ACCOUNTANCY FORM 6 – PARTNERSHIP ACCOUNTING

RETIREMENT OF A PARTNER

This is when a partner leaves partnership firms due to various reasons e.g. Age, limit.

Example; NECTA 2007

A, B, and C were carrying on a business as partner’s sharing profit in the ratio of 5:3:2 respectively on 31^st March 1991 their balance sheet stood as follows;

C Retired on the above mentioned date on the following terms;

(a)  Freehold Premises to be appreciated by 20%

(b)  Furniture & Fitting to be reduced by Tshs 2,255

(c)  Provision for doubtful debts to be created on trade debtors at 5%

(d)  Goodwill account be raised by Tshs 60,000 the agree value of the firm’s goodwill. The amount finally due to C be paid immediately A and B brings in Tshs 20,000 each to facilitate the payment. A and B agree to share profits in the ratio of 3:2 respectively immediately after c’s retirement and write off goodwill account.

You are required to prepare;

-Partner’s capital a/c

-Cash Book.

-The balance sheet of A and B for the year ended March 1994

             DR                               PARTNER’S CAPITAL ACCOUNT                   CR

DR                                                  CASH AT BANK                                                       CR

       BALANCE SHEET FOR THE YEAR ENDED 31^ST MARCH 1994

RETIREMENT OF A PARTNER:

We have discussed the accountancy problems that arise on admission of a new partner.

In this character, we shall look at the problems that arise on retirement or death of a partner which are;

(a)   Treatment of Goodwill

(b)     Revaluation of Assets and liabilities

a) Treatment of Goodwill;

on the retirement or death of a partner, his share of Goodwill will have to be valued in according with the terms of the partnership Deed, and in the absence of such provision in the Deed, by mutual agreement or understanding among the partner. Then one of the following courses may be adopted to give to the nglish-swahili/distribution” target=”_blank”>distribution in the Books of Accounts.

1. Goodwill raised in the Books:
   

   Entries are
   

   Debit; Goodwill Account,
   

   Credit: are all partners’ (including retiring) Capital Accounts in their profit sharing    proportions.
   

 

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ii)   Goodwill raised in the Books but immediately written off Entries are;

         Debit; Goodwill Account

         Credit; All partners’ (including retiring) capital Access in their profit sharing    proposition.

         Debit; Remaining partner’ (In new profit sharing proportion)

         Credit: Goodwill Account.

iii).   Only Goodwill share of the retiring partner is brought into books. The entry is,

Debit; Goodwill Account

   Credit; Retiring partner (with his share)

It is advisable to write – off the goodwill to the remaining partners in the ratios in which they gain on the retirement.

It may be noted carefully that if Goodwill Account already exists in the books, entries for raising Goodwill should be made only for difference.

Illustration; Mukosa, Mosoke and Ochieng are partners sharing profit in the proportion of and respectively. Mosoke retires and the Goodwill is valued at Tshs 21,600/=. No Goodwill Account appears in the books of the firm. Assuming that Mukasa and Ochieng share future profit in the ratio of 5:3, pass entries for Goodwill if (a) Goodwill is raised in the books (b)Goodwill is raised and written – off (c)Goodwill share of the retiring partner only is brought into the books.

REVALUATION OF ASSETS AND LIABILITIES

After ascertaining the share of good will payable to the retiring partner. The next problem that arises in the revolution of assets and liabilities for the purpose of ascertaining the fair amount due to the out-going partner in respect of his share of firm’s assets.

Even if the partnership deed is silent on this point Assets and liabilities should normally be valued. The partner can, of course, agree not to revolve the assets and liabilities either on retirement or death or on both but such provision in the Deed is, that the balance of his capital Account represents his true interest in the partnership. Apart from the question of Goodwill which has already been dealt with some of the assets may have appreciated in value without any adjustment having been made in the books, whilst others may have been insufficiently depreciated or completely written-off.

A Revolution Account for profit and loss Adjustment (is prepared to which all differences in value are debited or credited as the case may be and the resultant balance is transferred to all the partners including retiring) in the old profit sharing ratios. The Assets and liabilities appear in the books of the new firm at the changed values.

