Partnership

Chp 17 & 18
 Meaning
An agreement between two or
more people to carry on a business
in order to make a profit.
 +
Advantages
₳ Raise more capital
₳ More skills & knowledge
₳ Share the responsibilities
- Ѫ
Disadvantages
Profits must now be shared
Ѫ Disagreements can occur
Ѫ Partners cannot act
independently
Partnership Act, 1890

01 02
All partners contribute Partners are NOT
equal capital entitled to interest on
capital / salaries

03 04 05
Partners will NOT be Profits / Losses will be Partners are entitled
charged interest on equally shared to 5% interest on loan
drawings
Accounting for Partnership
Appropriation
Continues from the P&L A/c.
Profit / Loss will be treated
between the partners.
Drawings
Each partner has their own
drawings A/c
Partners Capital
Each of the partners will have
their own Capital A/c.
Fluctuating Capital A/c
Fixed Capital A/c
Current Account
Each partner has their own
Current A/c if the Capital a/c are
fixed.
It may also be credited with any
interest on a loan made by the
partner to the business
Activity 1 & 2
Page No. 213 & 214
Partnership Changes
Profit sharing ratio New partner joins
Before - Old ratio ₽ Changes the profit sharing
After - New ratio ratio
₽ New Capital introduced
₽ Revaluation of assets &
liabilities
₽ Goodwill adjustment
Existing partner leaves
₽ Changes the profit sharing
ratio
₽ Repayment of Capital
₽ Revaluation of assets &
liabilities
₽ Goodwill adjustment
 Revaluation of
assets & liabilities
Gain on revaluation
Increase in the value of an asset
Asset A/c Dr 01
Revaluation A/c Cr

Decrease in the value of a liability

Liability A/c Dr 02
Revaluation A/c Cr

*The amt in these entries would be the change in the value.

Market value – Book value
Loss on revaluation
Decrease in the value of an asset
Revaluation A/c Dr 01
Asset A/c Cr

Increase in the value of a liability

Revaluation A/c Dr 02
Liability A/c Cr

*The amt in these entries would be the change in the value.

Market value – Book value
 Loss Revalution A/c Gain

Details $ Details $

Liability Asset

Asset Liability
Dr Revalution A/c Cr

Details $ Details $

Decrease in asset xx Increase in asset xx

Increase in liability xx Decrease in liability xx

Profit Loss
Dr Revalution A/c Cr

Details $ Details $
Decrease in asset xx Increase in asset xx

Increase in liability xx Decrease in liability xx

Profit on revaluation: Loss on revaluation:

A x A x
If Cr > Dr If Dr > Cr
B x B x

xxx xxx
 Dr Partner’s Capital A/c Cr

Details A B Details A B

Loss on revaluation x x Balance b/d xx xx

Profit on revaluation x x

xx xx xx xx
Activity 1
Page No. 226
 HW
Activity 2
Page No. 229
Goodwill
'Goodwill' is an intangible asset that signifies the good reputation a firm carries as a result of
brand value, favorable location, customer contracts, market share, etc.
● It indicates the profit earning capacity of the business in future.
● The new partner will be entitled to receive share in these future profits and the
existing partners will lose their share in future profits.
● The new partner shall compensate the sacrificing partners for their share of profits
sacrificed.
Account for Goodwill

To be kept in books NOT to be kept in books

OLD Partners OLD ratio
Goodwill A/c Dr
Goodwill A/c Dr
Partners’ capital A/c Cr
Partners’ capital A/c Cr

NEW Partners NEW ratio

Partners’ capital A/c Dr
Goodwill A/c Cr
Activity 3 & 5
Page No. 232 & 237
 HW
Activity 4
Page No. 235
 Admission VS Retirement
BASIS ADMISSION OF A PARTNER RETIREMENT OF A PARTNER

Revaluation of Revaluation Dr Revaluation Dr

assets & liabilities Partners’ capital A/c Cr Partners’ capital A/c Cr

Goodwill Dr Goodwill Dr
Old Partners’ capital A/c Creating
Cr Partners’ capital A/c Cr
Goodwill
adjustment
Written
New Partners’ capital A/c Dr offContinuing Partners’ capital A/c Dr
Goodwill Cr Goodwill Cr
Old Partner’s capital Dr
Cash/Bank/Asset Dr
Capital Cash/Bank/Asset Cr
New Partner’s capital A/c Cr
Old Partner’s loan Cr
Activity 6
Page No. 241
 Dissolution
A partnership may dissolve due to the following reasons:
● Disagreement among partners
● Bankruptcy / legal issue
● Conversion to a company
● Death of partner/s
Order of discharge of firm liabilities:
1) Realization expenses
2) Outside liabilities
3) Liabilities towards partner/s
4) Repayment of capital
Journal Entries for Dissolution
1. Transfer of all the assets of the firm (except Cash & Bank)
Realisation A/c Dr xx
Building A/c Cr xx
Book value
Machinery A/c Cr xx
Inventory A/c Cr xx
Trade Receivables Cr xx

