Chapter 7-

Accounting for
Partnership

Prepared By: Afaf Izzati Nafhah bt Radzi 1

INTRODUCTION
DEFINITION:
 A business owned by more than 2 person.

 Must be doing the same type of business.

 Reasons for conducting business as partnership:

 Additional capital
 Additional expertise
 Additional management time – additional partners allow more time
to be spent on managing the expanded business operations.

 Disadv: Unlimited liability regulation applicable to p/ship business

GENERAL PRINCIPLE:
 Accounting view: A separate entity
Legal 2013
 EmyWahid view: not separate entity i.e. unlimited liability2
INTRODUCTION, con’t..
NATURE OF PARTNERSHIP
 Form for profit purposes
 Must follow Partnership Act 1961
 Number of partners between 2 – 20 (for professional firms max 50 partners)
 Unlimited liability except for limited partners
 At least 1 general partner with unlimited liability

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Types of Partners in a Business Partnership

1. General partner – fully participates in the operational

and managerial functions of business. Fully liable for all
debts and obligations.

2. Sleeping partner – takes no active part in the business or

who has retired from active participation in the business
but retains his capital in the p/ship. Also known as
dormant partner. Fully liable for partnership debt.

3. Limited liability partner – liability limited to the amount

of capital invested by him into the p/ship i.e. personal
possessions

 In any p/ship, there must be at least 1 general partner

with2013unlimited liability.
EmyWahid 4
AGREEMENT
YES NO
 Can be either verbal or written  Automatically P/ship Act 61, S 26 apply in the
 Called Partnership Agreement setting out the absence of any agreement either expressed or
rights, duties, and liabilities. Hence record the implied between partners.
intentions of the partners.  Among the clauses covered:
 Clauses usually covered in the agreement are: 1. Profits and losses to be shared
a) Name of partnership EQUALLY
2. No partners’ salaries
b) Names of partners
3. No interest on capital invested
c) Date of p/ship agreement signed and date of
p/ship is to commence 4. No interest on drawings made by partners
5. Partners will receive 8% p.a. on any loans
d) Nature of business
advanced to the business.
e) Capital introduces by each partners
6. Every partner may take part in the mgmt
f) Profit and Loss sharing ratio of p/ship business
g) Interest charged on capital contributions 7. Any business decision may be decided by
h) Arrangements on drawings and interest on a majority of the partners, for instance
drawings introducing a new partner into the
i) Arrangements as to partners’ salaries business
j) Arrangements as to interest on advances/loan 8. P/ship automatically dissolved upon the
from partners death or legal disability of a partner due to
factors such as lunacy or bankruptcy
k) Method of valuing goodwill upon admission,
retirement
EmyWahid 2013or death of a partner 9. P/ship books to be 5 kept at the place of the
business of p/ship and every partner
l) Provisions as to dissolution of the partnership
entitled to access to them
DIFFERENCE BETWEEN PARTNERSHIP & LIMITED
COMPANIES
PARTNERSHIP LIMITED COMPANIES

Must be registered with the Registrar of Must be registered with Registrar of

business under Business Registration Act Companies under Companies Act 1965
1957.

Capital – contributed by partners according to Capital – contributed by shareholders

their agreement.

Own by 2 – 20 partners Own by shareholders. If private 2 to 50 and

public minimum of 2 and maximum number is
up to the amount of authorized capital.

Manage and control by partners or by board Manage and control by Board of Director
consists of partners. (BOD) appointed by shareholders.

Liability is unlimited – if business bankrupt, Limited liability – if business bankrupts,

creditors have a right against partners creditors have no right on personal
personal properties properties.

Profit or loss will be shared by partners Profits will be paid to shareholders in the form
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according to their profit sharing ratio (PSR) of dividend
THE FINAL ACCOUNT
A) Statement of Profit or Loss
 P/ship required to prepare Statement of Profit or
Loss at the end of financial year. Net profit
derived from this account will be transferred to
Appropriation Statement.