But if it’s desired that Assets and liabilities should continue to appear in the books at the old values. A memorandum Revolution Account is prepared. It’s balance will be transferred to all the partner in the profit sharing ratio’s, and then the same account will be put on the reverse side and transferred to the remaining partners in the new profit sharing ratio.

Important Hints, Any reserve or accumulated profit appearing in the books should be transferred to all partners in their old profit sharing ratios. Alternatively only the retiring partner may be credited with his share and the remaining reserve side and transferred to the remaining reserve side and transferred to the remaining reserve may continue to appear in the books and the reduced figure.

Payment to the retiring partner.

When the accounting formalities are over, the final balance standing to the credit of a retiring partner’s capital Account in paid either in cash (if cash position permit) or transferred to his loan account until it paid off. In the modern business world, some other method s are also evolved for payment of the amount such as÷

(i)   Policy of survivorship assurance.

(ii)   Annuity method.

(iii)   Installment method

Example 1.

The balance sheet of A and B partnership, who are sharing profits and losses in the ratio 2:1 between A and B respectively as on 31^st Dec 1984.

                       BALANCE SHEET AS AT 31^ST DEC 1984

On 1^st January 1985 they decided to admit (into Partnership on the following terms;

(i)     “C” to bring in Tshs.75, 000 in cash for his capital.

(ii)     Profit sharing ratio to be 3:2:1 as for A, B and C respectively

(iii)   Goodwill to be revalued at shs12, 000/= but is not be maintained in the books “C” is to pay for his share of goodwill

(iv)   Plant and Machinery Furniture and Fittings and Vehicle to be revalued at Shs120, 000, 15,000 and 70,000 respectively.

(iv)   5% of stock is absolute. 10% of Debtors to written off

(v)     Current liabilities amounting to Tshs 500/= was overlooked

(vi)     Long term liabilities to forge Tshs.2000/=

(vii)   A and B are to pay Tshs 8,000/= in respect of the revaluation costs

Required;

show the following: – 1. Revaluation account   2.Bank account.

      
DR                     REVALUATION ACCOUNT               CR

            DR                               PARTNER’S CURRENT ACCOUNT                                 CR

                             A, B & C     BALANCE SHEET AS AT DATE

                                 BALANCE SHEET AS AT 1^ST JAN 1998

PARTNERSHIP (CONTRACT).

Death of a partner:

From the Accountancy point of view, the only difference between retirement and the death of the partner is that in the former case the retiring partner’s share if not paid at once is credited to “loan Account” in the name of the outgoing partner, where as in the case of a partner is death, the adjusted balances of a capital and current Accounts of the deceased partner are transferred to an account called “Executor’s to Deceased” pending payment.

There are no special problems of death except that death may occur any time of the year and this would mean Executors of the deceased partner would be entitled to his share of profit arising after the last closing up to the date of his death.

Death/Retirement.

Treatment of Goodwill

Goodwill Account existed before retirement or death.

(i)   Increase in values Goodwill

     DR; Goodwill A/c

     CR; All partners’ capital A/c, In old sharing ratios

(ii)   Decrease in values of Goodwill.

     DR; All partners’ capital A/c

     C/R; Goodwill A/c, In old sharing ratios.      

Admission of New Partner.

Treatment of Goodwill

A new partner pays as his/her share of Goodwill. If a new partner to pay a portion of his Goodwill in cash, such cash paid is called PREMIUM.

Entries;

Cash received from a new partner as his share of Goodwill

   DR; Cash/Bank A/c

   CR; Premium A/c

Premium is divided between old partners in old profit sharing ratio.

       DR; Premium A/c

       CR; Old partner’s capital A/C

DISSOLUTION OF A PARTNERSHIP.
Is the situation whereby the firm ceases its operation and its property are disposed off.

REASONS FOR DISSOLUTION
Partnership firm or organization may dissolve due to the following reasons;
(a) If entered into for a specific reason they by expire of that term.