2. Transfer of all liabilities of the firm (except liabilities towards partner)

Bank loan Dr xx
Bank overdraft Dr xx
Book value
Trade payables Dr xx
Expenses payable Dr xx
Realisation A/c Cr xx
3. Realisation of assets
Bank A/c Dr xx
Realisation A/c (do not write asset A/c or inventory) Cr xx

4. Payment of all outside liabilities

Realisation A/c (do not write loan A/c or creditors) Dr xx
Bank A/c Cr xx

5. Payment of realisation expenses

Realisation A/c Dr xx
Bank A/c Cr xx
6. Partner takes over an asset/s
Partner’s capital A/c Dr xx
Realisation A/c (do not write asset A/c or inventory) Cr xx

7. Partner takes over liabilities

Realisation A/c (do not write loan A/c or creditors) Dr xx
Partner’s capital A/c Cr xx

8. Partner pays realisation expenses

Realisation A/c Dr xx
Partner’s capital A/c Cr xx
9. a) Realisation profit transferred
Realisation A/c Dr xx
Partner’s capital A/c Cr xx

9. b) Realisation loss transferred

Partner’s capital A/c Dr xx
Realisation A/c Cr xx

10. Repayment of partner’s loan

Partner’s loan A/c Dr xx
Bank A/c Cr xx

11. Repayment of partner’s capital

Partner’s capital A/c Dr xx
Bank A/c Cr xx
 Dr Realisation A/c Cr
Details $ Details $

Building/Machinery/Equipment xx Bank loan xx

Inventory/Trade receivables xx Trade/Other payables xx

Bank (payment of liabilities) xx Bank (sale of assets) xx

Bank (payment of expenses) xx Partner’s capital A/c (asset taken over) xx

Partner’s capital (liabilities taken over) xx

Partner’s capital (expenses paid by partner) xx

Profit on realisation trf to partner: Loss on realisation trf to partner:

A x A x

B x B x

xxx xxx
 Dr Partner’s Capital A/c Cr

Details A B Details A B
Realisation A/c
xx xx Balance b/d xx xx
(assets taken over)

Realisation A/c
Realisation loss x x xx xx
(liabilities taken over)

Bank (balancing fig) xx xx Realisation profit xx xx

xxx xxx xxx xxx

 Dr Bank A/c Cr

Details $ Details $
Balance b/d xx Realisation A/c (liabilities paid) xx

Realisation A/c (assets sold) xx Partner’s loan xx

Partners’ capital xx

xxx xxx

*If your bank a/c tallies then your answer is correct

Activity 7 & 8
Page No. 246 & 250
 Thanks!
Do you have any questions?

preranas@dgkhetan.edu.in

This PPT is for educational purposes only

 Answers to activities, practice exercises and exam practice questions: Chapter 17

17 Partnership accounts
Activities
Activity 1
a
Tee and Shirt
Income statement and appropriation account
for the year ended 31 March 2016
$ $ $
Sales 215 000
Less: cost of sales
Inventory at 1 April 2015 16 000
Purchases 84 000
100 000
Less: inventory at 31 March 2016 20 000 80 000
Gross profit 135 000
Selling expenses 24 000
Administration expenses 46 000
Depreciation:
Fixtures and fittings 4 800
Office equipment 5 400 10 200
Interest on loan 600 80 800
Profit for the year 54 200
Share of profit: 75
 1 27 100
Tee  
2

 1 27 100 54 200
Shirt  2

b Partners’ current accounts

Tee Shirt Tee Shirt
2016 $ $ 2015 $ $
Mar 31 Drawings 29 000 31 000 Apr 1 Balances b/d 5 000 10 000
2016
Balance c/d 3 100 6 700 Mar 31 Interest on loan 600
Share of profit 27 100 27 100
32 100 37 700 32 100 37 700
Apr 1 Balance b/d 3 100 6 700

c
Statement of financial position at 31 March 2016
Cost Accumulated Net book
depreciation value
$ $ $
Non-current assets
Fixtures and fittings 48 000 12 800 35 200
Office equipment 27 000 10 400 16 600
75 000 23 200 51 800

(cont.)
 Cambridge International AS and A Level Accounting

Statement of financial position at 31 March 2016

Cost Accumulated Net book
depreciation value
$ $ $
Current assets
Inventory 20 000
Trade receivables 24 000
Other receivables 6 000
Cash and cash equivalents 85 000
135 000
Total assets 186 800
Capital and liabilities
Capital accounts:
Tee 100 000
Shirt 50 000
150 000
Current accounts:
Tee 3 100
Shirt 6 700
9 800
Non-current liability
Loan – shirt 12 000
76
Current liabilities
Trade payables 11 000
Other payables 4 000
15 000
Total capital and liabilities 186 800

Activity 2
Tee and Shirt
a Income statement and appropriation account
for the year ended 31 March 2016
$ $ $
Sales 215 000
Less: cost of sales
Inventory at 1 April 2015 16 000
Purchases 84 000
100 000
Less: inventory at 31 March 2016 20 000 80 000
Gross profit 135 000
Selling expenses 24 000
Administration expenses 46 000
Depreciation:
Fixtures and fittings 4 800
Office equipment 5 400 10 200
Interest on loan 1 200 81 400
Profit for the year 53 600
76
 Answers to activities, practice exercises and exam practice questions: Chapter 17