B) Appropriation Statement (vertical format)

 Prepared before any profits or loss can be
distributed among the partners. Necessary to
make some adjustments such as loan/ advances
from partners, interest on drawings, interest on
capital and partners’ salaries.
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ITEMS IN Appropriation Statement
1. Net Profit
 Amount derived from Income Statement need to be
adjusted to expenses incurred and income earned by
partners.

2. Interest on Drawings
 Charged starting from the date of the withdrawal to
the date when final accounts are prepared.
 Apportioned on time basis.
 Income to p/ship business.
 Need to be shown in Debit side of Current account.
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ITEMS IN Appropriation Statement, con’t..
3. Partners’ Salaries

 Salaries paid to partners for acting in the business, considered as expenses

to P/ship.
 If salaries already paid, not to be shown in Current a/c.

 If salaries has not been paid, must be shown in Current a/c (credit).

4. Interest on Capital

 Rate of interest on capital: depends on p/ship agreement and computed

from the date the capital is contributed by partners.
 Apportioned on time basis

 Expenses to partnership business.

 Need to be shown on the credit side of Current account

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ITEMS IN Appropriation Statement, con’t..
5. loans/advances from partners
o A partner gives loans or advances besides capital contribution

o Interest on loan are calculated based on amount agreed.

o If there is no interest rate specified, the partnership act provides for to

be paid at 8% per annum on loans by partners.

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 ALI, BABA AND CICI PARTNERSHIP
APPROPRIATION STATEMENT FOR THE YEAR ENDED
31st DECEMBER……..
RM RM
Net Profit b/d XX
Less: Interest on loan – Ali (expense in the P&L, unless XX
stated that it is Appropriation Statement item) XX
ADJUSTED NET PROFIT
Add : Revenue
Interest on drawings : Ali X
: Baba X
: Cici X XX

Less : Expenses
Salary : Ali X
: Baba X
: Cici X (XX)

Interest on capital : Ali X

: Baba X
: Cici X (XX)

Interest on Loan : Ali (XX)

NET PROFIT / (NET LOSS) BEFORE APPROPRIATION XXX

CURRENT A/C (Share of remaining profits or losses)
(based on profit sharing ratio)
- Ali X
- Baba X
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- Cici X
XXX
SHARING DISTRIBUTION OF PROFITS

 Distribute based on agreement made.

 All the partners are entitled to share equally in the profits of the business if
there is no agreement made between partners (Partnership act 1961).

 Then transferred the amount to their respective Current Accounts.

 Illustration 1:
A business with 3 partners Jay, Kim and Lan agree to share profits in the ratio
of 3:2:1. If the profit available is RM 60,000 how much will each partner will
earn?

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SPECIAL RULE OF DISTRIBUTION
MINIMUM GUARANTEED PROFITS
 Stated in the p/ship agreement, will be guaranteed to
receive nothing less than the minimum amount.

 if distributable profits not sufficient to pay partner’s min

share of profits, other partners have to Surrender their
share to the partner-receive.

 Illustration 2:
A business with 3 partners May, Nisha, Odah agree to
share profits in the ratio of 3:2:1. However, Odah has
been guaranteed with a minimum of RM 12,000. If the
available profit is RM 60,000, show the profit earned by
each partner?
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 THE FINAL ACCOUNT, con’t..
C) Partner’s Personal account
1. Capital Accounts
 Record only transactions relating to capital contributions of each
partner.
 Generally remain unchanged from year to year, except when there
is new capital contribution by partners.
 Any additional will be credited while any reduction will be debited.

2. Current Accounts
 Show the transaction between partners and p/ship agreement.
 Record all adjustment - debited with amount of drawings, interest
on drawings and share of loss and credited with interest on capital,
partners’ salaries accrued, interest on loan/advances and share of
profits.
 EmyWahid
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Credit Bal. However, when partner withdraws more than
his share of profits, there will be Debit Bal.
Capital account
 can be prepared in 2 ways:
1. Fixed Capital Accounts
2. Floating Capital Accounts
FIXED CAPITAL ACCOUNTS FLOATING CAPITAL ACCOUNTS

Number of Partners are required to Partners are required to maintain

accounts maintain 2 sets of accounts – 1 set of account – CAPITAL
CAPITAL ACCOUNT & CURRENT ACCOUNT
ACCOUNT

Adjustments All adjustments for drawings, All adjustments for drawings,

salary, interest on capital, etc. salary, interest on capital, etc. are
are made in the current made in the capital accounts.
accounts and not in the capital
accounts.

