Partnership

Iffah Hanani
 Learning Outcome
At the end of this chapter, you are able to:
• Definition & characteristics of partnership
• Forming a partnership business
• Types of partners
• Advantages & disadvantages
• Transactions pertaining to a partnership business
CHARACTERISTICS
AND FORMING A
PARTNERSHIP
BUSINESS
 CHARACTERISTICS OF A
PARTNERSHIP BUSINESS
Ownership:
Register with CCM Capital contributed 2-20
under ROB by partners 2-50: professional
partnership

No legal obligation
Sharing profit or
Unlimited liability to maintain books of
loss
accounts
 FORMING A PARTNERSHIP
BUSINESS

2 or more individuals

Sole trader expand to partnership

Two sole traders combine

TYPES OF PARTNERS
&
ADVANTAGES,
DISADVANTAGES
 Types of Partners
Sleeping Partner:
General Partner:
Takes no active part in the business or who
Fully participates in the operational and
has retired from active participation in the
managerial functions of the business.
business but retains his capital in the
Fully liable for all debts and obligations.
p/ship. Also known as dormant partner.
Fully liable for partnership debt.
.

Limited liability Partner:

Liability limited to the amount of capital
invested by him into the partnership..
Advantages & Disadvantages

advantages disadvantages
THE GOVERNANCE
OF A PARTNERSHIP
BUSINESS
 The Governance

PARTNERSHIP PARTNERSHIP
AGREEMENT ACT 1961
• capital contribution • Interest on capital
• profit shared • Profit shared
• Withdrawals • Interest on advanced or
• Advances or loans loans
• Remunerations • Remunerations
THE FINAL
ACCOUNT
A) Income Statement
B) Appropriation Statement
C) Partner’s Personal Account
D) Statement of Financial Position
 The Final Account
A) Income Statement
P/ship required to prepare Income Statement 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.
 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
• Need to be shown in Debit side of Current account.
 Appropriation Statement
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.

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

 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 Income Statement, 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
: Abu X
: Ahmad X XX

Interest on capital : Ali X

: Abu X
: Ahmad X 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
- Cici X
XXX
 The Final Account
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 - DEBIT with amount of drawings, interest on drawings and share of loss
and CREDIT with interest on capital, partners’ salaries accrued, interest on loan/advances and
share of profits.
• Usually Credit Bal. However, when partner withdraws more than his share of profits, there will
be Debit Bal.
 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 X X X
losses profits
Interest on loan
(if appropriation
item)
Balance c/d (#) X X X Balance c/d (*) X X X
XX XX XX XX XX XX
 PARTNERS’ CAPITAL A/C

Ali Baba Cici Ali Baba Cici

Revaluation loss X X X Balance b/d X X X
Realisation loss X X X Revaluation profit X X X
Goodwill X X X
Bank- contribution + X X X
goodwill X X X
Realisation profit X X X
Balance c/d (¤) X X X
XX XX XX XX XX XX
 The Final Account

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)

 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

XXX
 CHANGES IN
PARTNERSHIP
 Introduction
• A partnership may add a new partner in the business
• Due to various reasons: - a partner may retire or withdraw himself/herself
from the partnership.
 Admission of New Partner
• New partner admitted – the existing partnership is legally dissolved
• Economic view – small impact on the operation of the business
• Method of admission:

• Admission by purchase of an interest

- New partner purchases the interest of 1 or more existing partners
- only capital account are affected

• Admission by investment
- new partner invests assets in the partnership
- net asset & total capital of partnership are increased
 Admission of New Partner
• Changes in partnership – revaluation of assets took place.
• Net assets of the partnership should be revalued to reflect the current
value of the net assets.
• Who conduct revaluation? – independent & external professional valuer.
• Current or market value of net assets may higher or lower than their
carrying value.
• - Record as profit or loss on revaluation.
 Retirement / withdrawal of existing partner

• Reason:
1) conflict of interest
2) better opportunities
3) ill health
• When an existing partner retires, goodwill and revaluation of net assets should be
determined.
• The remaining balance of retired partner’s capital and current accounts will be
paid to him/her.
 THANK YOU !!!
Test 2- Week 14 (replacement)
GP 2- Week 14