$ $ $
Add Interest on drawings:
Tee 2 900
Shirt 3 100 6 000
59 600
Less: interest on capitals
Tee 10 000
Shirt 5 000 (15 000)
Less: salary
Shirt (4 000)
40 600
Share of profit:
Tee   3
 5
24 360

Shirt  
2

5
16 240 40 600

b Partners’ current accounts
Tee Shirt Tee Shirt
2016 $ $ 2015 $ $
Mar 31 Drawings 29 000 31 000 Apr 1 Balances b/d 5 000 10 000
Interest on drawings 2 900 3 100 2016
Balances c/d 7 460 2 340 Mar 31 Interest on capital 10 000 5 000 77
Interest on loan 1 200
Salary 4 000
Share of profit 24 360 16 240
39 360 36 440 39 360 36 440
Apr 1 Balance b/d 7 460 2 340

c
Statement of financial position at 31 March 2016
Cost Accumulated Net book
depreciation value
$ $ $
Assets
Non-current assets
Fixtures and fittings 48 000 12 800 35 200
Office equipment 27 000 10 400 16 600
75 000 23 200 51 800
Current assets
Inventory 20 000
Trade receivables 24 000
Other receivables 6 000
Cash and cash equivalents 85 000
135 000
Total assets 186 800

(cont.)
77
 Cambridge International AS and A Level Accounting

Statement of financial position at 31 March 2016

$ $ $
Capital and liabilities
Capital accounts:
Tee 100 000
Shirt 50 000
150 000
Current accounts:
Tee 7 460
Shirt 2 340
9 800
Non-current liability
Loan – shirt 12 000
Current liabilities
Trade payables 11 000
Other payables 4 000
15 000
Total capital and liabilities 186 800

Practice exercises
1 a
Bell and Binn
78 Income statement and appropriation account for the year ended 30 April 2016
$ $
Revenue 425 000
Less: cost of sales
Opening inventory 30 000
Add: purchases 200 000
230 000
Less: closing inventory (27 000) 203 000
Gross profit 222 000
Less: expenses
Wages 98 000
Rent $(25 000 − 1 500) 23 500
Heat and light 16 000
Office expenses 12 600
Vehicle expenses 5 510
Advertising $(3 500 − 2 000) 1 500
Irrecoverable debts written off 416
Bank charges $(314 + 860) 1 174
Depreciation of motor vehicles 3 800
Depreciation of plant and machinery 12 500 175 000
Profit for the year 47 000

78
 Answers to activities, practice exercises and exam practice questions: Chapter 17

$ $
Add: interest on drawings
Bell 3 000
Binn 1 350 4 350
51 350
Less: interest on capital
Bell 5 000
Binn 4 000 9 000
Less: partner’s salary
Bell 10 000
Binn 8 000 18 000
Share of profit:
Bell 14 610
Binn 9 740 24 350

b Partners’ current accounts

Bell Binn Bell Binn
$ $ $ $
Drawings 30 000 13 500 Opening balance b/d 7 000 3 000
Interest on drawings 3 000 1 350 Interest on capital 5 000 4 000
Closing balance c/d 3 610 9 890 Salary 10 000 8 000
Share of profit 14 610 9 740
79
36 610 24 740 36 610 24 740
Balance b/d 3 610 9 890

c Statement of financial position at 30 April 2016

Cost Accumulated Net book
depreciation value
$ $ $
Non-current assets
Plant and machinery 125 000 48 500 76 500
Motor vehicles 41 000 25 800 15 200
166 000 74 300 91 700
Current assets
Inventory 27 000
Trade receivables 45 750
Less: provision for doubtful receivables (1 000) 44 750
Other receivables $(1500 + 2000) 3 500
Cash and cash equivalents 14 550
$(15 724 - 314 - 860)
89 800
Total assets 181 500

(cont.)

79
 Cambridge International AS and A Level Accounting

Statement of financial position at 30 April 2016

$ $ $
Capital and liabilities
Partners’ capital and current accounts
Bell Binn
$ $
Capital account 50 000 40 000 90 000
Current account 3 610 9 890 13 500
53 610 49 890 103 500
Non-current liability
Long-term loan – Bell 60 000
Current liabilities
Trade payables 18 000
Total capital and liabilities 181 500