Fixed The capital account balance The balance of the capital account
balance remain unchanged unless there fluctuates from year to year.
EmyWahid 2013
is addition to or withdrawal of 15

capital.
 FIXED CAPITAL ACCOUNTS
PARTNERS’ CURRENT A/C
Ali Baba Cici Ali Baba Cici
Balance b/d (*) X X X Balance b/d (#) X X X
Drawings X X X Salary X X X
Int. on drawings X X X Int. on Capital X X X
**Appropriation X X X **Appropriation profits X X X
losses
Interest on loan (if
appropriation item)
Balance c/d (#) X X X Balance c/d (*) X X X
XX XX XX XX XX XX
Balance b/d Balance b/d

PARTNERS’ CAPITAL A/C

Ali Baba Cici Ali Baba Cici
Balance b/d X X X
Bank/cash X X X
Balance c/d (¤) X X X
XX XX XX XX XX XX
Balance b/d

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 FLOATING CAPITAL ACCOUNTS
PARTNERS’ CAPITAL A/C
Ali Baba Cici Ali Baba Cici
Drawings X X X Balance b/d X X X
Int. on drawings X X X Bank X X X
**Appropriation X X X Salary X X X
losses
Interest on capital X X X
**Appropriation X X X
profits
Interest on loan (if
appropriation item)
Balance c/d (¤) X X X
XX XX XX XX XX XX

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THE FINAL ACCOUNT, con’t..
D. Statement of Financial Position
 Partnership balance sheet similar to sole trader Statement of Financial
Position.
 The only difference is the way capital balance of each partner is reported in
the Statement of Financial Position (SoFP)

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 ALI, BABA AND CICI
STATEMENT OF FINANCIAL POSITION AS AT 31st
DECEMBER ………..(extract)
RM RM RM
NON CURRENT ASSETS XX (XX) XX
CURRENT ASSETS XX
OWNER’S EQUITY XXX
Capital A/C:
Ali XX
Baba XX
Cici XX XXX

Current A/C:
Ali XX
Baba XX
Cici XX XXX

NON CURRENT LIABILITIES

Loan – Ahmad (by partner to the partnership) XX
CURRENT LIABILITIES XX
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XXX
CIRCUMSTANCES CONTRIBUTING
TO CHANGES
1. Changes or adjustment to the Profit Sharing Ratio
(PSR) of existing partners, maybe due to changes of
roles in management.

2. Admission of a New Partner

3. Death or Retirement of an existing partner.

GENERAL IDEA
Upon changes, old partnership (OPSR) dissolved. New partnership being
formed (NPSR).

PERIOD
Beginning, ending or during accounting period
 MATTERS TO BE CONSIDERED

1. Retirement or death of a partner

• Remaining balance in current a/c & capital
a/c will be paid to him.
• Amount may be paid in cash, installments or
by taking over assets. If installments, balance
unpaid will be recorded as loan to business
(may include interest on loan).
• Once amount owe is paid, there will be no
Bal c/d in either current or capital account.
 MATTERS TO BE CONSIDERED

2. Admission of partner
 Existing partners will want to ensure receive full entitlement up to date
of admission.
 As for new partner, he does not bear any losses which may arise before
admission.
 Usually brought in capital and premium goodwill.
 custom for the new partner to pay (subject to agreement) into the firm
a certain sum of money as contribution towards the capital of the
business.
 Additional amount in respect of g/will – regard as premium (considered
as form of compensation for the old partners).
MATTERS TO BE CONSIDERED

3. Changes in profit sharing ratio, maybe due to

changes of roles in management.
Example:
• Kay and Lee sharing profit and loss in the ratio of 3:2. They
have decided to admit Mir as a new partner. Mir is to
receive 1/11 of the profit. Calculate the new profit sharing
ratio for Kay and Lee.