Partnership Accounting

ALLAMA IQBAL OPEN UNIVERSITY,

ISLAMABAD
(Department of Business Administration)

Course: Financial Accounting

Level: MBA
Course code: 8501

Assignment Title:

Partnership Accounting

Submitted To: Submitted By:

Mr. Mehtab Anwar M. Haroon Khan

(MBA Marketing, Roll Number: BU 549995)

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Partnership Accounting

Acknowledgements

In the name of Almighty Allah, the most gracious, the most beneficent by help of whom I
am able to complete my assignment which is about compensation management of an
organization. I am grateful to Allah almighty, for enabling me to fulfill this tiring, but interesting
job for the completion of my assignment.

No doubt Allah is the main source of knowledge and wisdom. It is a great blessing of
Almighty Allah, that He enables me because of His Holy Prophet (peace is upon him) I am
presenting my humble contribution for distribution of knowledge. I bow my head before
Almighty Allah who gave me courage, knowledge and confidence and to carry on assignment
and enabled me to accomplish it.

I would not be going to do justice in presenting this assignment without mentioning the
people around me who have been inextricably related with the completion of this assignment. I
would like to express my heartfelt thanks to our course teacher for his support and guidance,
which he rendered throughout the study to peruse this assignment. Finally, for any all too fallible
errors, omissions and shortcomings in the writing of the report only I am responsible for which
we hope that all concerning regards of this assignment will forgive us.

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Abstract

As we know a partnership is where two or more persons work together and distribute
among themselves all profits and losses. But how exactly will this distribution of profit take
place?

Except for the number of partners' equity accounts, accounting for a partnership is the
same as accounting for a sole proprietor. In accordance with the provisions of the partnership
deed, the profits and losses made by the firm are distributed among the partners. However,
sharing of profit and losses is equal among the partners, if the partnership deed is silent.

However, certain adjustments such as interest on drawings & capital, salary &
commission to partners are required to be made. For this purpose, it is customary to prepare a
Profit and Loss Appropriation Account of the firm. The final figure of profit and loss to be
distributed among the partners is ascertained by Profit and Loss Appropriation Account.

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Table of Content

 Title page
 Acknowledgement
 Abstract
 Table of contents
 Introduction to the issue
 Practical study of the
organization
 Data collection method
 Swot anlysis (stregth ,weaknesses
, oppertunities , threats)
 Conclusion
 Recommendations
 References

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Partnership Accounting

Introduction to the topic

What is partnership?

Partnership is relation between two or more persons who have agreed to share the profits
of a business carried on by all or any of them acting for all.

For the constitution of Partnership firm the following things are necessary:

A business;

Mutual Partnership Agreement, express or implied, to share profits or losses of that

business;

The business must be carried out by all or nay of the partners acting for all;

The Partnership Act, 1932 (hereinafter referred as to “Partnership Law” is regulated all
the businesses, works under Partnership format. According to Partnership Law, the registration
of Partnership firm/business is not mandatory and registration is left at the option of the partners
but it is highly recommended that the partnership should be registered with registrar of
Partnership under Partnership Law. The registration business is performed by the Registrar of
Firms who has been given such powers under the said Act.

It does not emanate from status, it is the creation of agreement between individuals; it is a
relation between individuals who have entered into agreement. The individuals bound in relation
of partnership are individually called partners and are collectively called a firm.

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Numbers of Partners:

In Partnership business, minimum 2 and maximum 20 partners can register their

partnership firm legally. All these persons are liable for the risks and rewards of their business in
accordance with their holding in the business.

Types of Partnerships:

There are three types of partnerships:

Ordinary/General Partnership/Simple Partnership Agreement

Simple Partnership:

In simple partnership agreement each and every partner is equally involved in all the
activities of business such as anyone can present his money or anything for the purpose of
investment but the liabilities are equalities divided in all the partners and the profit and loss is
also divided simultaneously.