2 a Miller and Meredith
Forecast income statement and appropriation account
for the year ended 31 December 2016
$ $
Forecast net profit for the year $(21 560 + 21 600) 43 160
Less: interest on capital
Miller 2 000
80 Meredith 3 000 (5 000)
Forecast profit 38 160
Share of profit:
Miller 19 080
Meredith 19 080 (38 160)

b 
If the two businesses combine then Miller will have a forecast total income of $21 080
compared with $19 600 he earned for himself in the previous year. Meredith will have a
forecast income of $22 080 compared with $18 000 for the previous year as a sole trader.
It appears from the figures that both partners will be better off by combining their businesses.
However, there is no guarantee that the forecast increases in net profit will happen. Had they
stayed as sole traders and the forecast increases had happened then Miller would be worse off,
by $(21 560 − 21 080). Meredith, on the other hand would be better off by $(22 080 − 21 600).
On a strictly short term calculation, Miller should not agree to a partnership with Meredith
on those terms. However, the figures in both cases are very close together. On that basis,
therefore, he should consider whether there are longer term factors that may outweigh the
short term loss. There may be more scope to increase future net profits as a partnership
than by trading alone.
Workings:

Miller Meredith
$ $
Net profit for y/e 31 Dec 2015 19 600 18 000
Add: estimated increase 1 960 3 600
Forecast net profit 21 560 21 600
80
 Answers to activities, practice exercises and exam practice questions: Chapter 17

Exam practice questions

Multiple-choice questions
1 C
2 D
3 A
Note
Since interest on loans is an expense of the business, the profit for the year can be assumed to
have allowed for this. Accordingly, to answer the questions, no adjustment to profit should be
made for interest; nor is the interest received to be viewed as part of a partner’s profit share.
Similarly, a partner’s salary reduces the amount of profit to be shared, and in that strict sense her
share of the remainder is her profit share.

Structured question
a Advantages of forming a partnership (any two):
• The capital invested by partners is often more than can be raised by a sole trader.
• A greater fund of knowledge, experience and expertise in running a business is available to
a partnership.
• A partnership may be able to offer a greater range of services to its customers (or clients).
• The business does not have to close down, or be run by inexperienced staff, in the absence
of one of the partners; the other partner(s) will provide cover.
• Losses are shared by all partners.
Disadvantages of forming a partnership (any two):
81
• A partner doesn’t have the same freedom to act independently as a sole trader has.
• A partner may be frustrated by the other partner(s) in their plans for the direction and
development of the business.
• Profits have to be shared by all partners.
• A partner may be legally liable for acts of the other partner(s).
b Partners maintain separate capital and current accounts to keep better control of the
amounts introduced into the business and drawn from the business by each partner. The
capital account identifies how much each partner has introduced into the business. From this
it is possible to calculate any interest on capital agreed between the partners. The capital
account is adjusted only very occasionally, for example when a partner is admitted or retires,
or when there is a substantial change in the business’s need for capital.
The current account records each partner’s share of profits, either by way of profit share
or interest on capital/salary. It also shows how much a partner draws. Keeping the current
account also helps partners not to withdraw from the business more than their share of
profit. This ensures cash is retained and partners do not withdraw capital. (A partner that
deliberately withdrew excessive drawings would in effect have repaid himself some of his
capital whilst still charging interest on the full amount.)

81
 Cambridge International AS and A Level Accounting

c
Up and Down
Corrected statement of financial position at 30 June 2016
$ $
Assets
Non-current assets
Fixtures and fittings at cost 33 500
$(45 000 − 15 000 + 3 500)
Less: depreciation to date 22 500
$(34 500 − 10 500 − 1 500)
11 000
Current assets
Inventory $(28 500 + 10 000) 38 500
Trade receivables 24 000
Less: provision for doubtful debt 960 23 040
Other receivables 750
Cash and cash equivalents 9 000
71 290
Total assets 82 290
Capital and liabilities
Capital accounts:
Up 22 000
Down 14 000
82 36 000
Current accounts:
Up $(7 500 + 2 200 + 3579) 13 459
Down $(1 500 + 1 400 − 1075 + 2506) 4 331
17 790
Total capital 53 790
Non-current liability
Loan – Up 15 000
Current liabilities
Trade payables 12 000
Other payables 1 500
13 500
Total capital and liabilities 82 290

Workings:

Adjustments to profit
$
Loss on disposal of fixtures and fittings
$(15 000 − 10 500 − 3 500) (1 000)
Depreciation of fixtures sold written back 1 500
Loan interest on Up’s loan (1 500)
Undervalue of closing inventory 10 000
Provision for doubtful debts ($24 000 × 4%) (960)
Prepaid rent 750

82
 Answers to activities, practice exercises and exam practice questions: Chapter 17

$
Goods taken for personal use 1 075
Adjusted profit 9 865
Less: interest on capital
Up 2 200
Down 1 400
6 265
Share of profit:
Up 3 759
Down 2 506
6 265

