE:-

Refer example 1 above:-

     DR.                                     PARTNERS CAPITAL     A/C                                   CR

EXAMPLE 2

Yusuph  and   Christopher    began   to trade   in partnership   on Jan 1980 Yusuph   contributed Tshs   3000/=   and   Christopher   1000/=   in cash   they   agreed   as follows

 –        To share profit equally

 –        To allow   interest   on   capital   6%   p.a

 –        Christopher to get     salary   of   Tshs 400/=

 –        Drawings   Yusuph   Tshs 400/= on   1^st July and   Christopher   Tshs 200/= on 1^st April, 1^st July   and 1^st October

 –        To charge   interest   on drawings     6%   p.a   the net   profit  Tshs   2500/=

 Show

 a)      Appropriation   account

b)      Partners   capital

c)      Partners current   account

  Workings

 a)      Interest   drawings  

        Yusuph   6   x   400   x 6 = 12

                        100               12

        Christopher

                     6 x   200 x 9 = 9

                    100           12

                 6 x 200 x 6 = 6

                  100             12

               6 x 200 x 3 =   3

                  100             12

  Therefore   total interest on drawings   from Christopher   is   9+ 6+ 3= 18

b)      Interest on capital

      Yusuph   = 6 x   3000 = 180

                           100

        Christopher   6 x   1000=   60

                                100

 EXERCISE 1

 The   partnership agreement   between   A, B and C   contains     the following     agreement

 a)      The partnership   fixed   capital   shall be     A 10,000/= B   8000/= C   6000/=

 b)      A and B   are each   to n receive   a salary of   600/=   a year

 c)      Interest on capital   is to be   calculated   at   5%   per annum

 d)     A ,B , and C   are to   share   profit and losses   in the   ratio   of 3:2:1

 e)      No interest   to be allowed   on drawings or   current account

 On   1^st Jan 1978   the balance on   current   account were   A   credit balance   500/=   B credit   200/= credit 350/=

 During   the year   the drawing   were   A   4500/= B 3000   and   C 5000/=   the   profit   and   losses account   for   the   year   showed a net profit of 14500/=

    Before   charging   interest     on capital   and   partners   salaries

 Required

 a)       Capital   account   of A,B, and C

 b)      Partners   current account

 c)       Profit and loss appropriation     on   a/c

 EXERCISE 2

 Record   the following   facts   on the personal   account   of   A   and B.   two partners who are share profit and loss   in the   ratio of   5 to 3   and allow interest   on capital     at the rate   of   4 percent   per annum   no interest   is to be   allowed   or current   on charges or   drawings

 B.  is to be   credited   with a salary   of   300/=   for the year                  

                                                                                            A.                      B.

 1^st   Jan   capital   account                                                  4000                       3000

 30^th Jan   addition capital   brought                                     1000                    –

 1^st Jan current account                                                       72 DR                   100 CR

 1^st Jan – 31^st Dec   drawings                                                3650                     3650/=

 The   partnership   total   divisible   for   the year   after   charging   the salary   was   7188/=

 Required

 a)       Partners   capital   account

 b)      Partners   current   account

 c)       Profit   and loss appropriation   account

 FINAL ACCOUNT IN PARTNERSHIP:-

(1)   Profit and Loss Appropriation A/C

(2)   Capital account for each partner (carrying the fixed capital and Fluctuating capital).

(3)   Current Account

(4)   Balance  sheet

Example: – 1

Mohamed and Mcharo are in partnership sharing profit and Loss equally.  The following is their Trial balance as at 30^th June 2010.

  TRIAL BALANCE AS AT 30th JUNE 2010



Stock at 30th 2010
Required:

Prepare Trading and Profit and Loss, Appropriation account for the year ended 30^th June 2010 and the Balance sheet as at that date:-

(a)       Expenses to be accrued: Office exp 96.

(b)       Depreciation Fixture 10% on reducing balance basis building Tshs. 1,000

(c)        Reduce provision for bad debt t0 320

(d)        Partnership salaries Tshs. 800 to Mohamed not yet entered.

(e)        Interest on drawing Mohamed 180 and Mcharo 120.

(f)        Interest on capital account balance at 10%

WORKING:-

Interest on capital:

Mohamed  =  35,000 x 10/100 = 3,500

Mcharo =      29,500 x 10/100 = 2,950

       DR     TRADING AND PROFIT &LOSS A/C YEAR ENDED 30th June  2010      CR

       

        DR              PROFIT & LOSS APPROPRIATION                   CR

   DR.                  PARTNERS CURRENT     A/C           CR