PARTNERSHIPS

1
PARTNERSHIPS

• Partnerships
• This is when two or more persons enter into a
  business venture with the intention to make
  money.
• Partnership Agreement
• Legal document containing terms of agreement
  
• Signed by partners
• Used to avoid future disputes
• Items found In Agreement
• Share of profits/losses
• Capital Contribution
• Interest charged on drawings
• Interest on Capital
• Amount of salary to be paid
• Duties and responsibilities
• Agreement on admission of new partner

2
ADVANTAGES/DISADVANTAGES OF PARTNERSHIP

• Advantages
• Increased Capital Expand firm
• Share burden of work/holidays
• Allows for specialisation (lawyer may deal with
  criminal law, corporate law, or road traffic
  offences etc

• Disadvantages
• Profits must be shared
• More chance of disagreement
• Decisions slow
• Partners have Unlimited Liability

3
Terms Associated with Partnership Accounts
Appropriation Account
Limited Liability
Profit Sharing Ratio
Unlimited Liability
Current Account
Capital Account
4
Partnership Terms

• INTEREST ON CAPITAL
• Partners are awarded cash for the amount of money
  they invested in the business.
• This cash is taken from the NET PROFIT in the
  Appropriated Section of the Accounts
• It is also added to the partners CURRENT ACCOUNT
  (source of income)
• PROFIT SHARING RATIO
• In a partnership the Residual Profits are
  normally shared based on the amount of capital
  each partner has invested in the company.
• EG if H Larsson invests 20,000 capital and G
  Best invests 10,000 into their business.The
  share of profits should a ratio of 21
• Any share in profits partners receive is entered
  in each partners CURRENT ACCOUNT

5
Terms Associated With Partnership

• CURRENT ACCOUNT
• Contains any share of profits, drawings, interest
  on capital. Interest on drawings
• Allows distinction between capital investment and
  profit
• CAPITAL ACCOUNT
• Identifies initial fixed capital
• Records further investment
• Forms basis for profit calculation
• Identifies fluctuations in capital
• RESIDUAL PROFIT
• This is the amount of profit remaining after any
  payments have been made or taken from each
  partner
• This is the amount that is shared between partners

6
Terms Associated With Partnership
UNLIMITED LIABILITY This is where the personal
assets belonging to an individual are sold in
order to cover any outstanding debts owed to the
bank e.g. house car etc   LIMITED LIABILITY In
the event of the company going bankrupt the
owner/investor will only lose the original
capital that they invested in the company nothing
more.
7
Procedure for Creating Partnership Accounts

1. Complete notes for TPL Balance sheet
2. Work down to RESIDUAL PROFIT in TPL Acc
3. Work out share of profits for each partner
4. Complete appropriation account
5. Complete partners current accounts
6. Create balance sheet

8
Template for Partnership
PROFIT AND LOSS APPROPRIATED SECTION FOR Partner
1 AND Partner 2 FOR YEAR ENDED (Enter
Date) NET PROFIT x ADD Interest on
Drawings Partner 1 x Partner
2 x x x LESS Salary (insert
name) x Interest on Capital Partner
1 x Partner 2 x x RESIDUAL PROFIT x SHARE
OF RESIDUAL PROFIT Partner 1 x Partner 2
x x
9
Template for Partnership



CURRENT ACCOUNT PARTNER 1 Details
DR CR BAL Opening Bank Balance X
cr Interest in Capital X X cr Salary X X
cr Share of Profit X X cr -Drawings X X
cr X - Interest in Drawings X X cr X   (Closing
Bank Balances get carried forward to Balance
Sheet- Financed By Section)
10
Template for Partnership



CURRENT ACCOUNT PARTNER 2 Details
DR CR BAL Opening Overdraft X dr Interest
in Capital X X dr Salary X X cr Share of
Profit X X cr -Drawings X X cr - Interest in
Drawings X X cr   (Closing Bank Balances get
carried forward to Balance Sheet- Financed By
Section)
11
Template for Partnership
BALANCE SHEET OF (PARTNER 1 AND PARTNER 2) AS AT
(Enter Date) Cost Dep NBV FIXED
ASSETS Equipment x x x Premises
x x x   x  CURRENT ASSETS Stock x Debtor
s x Prepayments etc x x  CURRENT
LIABILITIES Creditors x Accruals x Bank
Overdraft x VAT (Cr) x -x WORKING
CAPITAL x NET ASSETS x
12
Template for Partnership
BALANCE SHEET OF (PARTNER 1 AND PARTNER 2) AS AT
(Enter Date)   FINANCED BY CAPITAL
ACCOUNT BALANCES Partner 1 x Partner 2
x x CURRENT ACCOUNT BALANCES Partner
1 x Partner 2 x x NET
WORTH x
IF BALANCE SHEET BALANCES THEN NET ASSETS (FROM
PREVIOUS PAGE) NET WORTH
13
Procedure for Creating Partnership Accounts

