PRINCIPLES OF ACCOUNTS

PARTNERSHIP ACCOUNTS HANDOUT

A partnership is a type of business organization owned and operated by two or more persons
with the main aim of making a profit. This type of business is preferred as more capital can be
raised and a variety of skills and expertise can be contributed to the partnership.

PARTNERSHIP AGREEMENT

Partners usually develop a written agreement which is called a deed. This agreement usually
includes:
a. The capital to be contributed by each partner
b. The ratio in which profits or losses are to be shared
c. The rate of interest, if any, to be paid on capital before profits are shared
d. The rate of interest, if any, to be charged on partners’ drawings
e. Salaries to be paid to partners
f. Performance-related payments to partners

NB – Partnership agreement is an option and so if the partners refuse to have one, there is the
Partnership Act that governs the partnership. This act states that, if there is no agreement, profits
and losses are to be shared equally, there is to be no interest on capital nor interest on drawings
and salaries are not allowed.

THE FINANCIAL STATEMENTS FOR A PARTNERSHIP

The final accounts for a partnership are similar to those for the sole trader. However, since the
business is owned by more than one person, then the profits/losses will have to be shared. As a
result, the Trading and Profit and Loss account will have an additional section to show the
appropriation of profits. This section is called the Profit and Loss Appropriation Account.
BELOW IS AN EXAMPLE.

SHANEIL AND AALIYA

Profit and Loss Appropriation Account for the period ending December 31, 2019
$ $ $
Net profit 50000
Add Interest on drawings- Shaneil 500
Aaliya +1000 +1500
51500
Less: Interest on Capital – Shaneil 1000
Aaliya +3000 4000

Salary- Shaneil +15000 -19000

Profit to be shared 32500

Share of Profit:
Shaneil (3/5) 19500
Aaliya (2/5) +13000 32500

3:2 2+3=5 Shaneil will get 3/5

Aaliya will get 2/5