Limited Partnership:

When partners are limited in their liabilities and duties then it is known as the limited
partnership. In this partnership any partner can dissolve his position without any issue by the
others. In this conditions the profit and loss is also limited as per the investment and liabilities.

At-Will Partnership:

What is partnership at will is a very common question. This is the best partnership policy
because it contained on both the above types of partnership. It is because in this partnership
policy one can invest on his will, can took up liabilities as per his or her expertise and pocket.
The profit is divided according to his investment and his works. In case of death or dissolution of
a partner the profit will be delivered in to his family account (vary/assume partner to partner)
until the firm in running.

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How to register/form a Partnership Firm in Pakistan?

The Partners of the firm, themselves or through their representatives can apply for the
registration of partnership under the law of “The Partnership Act, 1932”. The following
document shall be submitted along with application:

 Original Partnership Deed duly signed by all partners with firm stamp on the stamp paper
of Rs.2000/- as well as attested with notary public/oath Commissioner.
 Copy of Partnership Deed duly attested with notary public/oath Commissioner.
 Attested Photocopy of CNIC of all Partners
 Statement in prescribed form (Form A)
 Challan of Rs.110/- deposited in National Bank of Pakistan
 Blank Stamp Paper of Rs.50/-
 Authority letter in favor of legal representative

Once all the above documents are ready, that shall be submitted before the Registrar of
Firm of the area in which any place of business of the firm is situated or proposed to be situated.

Partnership Deed:

It is noteworthy to mention here that Partnership Deed is a very important document that
outlines in details, the responsibilities and rights of all partners. It just like a constitution of that
business which provides a boundary to run business within, therefore it is advisable to have a
correctly drafted Partnership Deed carefully detailing the terms and conditions of the business
relation. The following are the main area that should be covered in a Partnership Deed:

 Name of the Partners along with fresh residential addresses and designation
 Name of the partnership
 The place or principle place of business of the firm
 The date when each partners joined the firm.

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 Business Objectives is one of the main area that requires proper attention. You have to
clearly set out the primary business of the partnership together with any restrictions on
the type of business.
 Responsibilities of partnership should be clearly incorporated in the Partnership Deed.
 Ratio of profit and loss.
 Management of the Partnership
 Capital contribution
 Meeting of the partners
 Financial Management and Taxation
 Partners Interest
 Termination of Partnership
 Resignations of Partners
 Resolving disputes
 Duration of Firm

However, in absence of proper drafted Partnership Deed, future benefits may be negated
by minor mistake which would otherwise be avoided by properly draft the terms of the
partnership deed.

Accounting for a Partnership:

One of the most strategically important activities that a company must perform is
accounting. This is an effort to collect, classify, analyze, verify, calculate, interpret and present
financial information. It is also known as bookkeeping. There are various types of accounting.
One of these is partnership accounting. It is performed in partnership companies. These are
business organizations formed by a group of partners. They possess unlimited personal liability.
Hence, they absorb profits as well as losses. In this type of accounting, the specific account of
each partner in a company is tracked. Factors such as distributions, investments as well as shares

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in profit or loss are analyzed. Partnerships are commonly observed in the industries of personal
services.

The Definition of Partnership in Accounting:

Partnership accounting assesses the financial activity of every partner in a company. It

covers tasks such as investments, fees and asset distribution. In addition to that this bookkeeping
activity deals with the investor accounts of each partner. Along with this, partnership accounting
also calculates performance and management fees as well. Allocation details such as profits and
losses are also covered in this type of accounting. Partnership accountants present financial
information in form of charts. By doing so, they are able to observe and measure any challenges
that could emerge in partnership accounting.

There are several distinct transactions associated with a partnership that are not found in
other types of business organization. These transactions are:

Contribution of funds:

When a partner invests funds in a partnership, the transaction involves a debit to the cash
account and a credit to a separate capital account. A capital account records the balance of the
investments from and distributions to a partner. To avoid the commingling of information, it is
customary to have a separate capital account for each partner.

