Professional Documents
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INTRODUCTION
Two or more people may form themselves into a partnership. This is a long-term
commitment to operate in business together. The people who own a partnership are
called partners. They do not have to be based or work in the same place, though
most do. However, they maintain one set of accounting records and share the profits
and losses.
Typical partnerships include:
- Law firms;
- Architectural firms;
- Insurance brokerage firms;
- Advertising firms;
- Medical clinics;
- Accounting firms.
It will be noted from the above most partnerships are in the services sector. The last
example (accounting firms) represents a case where the partners are in different
geographical locations (indeed for some of the largest firms such as PWC and KPMG
Peat Marwick they are not even in the same country!)
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3. The rate of interest, if any, to be paid on capital before the profits are shared;
4. The rate of interest, if any, to be charged on partners’ drawings;
5. Salaries to be paid to partners;
6. Arrangements for the admission of new partners;
7. Procedures to be carried out when a partner retire or dies.
1. Capital contributions
Partners need not contribute equal amounts of capital. What matters is how much
capital each partner agrees to contribute.
3. Interest on capital
If the work to be done by partners is of equal value but the capital contributed is
unequal, it is reasonable to pay interest on the partners’ capitals out of partnership
profits. This interest is treated as a deduction prior to the calculation of profits and
their distribution among the partners according to the profit sharing ratio.
The rate of interest is a matter of agreement between the partners, but it should
equal the return which they would have received if they had invested the capital
elsewhere.
4. Interest on drawings
It is obviously in the best interests of the firm if cash is withdrawn from the firm by
the partners in accordance with the two basic principles of
a) as little as possible, and
b) as late as possible.
To deter the partners from taking cash out unnecessarily the concept can be used of
charging partners interest on each withdrawal, calculated from the date of
withdrawal to the end of the financial year.
5. Partnership salaries
One partner may have more responsibility or tasks than others. As a reward for this,
rather than change the profit and loss sharing ratio, the partner may have a
partnership salary which is deducted before sharing the balance of profits.
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REVIEW QUESTIONS
1. George, Steve and Hellen are partners. They share profits and losses in the ratios of
3/11, 4/11 and 4/11 respectively.
For the year ending 31 July 2019, their capital accounts remained fixed at the
following amounts:
KES
George 120,000
Steve 80,000
Hellen 50,000
They have agreed to give each other 4% interest per annum on their capital
accounts.
In addition to the above, partnership salaries of KES 70,000 for Steve and KES 40,000
for Hellen are to be charged.
The net profit of the partnership, before taking any of the above into account was
KES 230,000.
Required
You are required to draw up the appropriation account of the partnership for the
year ending 31 July 2019.
2. Draw up a profit and loss appropriation account for the year ending 31 December
2020 and balance sheet as at that date, from the following
i) Net profits KES 111,000
ii) Interest to be charged on capitals: Bonnie KES 3,000; Salano KES 2,000; Chuma
KES 1,500
iii) Interest to be charged on drawings: Bonnie KES 400; Salano KES 300; Chuma
KES 200
iv) Salaries to be credited: Salano KES 20,000; Chuma KES 25,000
v) Profits to be shared: Bonnie 70%; Salano 20%; Chuma 10%
vi) Current accounts: balances b/d Bonnie KES 18,600; Salano KES 9,460; Chuma
KES 8,200;
vii) Capital accounts: balances b/d Bonnie KES 100,000; Salano KES 50,000; Chuma
KES 25,000;
viii) Drawings: Bonnie KES 39,000; Salano KES 27,100; Chuma 16,800.
3. Farasi and Rafiki are in partnership sharing profits and losses in the ration 3:2. The
following is their trial balance as at 30 September 2019:
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Dr Cr
KES KES
Buildings (cost KES 210,000) 210,000
Accummulated depreciation: Buildings at 30.09.2018 50,000
Fixtures at cost 8,200
Accummulated depreciation: Fixtures at 30.09.2018 4,200
Accounts receivable 61,400
Accounts payable 26,590
Cash at bank 6,130
Inventory at 30 September 2018 62,740
Sales 363,111
Purchases 210,000
Carriage outwards 3,410
Discounts allowed 620
Loan interest: P. Mfalme 3,900
Office expenses 4,760
Salaries and wages 57,809
Bad debts 1,632
Allowance for doubtful debts as at 30.09.2018 1,400
Loan from P. Mfalme 65,000
Capitals: Farasi 100,000
Rafiki 75,000
Current accounts: Farasi 4,100
Rafiki 1,200
Drawings: Farasi 31,800
Rafiki 28,200
690,601 690,601
Required
Prepare an income statement and a profit and loss appropriation account for the
year ending 30 September 2019 and a balance sheet as at that date.
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4. Mwerevu and Kitungu are trading in partnership, sharing profits and losses equally.
Interest at 5% per annum is allowed or charged on both the capital and the current
account balances at the beginning of the year. Interest is charged on drawings at 5%
per annum. The partners are entitled to annual salaries of Mwerevu KES 12,000;
Kitungu KES 8,000.
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At 31 December 2020:
a) Inventory was valued at KES 68,000
b) Purchase invoices amounting to KES 3,000 for goods included in the inventory
valuation at (a) above had not been recorded
c) Staff salaries owing KES 900
d) Business rates paid in advance KES 200
e) Allowance for doubtful debts to be increased to KES 2,400
f) Goods withdrawn by partners for private use had not been recorded and were
valued at: Mwerevu KES 500, Kitungu KES630. No interest is to be charged on
these amounts
g) Provision is to be made for depreciation of fixtures and fittings at 10% on cost
h) Interest on drawings for the year is to be charged: Mwerevu KES 360, Kitungu
KES 280
Required
From the information given above, prepare the partnership income statement and
profit and loss appropriation account for the year ending 31 December 2020, and the
balance sheet as at that date.
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Chafua and Benson
Trial Balance as at 31 December 2021
Dr Cr
KES KES
Capital account Benson 50,000
Chafua 75,000
Current account Benson 4,000
Chafua 5,000
Drawings Chafua 17,000
Benson 20,000
Sales - goods and services 541,750
Purchases of textbooks for distribution 291,830
Returns inwards and outwards 800 330
Carriage inwards 3,150
Staff salaries 141,150
Rent 2,500
Insurance - general 1,000
Insurance - public indemnity 1,500
Compensation paid due to Benson error 10,000
General expenses 9,500
Bad debts written off 1,150
Fixtures and fittings at cost 74,000
Accummulated depreciation of fixtures and fittings at 1.1.2021 12,000
Accounts receivable and accounts payable 137,500 23,400
Cash 400
711,480 711,480