d Up and Down
Revised current accounts at 30 June 2016
Up Down Up Down
$ $ $ $
Original balances 7 500 1 500
Goods taken 1 075
Balance c/d 13 459 4 331 Interest on capital 2 200 1 400
Share of profit 3 759 2 506
13 459 5 406 13 459 5 406
Opening balances b/d 13 459 4 331
83
e There are really only two ways in which Down could increase the balance on his capital
account. The first is to introduce some assets into the business rather than cash. This would
mean him purchasing, say, some inventory and introducing that into the business. He could
also bring in some of his personal assets into the business, say, his car or computer. If he
decides to purchase some assets then his ability to do so will depend on how much personal
cash he has available. If he has very little then this is not a viable option. Likewise, he may not
want to introduce his own assets into the business.
The other option is for Down to explore ways in which he can give up a part of his other
entitlements from the partnership and turn these into a further capital contribution. For
example, he could agree that some of his current account can be credited to the capital
account instead. Based on the above figures, he could contribute up to $4 331 this way.
However, that would mean that Down would not have any balance left on his current account to
draw for his immediate needs, and in any case, Up wishes him to increase his capital by $8 000.
Another idea would be for the partners to agree that a portion of Down’s future shares of
profit are credited to the capital account, instead of to the current account. (For example,
$2 000 for each of the next four years. If the partnership is highly profitable, it may be possible
to complete this exercise in a shorter time or even in one year.)
Down’s options are limited and it may be that he is unable to increase the balance on his
capital account without introducing some more cash into the business. He may have to
borrow money to do so.

83
 Cambridge International AS and A Level Accounting

18 Partnership changes
Activities
Activity 1
a
Revaluation account
$000 $000
Property (old value) 120 Property (new value) 150
Plant and machinery (old value) 60 Plant and machinery (new value) 51
Inventory (old value) 20 Inventory (new value) 17
Trade receivables (old value) 30 Trade receivables (new value) 28
Trade payables (new value) 22 Trade payables (old value) 24
Profit on revaluation – Ann 12
Profit on revaluation – John 6
270 270

b Capital accounts
$000 $000 $000 $000
Ann John Ann John
Balance c/f 132 66 Opening balances 120 60
Profit on revaluation 12 6
132 66 132 66
Balance b/d 132 66
84
Statement of financial position at 31 October 2016 following revaluation
c
$000
Non-current assets
Property 150
Plant and machinery 51
201
Current assets
Inventory 17
Trade receivables 28
Bank account 1
46
Total assets 247
Capital and liabilities
Capital accounts:
Ann 132
John 66
198
Current accounts:
Ann 17
John 10
27
Current liabilities
Trade payables 22
Total capital and liabilities 247
 Answers to activities, practice exercises and exam practice questions: Chapter 18

Activity 2
Workings:

Journal
Name of account Dr Cr
$ $
Freehold premises 25 000
Fixtures and fittings 3 000
Office equipment 2 000
Inventory 3 000
Trade receivables control 1 000
Revaluation account 16 000
Revaluation of assets at 1 September 2016 as agreed by partners
Revaluation account 16 000
Capital account – Tom 8 000
Capital account – Tilly 8 000
Apportionment of profit on revaluation of assets to partners in profit-sharing ratios

a
Revaluation account
$ $
Journal on allocation of revaluation gains 16 000 Journal on revaluation of assets 16 000

Journal
85
Name of account Dr Cr
$ $
Freehold premises 25 000
Revaluation account 25 000
Revaluation account 3 000
Fixtures and fittings 3 000
Revaluation account 2 000
Office equipment 2 000
Revaluation account 3 000
Inventory 3 000
Revaluation account 1 000
Trade receivables control 1 000
Revaluation account 8 000
Capital account – Tom 8 000
Revaluation account 8 000
Capital account – Tilly 8 000
Revaluations of assets at 1 September 2016 as agreed by partners,
and apportionment of net profit on revaluation of assets to partners in
profit-sharing ratios.

85
 Cambridge International AS and A Level Accounting

Revaluation account
$ $
Fixtures and fittings 3 000 Freehold premises 25 000
Office equipment 2 000
Inventory 3 000
Trade receivables control 1 000
Capital account – Tom 8 000
Capital account – Tilly 8 000
25 000 25 000

b Tom and Tilly

Statement of financial position as at 1 September 2016

$ $
Assets
Non-current assets at new values
Freehold premises 65 000
Fixtures and fittings 15 000
Office equipment 5 000
85 000
Current assets
86 Inventory 14 000
Trade receivables 3 000
Cash and cash equivalents 6 000
23 000
Total assets 108 000
Capital and liabilities
Capital account – Tom 56 000
Capital account – Tilly 49 000
105 000
Current liabilities
Trade payables 3 000
Total capital and liabilities 108 000

c As the terms of the partnership changed, with Tilly now being entitled to a salary as well as
a share of profits, then the partners were correct to revalue the assets. This ensures that any
effort by the partners in the 'old' partnership that has generated a profit (or gain, or loss) that
will be divided up in the future is rewarded in the proportions that were agreed to apply to the
earlier period.