1. Complete notes for TPL Balance sheet
2. Work down to RESIDUAL PROFIT in TPL Acc

14
Exercise 1 Stewart Kinsey
Notes
Interest on Capital 20 P Stewart Capital 20,000 B
al Sheet / Cap Acc Interest 4,000 App Acc/
Current Acc S Kinsey Capital 15,000 Bal Sheet /
Cap Acc Interest 3,000 App Acc/ Current
Acc Interest on Drawings 10 P
Stewart Drawings 9,000 Current Acc Interest
charged 900 App Acc/ Current Acc S
Kinsey Drawings 10,000 Current Acc Interest
Charged 1,000 App Acc/ Current Acc
15
EX 1
Profit Loss Appropriation Acc of P Stewart S
Kinsey for the year ended 31 Mar 2011 NET
PROFIT 16,790 ADD Interest on Drawings P
Stewart 900 S Kinsey 1,000 1,900 18,690 LE
SS Salary Kinsey 8,000 Interest on
Capital Stewart 4,000 Kinsey 3,000 15,000 RESIDUAL
PROFIT 3,690
16
Procedure for Creating Partnership Accounts
3 Work out share of profits for each partner
17
Exercise 1 Stewart Kinsey
Notes
Share of Residual Profit 32 P Stewart Residual
profit 3,690 Profit 3/5 2,214 App Acc/ Current
Acc P Kinsey Residual profit 3,690 Profit
2/5 1,476 App Acc/ Current Acc
18
Procedure for Creating Partnership Accounts
4 Complete appropriation account
19
EX 1
Profit Loss Appropriation Acc of P Stewart S
Kinsey for the year ended 31 Mar
2011 RESIDUAL PROFIT 3,690 SHARE OF
RESIDUAL PROFIT P Stewart 2,214 S Kinsey
1,476 3,690
20
Exercise 2 Glynn and Maloy

• PROCEDURE
• Complete notes for TPL Balance sheet
• Work down to RESIDUAL PROFIT in TPL Acc
• NOTES
• None at moment
• No interest on capital or drawings

21
EX 2
Profit Loss Appropriation Acc of Glynn Maloy
for the year ended 31 Dec 2010 NET
PROFIT 7,000 LESS Salary Glynn 1.000 1,000 RESI
DUAL PROFIT 6,000
22
Procedure for Creating Partnership Accounts
3 Work out share of profits for each partner
23
Exercise 2 Glynn Maloy
Notes
Share of Residual Profit 21 Glynn Residual
profit 6,000 Profit 2/3 4,000 App Acc/ Current
Acc Maloy Residual profit 6,000 Profit
1/3 2,000 App Acc/ Current Acc
24
Procedure for Creating Partnership Accounts
4 Complete appropriation account
25
EX 2
Profit Loss Appropriation Acc of Glynn Maloy
for the year ended 31 Dec 2010 RESIDUAL
PROFIT 6,000 SHARE OF RESIDUAL PROFIT Glynn
4,000 Maloy 2,000 6,000
26
Exercise 2 b) Current Acc - Glynn
Date Details Dr Cr Bal
30 Dec Opening Bal 200 200 Cr



