Partnership

-is a business in which 2 or more people come together and work with the view of making a
profit e.g. accountancy firms, family businesses and law firms

Advantages of a partnership
-More skills/expertise available
-More capital available
-Responsibilities are shared
-Discussions before decisions are made
-Share losses

Disadvantages of a partnership
-Profits have to shared
- Individual decisions cannot be made so decisions have to be recognized by all partners
-One partner’s decision affects all other partners.
-All partners responsible for the debts of the business
-Jointly and severally liable for actions taken by a partner
-There is a possibility of disputes and disagreements

Partnership agreement
-is the document signed by partners before the partnership is formed outlining the terms and
conditions of such partnership.

Contents of a partnership agreement

-the profit/loss sharing ratio
- Salaries of partners-if one partner has more responsibilities than the other.
-Rate of interest on capital
-Rate of interest on drawings
-Arrangements for loans- interest on partners loan to company.
-Arrangements for introduction/retirement of partners

Importance of a partnership agreement

-Determines the allocation of responsibilities.
-Determines the apportionment of profits.
-Details share of capital, interest on capital, drawings and agreed salaries of partners.
-Avoids disputes at a later date-helps prevent misunderstandings and arguments amongst
partners in the future.

The purpose of an appropriation account

-To allow adjustments to be made to the profit for the year from income statement before
distribution of any residual profit is made to the partner capital accounts.
-it shows how the profit for the year or loss for the year is shared between the partners

1
 Income Statement and Appropriation Account Layout

$ $

Revenue xx

Less Returns Inwards/Sales returns (xx)

xx

Opening inventory xx

Purchases xx

Returns outwards/Purchases returns (xx)

xx

Closing inventory (xx)

Cost of sales xx

Gross Profit xx

Other income:

Commission receivable xx

Rent receivable xx

Decrease in provision for doubtful debts xx

Any other receipts xx

xx

Less expenses:

Wages and salaries xx

Bank loan interest xx

Motor vehicle expenses xx

Rent Paid xx

Interest on Partner’s loan xx

2
Depreciation-

Buildings xx

Motor vehicles xx

Office equipment xx

Irrecoverable debts xx

Increase in provision for doubtful debts xx

Any other Expenses xx

(xx)

Profit for the year xx

Interest on drawings:

Kymberley xx

Tariq xx

xx

xx

Interest on Capital:

Kymberley (xx)

Tariq (xx)

(xx)

Salary-Tariq (xx)

(xx)

xx*

Share of profit:

Kymberley xx

Tariq xx xx

3
Notes
-Opening inventory is taken from the Trial balance/List of balances.
-Closing inventory is taken from additional information.
-Prepaid is subtracted from an expense/income.
-Due/owing/outstanding/An accrual is added to the expense/income.
-Partners salary should not be mixed with other expenses in the income statement. Partner’s
salary is only for specified partner
-Rent and commission having credit balances or being credited are recorded under gross
profit as other incomes

Calculation of Increase/ Decrease in provision for doubtful debts

%
Step1 x (Trade Receivables-irrecoverable debts in the additional information)=$xx
100

Step 2 $xx- Provision for doubtful debts= Increase in provision for doubtful debts
If the answer is negative= Decrease in provision for doubtful debts

Calculation of Depreciation per annum on cost/ using straight-line method

%
x At cost of that asset in the trial balance
100

Calculation of Depreciation using reducing balance method

%
x (At cost of the asset in the trial balance-Provision for depreciation of the asset in the
100
Trial Balance)
Calculation of interest on drawings
%
x Drawings in the Trial balance/list of balances (Do this for each partner )
100
% is the rate of interest of drawings given

Calculation of interest on capital

%
x capital accounts in the Trial balance/list of balances (Do this for each partner )
100
% is the rate of interest of capital given

Calculation of share of profit/loss

Profit sharing ratio for the partner multiplied by xx* (Do this for each partner)

4
 Current accounts
Date Details Kymberley Tariq Date Details Kymberley Tariq
Sept $ $ Sept $ $
30 Balance b/d xx 30 Balance c/d xx
Drawings xx xx Salary xx
Interest on xx xx Interest on xx xx
drawings capital
Salary paid xx Interest on xx
loan
Balance c/d xx xx Profit share xx xx
xx xx xx xx
Oct 1 Balance b/d xx xx

-Balance b/d’s are taken from the trial balance or list of balances. Debit balance is debited
and credit balance is credited.
-Loss share is recorded on the debit.

Differences between a partner’s capital account and a partner’s current account

-Capital account is fixed while current account is fluctuating.
-Capital account is not used for day to day transactions while current account is used for day
day transactions.
-Capital account normally only varied by agreement between the partners while current
account varies with the actions of individual partners.

5
 Statement of Financial Position Layout

$ $ $
Cost Accumulated Book
Non-current assets Depreciation value

Land and buildings/Premises xxx xx xx

Motor vehicles xxx xx xx

Office equipment xxx xx xx

xxx xx xx

Current assets

Inventory xx

Trade receivables xx

Less provision for doubtful debts (xx)

xx

Other receivables xx

Bank xx

Cash xx

xx

Total assets xx

Capital and Liabilities

Capital accounts:

Kymberley xx

Tariq xx

xx

Current Accounts:

Kymberley xx

Tariq xx

6
 xx
xx

Non-current Liability

5% Bank loan xx

Current liabilities

Trade payables xx

Bank overdraft xx

Other payables xx

xx

Total capital and Liabilities xx

Notes

-Accumulated depreciation amounts are calculated as depreciation recorded in the income

statement plus provision for depreciation given in the trial balance/list of balances. Do this
for each non-current asset.

-Inventory amount is taken from additional information. It is the closing inventory.

-Provision for doubtful debts is the provision for doubtful debts you calculated before
subtracting provision at the beginning of the year.
%
x (Trade Receivables-irrecoverable debts in the additional information)=$xx
100

-Other receivables amount is the total amount of all prepaid expenses and all due/owing/
outstanding incomes.

-Cash and cash equivalents amount is the combined amounts for bank and cash.

-Capital accounts amounts are taken from the trial balance/list of balances.

-Current accounts amounts are balance c/d’s from the current account you have prepared.
Debit balances are subtracted.

-Bank overdraft is the bank with a credit balance.

-Other payables figure is the total amount of all owed/outstanding/due expenses and prepaid
incomes.