86
 Answers to activities, practice exercises and exam practice questions: Chapter 18

Activity 3
a
Vera and Ken
Calculation of goodwill
Value of net assets $
Premises 140 000
Fixtures and fittings 65 000
Motor vehicles 35 000
Office equipment 15 000
Inventory 6 500
Trade receivables 11 800
Bank 3 620
276 920
Less:
Trade payables 5 830
Net asset value 271 090

Value of goodwill: $(300 000 − 271 090) = $28 910

b Amounts to be credited to capital accounts for goodwill:

( )
Vera  1  of $28 910 : $14 455
 2

(
 1
Ken   of $28 910 :
2 ) $14 455

Activity 4 87

a
Old New Adjustments to capital
profit-sharing ratios profit-sharing ratios ­accounts (net)
$ $ $
Punch 12 000 10 800 1 200 credit
Judy 6 000 7 200 1 200 debit
18 000 18 000

b Capital accounts
Punch Judy Punch Judy
2016 $ $ 2016 $ $
Oct 1 Goodwill 1 200 Oct 1 Balance b/f 36 000 14 000
Goodwill 1 200
Oct 1 Balance c/d 37 200 12 800
37 200 14 000 37 200 14 000
Oct 1 Balance b/d 37 200 12 800

Note:
In this case the net adjustment for each partner has been made. It would be equally correct to:
• credit Punch’s capital account with $12 000 and debit it with $10 800
• credit Judy’s capital account with $6 000 and debit it with $7 200.

87
 Cambridge International AS and A Level Accounting

Activity 5

Hook, Line and Sinker

Trading section of the income statement and appropriation
account for the year ended 31 December 2016
$
Sales 129 500
Less cost of sales 66 500
Gross profit carried down 63 000

Hook, Line and Sinker

Income statement and appropriation account for the
year ended 31 December 2016
Six months to Six months to Year to
30 June 2016 31 December 2016 31 December 2016
$ $ $ $ $ $
Gross profit brought down 31 500 31 500 63 000
Wages 7 000 7 000 14 000
General expenses 1 750 3 500 5 250
Interest on loan 200 400 600
Depreciation 875 9 825 875 11 775 1 750 21 600
Profit for the year 21 675 19 725 41 400
Salary – Hook 3 000 3 000 3 000
88 16 725 38 400
Share of profit:
 3  1
Hook   10 838   5 575 16 413
6   3   

 2  1
Line     7 225   5 575 12 800
6 3   

 1  1
Sinker     3 612 21 675   5 575 16 725 9 187 38 400
6 3   

Activity 6
a
Income statement and appropriation account for the year ended
31 December 2016
$
Turnover 600 000
Less: cost of sales (330 000)
Gross profit 270 000

For eight months For four months

Gross profit 270 000 → 8 : 4 180 000 90 000
Less: operating expenses:
Manager salary (24 000 × 8/12) 16 000 −
Wages and salaries (106 000 − 16 000) → 8 : 4 60 000 30 000
Rent (42,000 → 8 : 4) 28 000 14 000
Heating and lighting (6 000 → 8 : 4) 4 000 2 000
 Answers to activities, practice exercises and exam practice questions: Chapter 18

Other operating expenses (12 000 → 8 : 4) 8 000 4 000

Depreciation:

( )
8
Premises   180 000 × 4% × 4 800
12

      (210 000 × 4% × )
4
2 800
12

Plant    (90 000 × 20% × )

8
12
12 000

     (27 000 × 20% × )
4
1 800
12

Motor car   (30 000 × 25% × )

8
5 000
12

      (5 000 + 7 000 × 25% × )

4
1 000
12

Equipment   (21 000 × 10% × )

8
1 400
12

      (6 000 × 10% × )
4 200
12

Interest on loan (20 000 × 12% × )

4 (139 200) 800 (56 600)
12
Profit for the periods 40 800 33 400
Less: appropriation:
Interest on capital:

(
Hardeep   100 000 × 10% ×
12
8
) 6 667
89
      (158 800 × 10% × )
4 5 293
12

Nasma   (60 000 × 10% × ) 4 000

8
12

      (87 400 × 10% × )
4 2 913
12

Arfan    (45 000 × 10% × )
4 1 500
12
Total interest 10 667 9 707

(15 000 × )
Salary – Nasma  
8
12
10 000

        (18 000 × )
4 – (20 667) 6 000 (15 707)
12
Residual profits 20 133 17 693
Share of profit

(
Hardeep   20133 × ) 2
3
13 422

     (17 693 × )
2 7 077
5

Nasma   (20 133 × )
1 6 711
3

      (17 693 × )
2 7 077
5

(
Arfan     17 693 ×
1
5 ) (20 133) 3 539 (17 693)

– –
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 Cambridge International AS and A Level Accounting

b Capital acounts
Hardeep Nasma Arfan Hardeep Nasma Arfan
Balance b/d 100 000 60 000
Gain on revaluation 62 800 31 400
Goodwill written off 24 000 24 000 12 000 Goodwill 40 000 20 000
Transfer to loan a/c 20 000 Bank 50 000
Balance c/d 158 800 87 400 45 000 Motor car 7 000
202 800 111 400 57 000 202 800 111 400 57 000
Balance b/d 158 800 87 400 45 000

Working for gain on revaluation

Assets Book value Dep for 8m Book value Revalued Gain

on 1 Jan 2016 on 1 Jan 2016 1 Sept 2016
Premises 135 000 (4 800) 130 200 210 000 79 800
Plan 30 000 (12 000) 18 000 27 000 9 000
Motor van 5 000 (5 000) – 5 000 5 000
Office equipment 7 000 (1 400) 5 600 6 000 400
Total (23 200) (94 200) →2:1

Current acounts
Hardeep Nasma Arfan Hardeep Nasma Arfan
Drawings 30 000 40 000 4 000 Balance b/d 16 000 12 000
90 Interest on loan 800
Interest on capital 11 960 6 913 1 500
Salary 16 000
Balance c/d 19 260 8 702 1 039 Share of profit 20 500 13 788 3 539
49 260 48 702 5 039 49 260 48 702 5 039
Balance b/d 19 260 8 702 1 039

Note: Rounding differences have not been eliminated in presenting this answer.