1,000
1,200 cr
30 Dec
Salary
4,000
5,200 cr
30 Dec
Share of Profit
3,700 cr
30 Dec
Drawings
1,500
27
Exercise 2 Theory
a) Explain the term Capital Expenditure
This is the money spent on buying assets
b) Give 2 examples of Capital Exenditure
Machinery, Vehicles, Fixtures Fittings
c) Explain the term Revenue Expenditure
This is money spent on the running of the
business eg paying bills
d) Give 2 examples of Revenue Expenditure
Rent, Rates, Telephone, Heating etc
28
EX 3 Cagney Lacey
Profit Loss Appropriation Acc of Cagney Lacey
for the year ended 30 Apr 11 NET
PROFIT 33,000 LESS Salary Cagney 10,000 Salary
- Lacey 8,000 18,000 RESIDUAL PROFIT 15,000
29
Exercise 3 Cagney Lacey
Notes
Share of Residual Profit 21 Cagney Residual
profit 15,000 Profit 2/3 10,000 App Acc/ Current
Acc Lacey Residual profit 15,000 Profit
1/3 5,000 App Acc/ Current Acc
30
EX 3
Profit Loss Appropriation Acc of Cagney Lacey
for the year ended 30 April 2011 RESIDUAL
PROFIT 15,000 SHARE OF RESIDUAL PROFIT Cagney
10,000 Lacey 5.000 15,000
31
Exercise 3 Current Accounts
Cagney
Date Details Dr Cr Bal




750
30 Apr
Opening Bal
750 Cr
30 Apr
Salary
10,750 Cr
10,000
30 Apr
Share of Profit
20,750 Cr
10,000
30 Apr
Drawings
15,750 Cr
5,000
Lacey
Date Details Dr Cr Bal




125
30 Apr
Opening Bal
125 Dr
30 Apr
Salary
7,875 Cr
8,000
30 Apr
Share of Profit
12,875 Cr
5000
30 Apr
Drawings
2,875 Cr
10,000
32
EX 3
Balance Sheet of Cagney Lacey as at 30 April
2004

Fixed Assets Cost Dep NBV


Current Assets



Less Current Liabilities Less Current Liabilities






Equipment
12,128
1,000
11,128
Premises
31,244
0
31,244
42,372
Stock
8,900
Debtors
3,678
12,578
Bank Overdraft
6,200
Vat
125
-6,325
6,253
Working Capital
48,625
NET ASSETS
33
EX 3
Balance Sheet of Cagney Lacey as at 30 April
2004 (Continued)

Financed by












Capital Acc
Cagney
20,000
Lacey
10,000
30,000
Current Acc
Cagney
15,750
Lacey
2,875
18,625
NET WORTH
48,625
34
Introducing a New Partner

• When a new partner is introduced to a company
• AT THAT POINT the final accounts of the company
  are drawn up and the profit appropriated
• A NEW Partnership Agreement is then drawn up
• Any further Accounts drawn up should take the
  conditions in the new agreement into account

35
Exercise 6 Williams Stewart
Notes
Interest on Capital Williams Capital 45,000 Inter
st 5 2,250 per year Divide by 2 1,125 6
months Stewart Capital 30,000 Interst
5 1,500 per year Divide by 2 750 6 months
36
EX 6
Profit Loss Appropriation Acc of Williams
Stewart for the 6 months ending 30 June
2010 NET PROFIT 8,200 LESS Salary
Stewart 2,500 Interest on Capital Williams 1,125 S
tewart 750 4,375 RESIDUAL PROFIT 3,825
37
Exercise 6 Williams Stewart
Notes
Share of Profit Williams Residual
Profit 3,825 3/5 2295 Stewart Residual
Profit 3,825 2/5 1,530
38
EX 6
Profit Loss Appropriation Acc of Williams
Stewart for the 6 months ending 30 June
2010 RESIDUAL PROFIT 3,825 Share of
residual profit Stewart 2,295 Williams 1,530 3,825