Contribution of other than funds:

When a partner invests some other asset in a partnership, the transaction involves a debit
to whatever asset account most closely reflects the nature of the contribution, and a credit to the
partner's capital account. The valuation assigned to this transaction is the market value of the
contributed asset.

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Partnership Accounting

Withdrawal of funds.:

When a partner extracts funds from a business, it involves a credit to the cash account
and a debit to the partner's capital account.

Withdrawal of assets:

When a partner extracts assets other than cash from a business, it involves a credit to the
account in which the asset was recorded, and a debit to the partner's capital account.

Allocation of profit or loss:

When a partnership closes its books for an accounting period, the net profit or loss for the
period is summarized in a temporary equity account called the income summary account. This
profit or loss is then allocated to the capital accounts of each partner based on their proportional
ownership interests in the business. For example, if there is a profit in the income summary
account, then the allocation is a debit to the income summary account and a credit to each capital
account. Conversely, if there is a loss in the income summary account, then the allocation is a
credit to the income summary account and a debit to each capital account.

Company Tax Reporting:

Partnership accounting also involves tax reporting. According to the Generally Accepted
Accounting Principles (GAAPs), every partnership company needs to issue a document known
as a Schedule K-1 to each partner in the firm. This document must be issued at the end of the t.
year. It contains details on the profit or loss that is allocated to each partner in a partnership
accounting format. As such, the recipients can use this document while filing their income tax
reports.

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Practical study of the organization

Adventure Pakistan: Leisure, Travel & Tourism

Established in: Jan 2010
Business Entity: Partnership
Location: Islamabad Capital Territory

“Adventure Pakistan”, one of the leading Tour Operators of Pakistan, offering a wide
range of tour itineraries relating to sheer adventure, exquisite culture and thrilling special interest
options throughout the country. Karim Tajik, Tariq Hussain and Shah Faisal are the founders and
Partners of this tourism organization.

The main field of activity of our company is adventure tours in the region of Gilgit
Baltistan – north Pakistan, a true paradise for adventure lovers. Adventure Pakistan is one of the
leading tour operators in Pakistan. They offer a wide range of itineraries relating to sheer
adventure, exquisite culture and thrilling special interest tours throughout the country. Their
highly experienced guides, cooks, kitchen helpers, HAP’s, porters, drivers and office staff are all
extremely motivated to provide you with the best of services and greatest of memories! Taking
that extra step to give you an adventure beyond imagination…

In order to form the partnership, partners have to invest in the entity. The investment may
be in the form of fixed assets which is taken in the partnership business at the value as mutually
decided among the partners. The investment may be in the form of cash as well.

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Reasons for Partnership Formation:

There are many reasons for building a partnershop firm. Most common are:

 Larger amount of capital can be raised because more than one persons invest in the
business.
 It is very easy to form a partnership, even you can set it up in a day.
 Partners contribute diverse skills, expertise and ideas into the business.
 Workload is shared among partners, so each partner can focus on its specific areas.

Essentials Features of Adventure Pakistan Partnership Agreement:

 Though, partnership can be created orally. But, in order to protect the interest of each
partner, it is always good to have the agreement in writing.
 Agreement among partners is called Partnership Deed.
 the deed must mention the way of distributing profits and losses among partners. They
can decide to share equally or in other agreed ratio.
 Interest on profits may be shared among existing partners according to the ratio of capital
invested by each of them. Such amount is called Interest on Capital. Usually, this interest
rate is decided and mutually agreed among partners is written in the deed document.
 Whenever a partner draws funds from the partnership, it is referred to as drawing.
Partners may decide to charge interest on drawing amount. Such interest is mentioned in
the partnership deed on per annum basis. It is a penalty amount which reduces the profit
share of the individuals in the firm.
 If some of the partners take lead role or active role in managing the business, then he or
she may be allowed to take reward which is called Partnership Salary.

Each partner has a separate capital account for investments and his/her share of net income or
loss, and a separate withdrawal account. A withdrawal account is used to track the amount taken
from the business for personal use. The net income or loss is added to the capital accounts in the

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closing process. The withdrawal account is also closed to the capital account in the closing
process.