Activity 7
a
Wilfrid, Hide and Wyte
Income statement and appropriation account for the year ended 30 June 2016
Six months ended Six months ended
31 Dec 2015 30 June 2016
$ $ $ $
Gross profit 93 500 93 500
Wages 45 500 45 500
Rent 6 000 6 000
Electricity 4 200 4 200
Interest on loan – 3 750
Other operating expenses 4 500 60 200 4 500 63 950
Profit for the year 33 300 29 550
Interest on capital: –
Wilfrid 4 000
Hide 2 500 1 650†
Wyte 1 500 8 000 325†† 1 975
25 300 27 575
 Answers to activities, practice exercises and exam practice questions: Chapter 18

$ $ $ $
Share of profit:
Wilfrid  3  12 650
 
6

Hide  2  1
  8 433   13 788
6 2

Wyte  1 4 217  1
25 300 27 575
    13 787
6 2

 1
† $33 000 × 10% ×   = $1 650
 2

 1
†† $6 500 × 10% ×   = $325
 2

b Partners’ capital accounts

Wilfrid Hide Wyte Wilfrid Hide Wyte
2015 $ $ $ 2015 $ $ $
Dec 31 Goodwill 10 000 20 000 Jul 1 Balance b/d 80 000 50 000 30 000
Revaluation 10 500 7 000 3 500 Dec 31 Goodwill 30 000
of assets
Loan a/c 75 000 Current a/c 5 650
Bank 30 150
91
2016
Jun 30 Balance c/d 33 000 6 500
115 650 50 000 30 000 115 650 50 000 30 000
2016
Jul 1 1 Balance b/d 33 000 6 500
Note: The goodwill adjustments have been shown net.

Partners’ current accounts

Wilfrid Hide Wyte Wilfrid Hide Wyte
2015 $ $ $ 2015 $ $ $
Dec 31 Drawings 23 000 Jul 1 Balance b/d 12 000 3 000 4 000
Capital a/c 5 650 Dec 31 Interest 4 000
Profit 12 650
2016
Jun 30 Drawings 28 000 18 000 2016
Balance c/d 1 371 5 829 Jun 30 Interest 4 150 1 825
Profit 22 221 18 004
28 650 29 371 23 829 28 650 29 371 23 829

Jul 1 Balance b/d 1 371 5 829

Note: Some questions will combine the revaluation of assets with the introduction of a new partner. In this
case, work through the revaluation account, transferring any profit or loss on revaluation to the old partners in
their old profit sharing ratios. Then introduce the new partner and adjust the capital accounts for goodwill in
line with Section 18.7.
 Cambridge International AS and A Level Accounting

Activity 8
a Realisation account
$000 $000
Property (book value) 80 Bank – sale of property 106
Motor vehicles (book value) 20 Samir’s capital account – value of car taken 7
Inventory (book value) 19 Bank – sale of vehicles 9
Trade receivables (book value) 16 Bank – sale of inventory 18
Bank – payments to trade payables 10 Bank – from trade receivables 13
Bank – expenses of sale 3 Trade payables (book value) 10
Profit on realisation:
Raul (3/5) 9
Samir (2/5) 6
163 163

b Capital accounts
Raul Samir Raul Samir
$000 $000 $000 $000
Vehicle taken 7 Opening balances 60 55
Current account – 4 Current accounts 10 –
Bank 79 50 Profit on realisation 9 6
79 61 79 61

92 c
Bank account
$000 $000
Sale of property 106 Opening balance 4
Sale of vehicles 9 Trade payables 10
Sale of inventory 18 Expenses of sale 3
From trade receivables 13 Capital account – Raul 79
Capital account – Samir 50
146 146

Practice exercises
1 a 
When a new partner is admitted, it is only fair that the old partners are rewarded for their
efforts in building up the business. The assets should be revalued prior to admitting a new
partner, because any profit on revaluation belongs to the old partners. The new partner
should not benefit from any of this profit.
b i Revaluation account
$ $
Property account (current value) 40 000 Property account (new value) 60 000
Inventory account (current value) 12 000 Inventory account (new value) 10 000
Capital account – Ali 9 000
Capital account – Siri 9 000
70 000 70 000

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 Answers to activities, practice exercises and exam practice questions: Chapter 18

Note:
This is the first account to be tackled because any profit or loss on revaluing assets
belongs to the old partners. Fiona, the new partner, isn’t entitled to any of this profit as
she has not been part of the business which generated it. It would have been acceptable
to shortcut the answer by showing the changes in the value of the assets rather than
show their old value and new value. This is shown below:

Revaluation account
$ $
Inventory account – loss 2 000 Property account – profit 20 000
$(12 000 – 10 000) $(60 000 – 40 000)
Capital account – Ali 9 000
Capital account – Siri 9 000
20 000 20 000

Both approaches would be acceptable. It’s very much a question of how confident
students feel. Putting in both the old and new values (the first approach) helps track
everything better. There is too much opportunity to make an arithmetic mistake by
shortcutting the approach.
ii Capital accounts
Ali Siri Fiona Ali Siri Fiona
$000 $000 $000 $000 $000 $000
Goodwill account 8 8 8 Opening balance 36 36 – 93

Balance c/d 49 49 22 Profit on revaluation 9 9 –

Bank 30
Goodwill 12 12 –
57 57 30 57 57 30
Balance b/d 49 49 22

c The treatment of goodwill is similar to the treatment of any profit arising on revaluation of
assets. The old partners’ capital accounts are credited with their share of goodwill in the
old profit sharing ratio. The capital accounts of all three partners are then debited with
goodwill in the new profit sharing ratio. This is done as the old partners have given up a
share of their goodwill to the incoming partner.
2 a
Capital accounts
Wilson Betty Keppel Wilson Betty Keppel
$000 $000 $000 $000 $000 $000
Goodwill account 12 12 – Opening balance 40 15 30
Current account 6 Goodwill 8 8 8
Bank 36
Balance c/d 40 15 – Profit on revaluation 4 4 4
52 27 42 52 27 42
Balance b/d 40 15 –

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 Cambridge International AS and A Level Accounting

b Partners’ capital accounts for the period from 1 May 2015 to 30 April 2016
Wilson Betty Imogen Wilson Betty Imogen
2015 $000 $000 $000 2015 $000 $000 $000
Nov 30 Goodwill 16 16 8 May 1 Opening 52 15 –
account balance
2016 Nov 30 Bank 20
April 30 Balance c/d 56 19 12 Goodwill 20 20 –
72 35 20 72 35 20
2016
May 1 Balance b/d 56 19 12

c Two advantages of partners preparing a partnership agreement are:

• 
It shows clearly how much of the profit earned by the partnership each partner is
entitled to. It also shows how much each partner must bear of any loss incurred.
• It will prevent future disputes between the partners.

d Partnership appropriation account for the year ended 30 April 2016

7 months to 5 months to
30 November 2015 30 April 2016
$ $ $ $
Profit for the period 81 666 58 334
Less: interest on capital
94
Wilson 3 033 2 333
Betty 875 791
Imogen – 3 908 500 3 624
Residual profit 77 758 54 710
Share of residual profit
Wilson 38 879 21 884
Betty 38 879 21 884
Imogen – 10 942
77 758 54 710

e
Partners’ current accounts
Wilson Betty Imogen Wilson Betty Imogen
$ $ $ $ $ $ $
Balance b/d 1 000 Balance b/d 2 000
Drawings 52 000 48 000 20 000 Interest on capital 5 366 1 666 500
Balances c/d 16 129 13 429 Share of profit 60 763 60 763 10 942
Balances c/d 8 558
68 129 62 429 20 000 68 129 62 429 20 000
Balance b/d 8 558 Balance b/d 16 129 13 429

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 Answers to activities, practice exercises and exam practice questions: Chapter 18

f It is possible that the partners will benefit from converting their business to a limited
company. It will give them limited liability for the debts of the business, unlike now where
they are all fully liable for the partnership debts and may have to use their own personal
assets to meet payment for them.
A limited company can issue shares to passive investors who share in the risk and reward

instead of taking a lender’s return in interest. Small parcels of shares can be awarded or
sold to key employees as a motivational bonus arrangement. Having the option to issue
shares or to take loans, or a mixture, may make raising capital easier in the future.
However, there is the need to decide how many shares each partner will be issued with.
If they are issued in proportion to the balances on their capital and current accounts
then Wilson will clearly have the most shares. This will give him control of the company
in making decisions on the way it is developed in the future. This may upset Betty and
Imogen as at the moment all three have an equal share in the decision making. This could
cause future friction between all three, leading to the business failing.
Clearly then, the shares should be issued in the same proportions as the partners intend

to share the profits going forward. This may mean that some amounts of capital are
repaid on incorporation, or are converted to loans from the individuals to the company,
or that Imogen will have to take out some personal loans so that she has enough to pay
for her full portion of the new shares. All this should be a matter for agreement between
the partners based around the capital needs of the business and their personal financial
circumstances.
The primary drawback of being a limited company is that there is extensive legislation
(in the UK in the Companies Act 2006) which regulates the conduct of companies and
their directors, and requires that information, including the annual accounts, are placed
on public record. In contrast, partnerships are allowed considerable privacy and relative 95
freedom of conduct.
It is usual to consider incorporation when the scale or nature of the business are such that
the advantage of limited liability outweighs the additional administrative burden.

Exam practice questions

Multiple-choice questions
1 D
2 A
3 D
4 B
5 A

95