39
Exercise 6 Current Accounts
Stewart
Date Details Dr Cr Bal





30 Jun
Opening Bal
800 Dr
30 Jun
Salary
1,700 Cr
2,500
30 Jun
Interest on Cap
2,450 Cr
750
30 Jun
Share of profit
3,980 Cr
1,530
2,400
30 Jun
Drawings
1,580 Cr
Drawings - 400 per month x 6 months
40
Exercise 6 Part B Williams, Stewart Dennis
Notes
Interest on Capital Williams Capital 60,000
(45,000 15,000) Interst 10 6,000 per
year Divide by 2 3,000 6 months
Stewart Capital 30,000 Interst 10 3,000 per
year Divide by 2 1,500 6 months Dennis Capital
15,000 Interst 10 1,500 per year Divide by 2
750 6 months
41
EX 6 Part B
Profit Loss Appropriation Acc of Williams
Stewart Dennis for the 6 months ending 31 Dec
2010 NET PROFIT 22,250 LESS Salary
Williams 3,000 Interest on Capital Williams 3,000
Stewart 1,500 Dennis 750 8,250 RESIDUAL
PROFIT 14,000
42
Exercise 6 Williams Stewart
Notes
Share of Profit Total Capital 105,000 Williams
60/105 4/7 Residual Profit 14,000 4/7 8,000
Stewart 30/105 2/7 Residual
Profit 14,000 2/7 4,000 Dennis 15/105
1/7 Residual Profit 14,000 1/7 2,000
43
EX 6 Part B
Profit Loss Appropriation Acc of Williams
Stewart Dennis for the 6 months ending 31 Dec
2010 RESIDUAL PROFIT 14,000 Share of
residual profit Stewart 8,000 Williams 4,000 Denni
s 2,000 14,000
44
Exercise 8 a) Correcting Net Profit
Lawson Johnston Net Profit 24000   Add
Wages 3000 Depreciation (1500-1000) 500 Discount
Received 500 4000   28000 Less
Sales Returns 300 Office Stationery 100 400 Corr
ected Profit 27600
45
GOODWILL

• Successful business build a reputation over a
  number of years
• This reputation is linked to their name
• Example Marks Spencer is associated with good
  quality products at a reasonable price They also
  have lots of loyal customers.
• This reputation and loyalty associated with a
  business is called Goodwill
• Goodwill is a an asset to the company and is
  acquired through time but it is not specifically
  bought like other assets
• It is also difficult to quantify in money terms
• Goodwill therefore is known as an Intangible
  Asset (cannot be seen or touched)

46
GOODWILL

• HOW TO TREAT GOODWILL IN THE FINAL ACCOUNTS
• It is entered just below the fixed assets in the
  Balance Sheet under a new heading Intangible
  Assets
• WRITING OFF GOODWILL
• In this instance the value of Goodwill should be
• Entered as Zero in the balance sheet

47
GOODWILL

• Calculating goodwill
• Calculated by taking the average weekly, monthly
  or annual sales over a period of time
• Goodwill is A DEBIT balance in the ledger
• No Guarantee that a purchaser or an incoming
  partner will agree to the value of goodwill .
• This is the main reason that goodwill very rarely
  appears in the balance sheet
• If goodwill is introduced, when a new partner
  joins, it is normally shared between the original
  partners based on their PROFIT SHARE RATIO.
• This amount is then CREDITED to each partners
  CAPITAL ACCOUNT

48
REVALUATION OF ASSETS

• Fixed and current Assets of any Partnership
  Account are normally REVALUED with the
  introduction of a new partner
• RISE IN VALUE
• Split the rise between the partners according to
  their profit sharing ratio.
• Credit (Add) the amount for each partner in
  his/her CAPITAL ACCOUNT
• DROP IN VALUE
• Split the decrease between each partner according
  to their profit sharing ratio
• Debit (subtract) the amount for each partner from
  the value in his/her CAPITAL ACCOUNT

49
Exercise 9 Bendix Chan

• Question ai)
• Chan has paid a premium for goodwill because the
  business
• is a going concern
• Has a large number of customers will continue to
  use the business
• Has a good reputation
• Has experienced and efficient staff
• Situated in a good location
• It has established links with suppliers

50
Exercise 9 Bendix Chan

• Question aii)
• Calculate the initial amount of capital for each
  partner
• Bendix
• Original capital 53,000
• Add good will 10,000
• 63,000
• Less Loss in
• Revaluation 3,000
• 60,000
• Chan
• Original capital 40,000