(b) If entered for a single adventure by termination of that adventure.

(c) If entered for undefined time but one partner giving notice to other one his intention to dissolve partnership.

Upon dissolution the following are formulae to follow

(a) Open a realization account and debt it with the total of assets  except cash or a debit balance of partners capital.

(b) Open account for cash, creditors, partner’s loan (if any) partner’s capital.

(c) Debit cash and credit realization account with the proceeds from sell of asset.

(d) Credit cash and debit realization account if any of the assets are not sold but are taken over by one of the partner then debit that partner capital account and credit realization account with the agreed value.

(e) Credit cash and debit realization account with the expenses of winding up.

(f) Pay off (a) creditors (b) partners loans i.e credit cash and debit these accounts.

(g) Balance the realization account and transfer the balance profit/ loss the partner’s capital accounts.

(h) Balance partner’s capital accounts and divide cash according to this credit balances of capital.

Example 1

Pendo and Upendo decided to dissolve their partnership on 31^st Dec 2010. They shared profit and equally. Their balances as the date on dissolution were as follows.

Additional Information’s

(i)   Sale proceeds were as follow from their Assets

(ii) Premises 140,000 stock was Tshs 270,000

(iii) Stock was 270,000 Debtors was 170,000

(iv) Upendo took over the fittings at an agreed Price of 20,000

(v) Dissolution expenses was Tshs.10, 000

Cash at bank Tshs.30, 000

Required;

Prepare the Necessary book of Accounts

  DR                                          REALIZATION ACCOUNT                     CR

DR                                                   CASH ACCOUNT                             CR

     DR                                PARTNER’S CAPITAL ACCOUNT                            CR                                          

LOSS ON REALIZATION

Any Partner with a deficit capital Account must paying efficient cash to clear the deficit cash

GARNER VERSUS MURRAY’S RULE CASE;

This rule states that, in the event of a partner’s insolvency share of deficiency shall be borne by solvent partner in their capitals and not in their P & L sharing ratio.

Example

Assume capital Account of A;B;C Tshs 200,000, Tshs 300,000, Tshs 100,000, C’s capital A/c run top a debit balance of Tshs 95,000 thousand out of which he is able to pay 45,000 on his own bank A/c. This will leave a deficiency of Tshs. 50,000 in his capital a/c and this deficiency will be borne by A and B in the ratio of their capital immediately before dissolution.

Soln;

1. Tshs 200,000
   
2. Tshs 300,000
   

 

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A share to C – x 50,000 =20,000

B share’s to C= x 50,000=30,000

                                JOURNAL ENTRIES

DR                             PARTNER’S CAPITAL ACCOUNT                                       CR

AMALGAMATION OF PARTNERSHIPS

Amalgamation, this is when two or more firms join together to form a partnership firm.

Amalgamation can be between;-     

1. A sole trader and sole trader
   
2. A sole trader and partnership
   
3. A partnership and a partnership
   

 

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• Each business must choose its own books of accounts and transfer them to a new partnership firm     
  
• But before closing the books of the following adjustment might own; Reserves are shared by partners in profit or loss sharing ratios of the old business.
  

 

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CONDITION NECESSARY FOR PARTNERSHIP TO AMALGAMATE.

(a)  To see each other Balance sheet presents a true statement of financial position of each business.

(b)   Asset must be stated at their fair value and all liabilities to be disclosed.

Unequal goodwill of the business will be assessed accordingly at the time of amalgamation by making the right allowances to compensate the owner of the more valuable business.

( c)  Balance sheet business is redrafted taken into consideration the adjustment agreed up and this re-drafted balance sheets is then combined to form the initial balance sheet of the partnership. Statement used in the process of Amalgamation.

Statement used on the Process of Amalgamation

(a)  A completed and signed copy of form of articles of amalgamation     

(b)  A completed and signed copy of form of initial registered office address and first board of directors.

(c )  A statutory declaration from a director or office of each amalgamation/corporation

(d)   Name search report unless the amalgamated corporation will use the corporate name of the amalgamation corporation

(e)   B/sheet of the two amalgamations