For example, assume Adventure Pakistan a partnership, earned 60,000 and their
agreement is that all profits are shared equally. Each of the three partners would be allocated
$20,000 ($60,000 ÷ 3). The journal entry to record this allocation of net income would be:

Date Account Title & Description Ref. Debit Credit

Dec.31 Income Summery 60,000

Karim Tajik 20,000
Tariq Hussain 20,000
Shah Faisal 20,000

Transfer Net Income to Partner’s

Capital Accounts

If the profit earned is 60,000 and the net income earned is shared according to the amount
of capital or investment paid by the partners. For example Karim’s Capital is 50%, Tariq’s
capital is 40%, and Shah’s Capital is 10%, then the portion of net income allocated to each
partner is simply the 60,000 multiplied by the individual partner’s capital percentage. The
split of net income would be:

Date Account Title & Ref Dr. Cr.

Description
Dec.31 Income Summery 60,000
Karim’s Account 50% 30,000
Tariq’s Account 40% 24,000
Shah’s Account 10% 6,000

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Liquidation of a Partnership:

Sometimes things do not go as well as planned in a business and it may be necessary to go

out of business. When a partnership goes out of business, the following items must be
completed:
 All closing entries should be completed including allocating any net income or loss to the
partners.
 Any non-cash assets should be sold for cash and any gain or loss from the sale would be
allocated to the partners.
 Any liabilities should be paid.
 Any remaining cash is allocated to the partners based on the capital balance in each
partner’s account.

Data collection method

I have collected data from different books, internet, and also through interviews of the respective
persons or employees of Adventures Pakistan. For this purpose I visited personaly to the sub
offices of organization and made calls to know about the exect situation.

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SWOT Analysis

Strengths:
 Shared cost of start-up.
 Shared responsibilities and work.
 Shared business risks and expenses.
 Complementary skills and additional contacts of each partner can lead to the achievement
of greater financial results together than would be possible apart.
 Mutual support and motivation.

Weaknesses:
 Partners in a general partnership are jointly and individually liable for the business
activities of the other. If your partner skips town, you’ll be liable for all the debts, not just
half of them.
 Shared profits.
 You do not have total control over the business. Decisions are shared, and differences of
opinion can lead to disagreements, a “falling out,” or even one partner buying out the
other.
 A friendship may not survive a partnership.

Opportunities:
 Gaining enough experience to be able to run your own business
 Roles in a private sector.

Threats:
 Falling out with partner
 Loss of income
 Bankruptcy .
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Conclusion

The accounting for a partnership is essentially the same as is used for a sole
proprietorship, except that there are more owners. In essence, a separate account tracks each
partner's investment, distributions, and share of gains and losses.

If you decide to organize your business as a partnership, be sure you draft a partnership
agreement that details how business decisions are made, how disputes are resolved and how to
handle a buyout. You'll be glad you have this agreement if for some reason you run into
difficulties with one of the partners or if someone wants out of the arrangement.

Any organization whose accounting system is weak or not properly controlled, the
progress of that organization can never grow fine. Since a partnership has a limited life, special
transactions need to be performed upon the death or withdrawal of a partner, dissolution and
liquidation.

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Recommendations

 Your agreement should carefully describe how ownership interests would be handled in
various scenarios, such as in the event of any partner’s death, a retirement, or bankruptcy.

 To protect your business from a partner leaving, setting up a new company, and stealing
your customers, you should also consider adding in a non-compete clause.

References

 Adventure Pakistan Head Office, Bahria Town, Islamabad.

 https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-
ii/partnerships/partnership-accounting

 https://www.toppr.com/guides/accountancy/accounting-for-partnership/distribution-of-
profit-among-partners/

 http://www.easyaccounting101.com/financial-accounting/partnership/partnership-
formation

 https://courses.lumenlearning.com/sac-finaccounting/chapter/journal-entries-for-
partnerships/

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