51
Exercise 9 Bendix Chan
Notes
General Reserve Net profit 30,000 Gen Res
20 6,000 Interest on Capital Bendix Capital 60,0
00 Interest 5 3,000 Chan Capital 40,000 Int
erest 5 2,000
52
Exercise 9 Bendix Chan
Notes
Interest on Drawings Bendix Drawings 10,000 Inter
est 20 2,000 Chan Drawings 5,000 Interest
20 1,000
53
Ex 9 Bendix Chan
Profit Loss Appropriation Acc of Bendix Chan
for the year ending 31 May 2011 NET
PROFIT 30,000 Less Transfer to Gen
Reserve 6,000 24,000 ADD Interest on
Drawings Bendix 2,000 Chan 1,000 3,000 27,000 LE
SS Salary Chan 2,000 Interest on
Capital Bendix 3,000 Chan 2,000 7,000 RESIDUAL
PROFIT 20,000
54
Exercise 9 Bendix Chan
Notes
Profit Sharing Ratio Capital Bendix 60,000 3 Ch
an 40,000 2 32 Bendix Residual
Profit 20,000 3/5 12,000 Chan Residual
Profit 20,000 2/5 8,000
55
Ex 9 Bendix Chan
Profit Loss Appropriation Acc of Bendix Chan
for the year ending 31 May 2011 RESIDUAL
PROFIT 20,000 SHARE OF RESIDUAL
PROFIT Bendix 12,000 Chan 8,000 20,000
56
Exercise 9 Q1(iv)
Current Account - Chan
Date Details Dr Cr Bal






31 May
Opening Bal
0 Cr
31 May
Salary
2,000 Cr
2,000
31 May
Interest on Cap
4,000 Cr
2,000
31 May
Share of profit
12,000 Cr
8,000
5,000
31 May
Drawings
7,000 Cr
Int on Drawings
1,000
31 May
6,000 Cr
57
Exercise 9 Q2(i)
Bendix Chan
Error / Omission Effect on Profit Amount








Sales understated
Increase
450
Purchases Overstated
Increase
2,700
Wrong type of account
-70
Decrease
Wages understated
Decrease
-180
0
Omission of VAT
Nil
Wrong type of account
Decrease
-100
Loss on asset
Decrease
-800
Change on profit
Increase
2,000
58
Ex 9 Bendix Chan
Additional Appropriation Acc of Bendix Chan for
the year ending 31 May 2011 Change to
profit 2,000 Less Transfer to Gen Reserve
(20) 400 RESIDUAL PROFIT 1,600 SHARE OF
ADDITIONAL RESIDUAL PROFIT Bendix 960 Chan 640 1,6
00
59
(H) Partnership revision Bogart Bacall
Notes
Bacall Interest on Capital Bacall Interest
10 3,000 Capital 3,000 x 10 30,000
Drawings Capital 30,000 Drawings 25 7,500
60
(H) Partnership revision Bogart Bacall
a) Current Account - Bacall
Details Dr Cr Bal
Opening bal 0





Int on Capital
3,000
3,000 Cr
Salary
11,000 Cr
8,000
Drawings
3,500 Cr
7,500
1,500
Int on Drawings
2,000 Cr
4,000
Share of profit
6,000 Cr
61
(H) Partnership revision Bogart Bacall
b) Bogart
i) Capital Invested (twice as much as Bacall)
30,000 x 2 60,000 ii)Bogart Annual
Drawings Capital 60,000 Drawings
25 15,000 iii) Bogart Share of Profit 32
Bacalls profit 4,000 (2/5) Bogart 3/5 so
(4,000 / 2) 2,000 (1/5) 2000 x 3 6,000
3/5
62
(H) Partnership revision Bogart Bacall
Profit Loss Appropriation Acc of Bogart
Bacall for the end of Year 1 NET
PROFIT x ADD Interest on Drawings Bacall Bogartl
LESS Salary Bacall Interest on
Capital Bogart Bacall RESIDUAL PROFIT SHARE
OF PROFIT Bogart Bacall
22,500
1,500
3,000
4,500
8,000
6,000
3,000
17,000
10,000
6,000
4,000
10,000
Reverse workings 10,000 17,000 4,500
63
(H) Partnership revision Bogart Bacall
di ) Introduction of a new partner
Bacall Share of Goodwill 15,000 x 2/5
6,000 Share of deficit 20,000 x 2/5
8,000 CAPITAL ACCOUNT -BACALL
Details Dr Cr Bal



Balance
30,000
30,000 Cr
Share of premium
36,000 Cr
6,000
Share of deficit
28,000 Cr
8,000
64
(H) Partnership revision Bogart Bacall
d) ii) Profit Sharing Ratio New partners share
25 1/4 Left over 3/4 (to be split in a
ratio of 32) Bacall Share of profit 2/5 x
3/4 6/20 3/10 30 To Check Bogart 3/5 x
3/4 9/20 45 Cagney 25 100