AFRICA NAZARENE UNIVERSITY

UNIT TITLE: FUNDAMENTALS OF ACCOUNTING 2

UNIT CODE: ACC 102

STUDENT NAME: SUSAN WANJIKU MWANGI,

STUDENT NUMBER: 19S01APS035,

LECTURER: NYAKEA YUVENALIS

ASSIGNMENT: BASIC CHARACTERISTICS OF A PATNERSHIP FIRM AND HOW

THEY FORM PART OF THE PATNERSHIP CONTRACT.

DATE: 9th MARCH 2020.

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Introduction

A partnership is a business entity with two or more owners who associate and share in the risks

and profits of the entity. According to Chiappetta .B, Shaw. K &Wild .V (2012.p 482)” a

partnership is an unincorporated association of two or more people to pursue business for profit

as co-owners.” A partnership contract is a document that establishes the terms of the partnerships

and the agreement made between partners.

The basic characteristics of the partnership firms form part of the partnership contract and they

include:

1. Existence of two or more members.

One of the basic characteristic of a partnership is that, it is an agreement between two or more

people but less than twenty who voluntarily agree to run a business , therefore when forming the

partnership contract two or more people bind themselves together to contribute the capital

required with the intention of dividing profits and losses among themselves.

2. Partnership agreement

In order to start working as partners there must be an agreement on how to conduct the business.

the partnership act of 1890 states that a partnership agreement normally sets out the purpose of

the partnership, how partners are to be treated, the sharing of profits and losses, the rules

governing a partnership management and so in order to form the partnership contract the partners

have to agree on these issues and thus the agreement becomes the contract also known as the

article of co partnership according to Chiappetta .B, et al (2012).the contract formed maybe oral

but it’s better to draft a written one.

3. There is sharing of profits and losses.

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Sangster .A & Wood .F (2012) notes that partners should agree to share profits in any way they

wish and come up with a mutual agreement on the ratio of sharing profits and losses. Therefore

when forming the contract the ratio in which profit and losses are shared should be included.

4. Unlimited liability.

Each partner is personally liable for the total obligations of the partnership .According to

Chiappetta .B et al (2012),”unlimited liability implies that each partner can be called on to pay a

partnership debt.” In partnerships except for limited partnerships the creditors have the right to

recover a firm’s debt from the private property of any partner when assets are not adequate. In

forming the contract this characteristic has to be clearly set out because it has to be an agreement

among or between the partners that there private property is involved in case of debts.

5. Principal agent relationship/mutual agency.

Chiappeta .B et al (2012) notes that mutual agency implies that each partner is a fully authorized

agent of the partnership, meaning that the of the partnership firm can be carried out by all or any

of the partner acting on behalf of all partners, therefore when forming a partnership contract this

has to be clearly set out and the partners may mutually agree on authorizing one partner or more

among themselves to manage the business of the firm and draft this in the contract.

6. Limited life.

A partnership has limited life implying that incase of death, bankruptcy or any event taking away

the ability of a partner to fulfill a contract ends the partnership or any partner may just decide to

terminate the partnership, therefore a partnership can end any time

7. Transfer ability of shares.

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In partnerships there are restrictions to transfer shares from one person to another without

consent of all the existing partners .this is part of the agreement or the partnership contract that

shares are restricted and can only be transferred with consent of all partners.

8. Capital contribution.

According to Sangster .A & Wood .F (2012) partners should contribute equal amounts of capital.

But what matters is how much capital each partner agrees to contribute and therefore after

agreeing on the capital contributions the agreement is included in the partnership contract or the

partnership deed.

9. Utmost good faith.

The relationship between partners is based on mutual trust and confidence. Every partner is

expected to act in the best interests of other partners and of the firm as a whole, therefore when

making the agreement the partners involved in the agreement should be truthful and act ethically.

10. Taxation.

According Chiappetta .B et al (2012), a partnership is not subject to taxes on its income. The

income or loss is allocated to the partners according to the partnership agreement thus it is

included in determining the taxable income for each partners tax return.

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REFERENCES.

Sangster .A & Wood. F, (2012).business accounting 1. England: Pearson education.

Chiappetta .B, Shaw .K, & Wild .J (2012). Fundamental accounting principles, United States:

mc grawhill.