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PARTNERSHIP
ACCOUNT
(Formation)
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Learning objectives
• To explain the meaning of partnership.
• To explain t he rationale to form a
partnership.
• To explain the characteristics of a
partnership.
• To explain the partnership agreement.
• To prepare partnership accounts.
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Formation of Partnership
Definition:
“The relation which subsists between
persons carrying on business in common
view of profit”. (Part II, section 3 (1)
Partnership Act 1961.
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Why partnership business is formed?
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Characteristics of partnership
1. Formed to make profit.
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5. Partnership will dissolve when one of the partners dies,
became mentally unfit or his term has expired.
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Partnership Agreement
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Among the clauses that are usually covered in
the agreement are:-
1. Nature of business
2. The amount of capital contributed by each partner
3. Profits or Losses sharing ratio
4. Interest charged on partners’ capital
5. Arrangement as to the amount of drawing and interest on
drawings
6. Arrangement as to partners’ salaries
7. Arrangement as to interest on advances/loan from partners
8. Method for valuation of goodwill upon admission,
retirement or death of a partner.
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What happen when there is no written
Partnership Agreement?
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Preparing partnership account
• In general, partnership accounts are similar to that of a sole proprietorship.
• However, there are two areas in which the partnership and a sole
proprietorship accounts differ.
• The differences are basically due to the business having more than one partners.
• Partners are also need to be informed of their current net assets and equity
standing - affecting the Owners’ Equity section in the Statement of Financial
Position.
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In such a case….,
1. The Net Profit/Loss earned or incurred during a particular
accounting period will be distributed/appropriated/shared
among partners. (Statement of Profit and Loss section).
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Statement of Profit and Loss
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Statement of Profit and Loss and the Appropriation Account for the year ended …
RM
Less: Interest on Loan/Advances
Ali xxx
Bakar xxx (xxx)
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• In arriving at the “Distributable Profits or Losses” to be
apportioned to partners, there are several items that need to
be accounted for.
• These are items that affect the partners and which are
stated in the Partnership Agreement.
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Interest on Capital
• Interest on capital is not treated as an expense to the
partnership. The amount is debited (deducted from the net
profit/loss) in the Appropriation acc. instead of in the P&L.
• DR Appropriation acc
CR Partners’ Current acc
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Partners’ Salaries/Remuneration
• Partners can take an active role in the Partnership.
DR Appropriation
CR Partners’ Salary Acc
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Partners’ Salaries/Remuneration
• If salary HAS NOT BEEN PAID or is still Accrued:
• The balance in the Partner’s salary acc. will then be closed and
transferred to the Appropriation Account at the end of the accounting
period.
DR Appropriation
CR Partners’ Salary
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Partners’ Drawings
• If the Partnership Agreement provide a clause allowing a
partner/s to make withdrawals from the business either in the
form of cash or goods for personal use, then:
• Drawing of cash
DR Partners’ Current account
CR Cash account
• Drawing of goods
DR Partners’ Current account
CR Purchases account
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Interest on Drawings
• Interest on drawings is treated as an income to the partnership.
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Example
Ali, Bala and Chan are partners in a partnership. The partnership agreement states the
following:
a) Ali and Bala are both entitled to salaries of RM1,000 per annum
b) Interest of 10% p.a will be paid on capital
c) Interest of 5% p.a will be charged on partners’ drawings
d) Profit and loss will be shared by the partners as follows:
Ali 5/10, Bala 3/10 and Chan 2/10 and Chan is guaranteed to receive a minimum
profits of RM1,000 a year.
• Capital acc balances for Ali, Bala and Chan were RM5,000,RM3,000 and RM2,000
respectively.
• Cash drawing made by Ali, Bala and Chan were RM2,500,RM3,000 and RM1,000
respectively.
Required:
Show the distribution of profit among the partner. 23
Answer:
Appropriation Statement for the year ended …
RM RM
Net profit 5,312
Add: Interest on drawings
Ali (2500 x 5%) 125
Bala (3000 x 5%) 150
Chan (1000 x 5%) 50 325
Less: Interest on capital
Ali (5000 x 10%) 500
Bala (3000 x 10%) 300
Chan (2000 x 10%) 200 (1000)
Partner's salaries
Ali 1000
Bala 1000 (2000)
Distributable profits: 2637
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Answer:
RM RM
Distributable profits: 2,637
Ali (2637 x 5/10) 1,318.50
Bala (2637 x 310) 791.10
Chan (2637 x 2/10) 527.40 2,637
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Statement of Financial Position section
Owners’ Equity:
Capital Acc. - Ali xxx
Bakar xxx
Current Acc. - Ali xxx
Bakar xxx
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Accounting procedures of a partnership
(focusing on the Statement of Financial Position Section)
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Fixed capital account method
Under this method, partners’ are required to maintain two sets of
accounts namely:-
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Example
Partners’ Capital account***
** whichever is applicable
*** the account can also be prepared using the ‘statement’ format29
Fluctuating Capital Account Method
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Example
** whichever is applicable
*** the account can also be prepared using the ‘statement’ format
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