DENBIGH HIGH SCHOOL

PRINCIPLES OF ACCOUNTS
LESSON NOTES
TOPIC: PARTNERSHIP
Objectives:
Students should be able to:

1. accurately define a ‘partnership’ from given information.

2. describe at least three advantages and three disadvantages of partnerships in an acceptable

manner from information given by the teacher.

3. correctly describe the main features of a partnership agreement or deed using their textbook.

4. clearly state the position if no partnership agreement exists using their textbook.

5. accurately prepare financial statements of a partnership: trading and profit and loss account,

appropriation account and balance sheet from given information and Past Papers.

Definition of a Partnership

A partnership is the coming together of 2-20 persons to form a business with the view of
making a profit.

Advantages of a Partnership

1. It is easy to form as there are no legal formalities

2. Each partner brings his/her own skills and expertise to the job.
3. The responsibility of management could be shared by additional partners.
4. More capital is available to enable growth and development.
5. Workload is shared among partners.
Disadvantages of a Partnership
1. The partners have unlimited liabilities except in the case of the limited partnership.
2. It’s difficult to liquidate or transfer partnership.
3. Conflict may arise.
4. Profits are shared.
5. Small partnership may suffer from lack of continuity.
6. A partnership is dissolved on the death of a partner.
1
Partnership Deed Agreement
This is a legal agreement drawn up by lawyer and signed by each partner. It states:
1. Start up date of the business.
2. Duties and responsibilities of a partner.
3. Amount of capital to be contributed by each partner.
4. Capital Interest to be charged on drawings.
5. Partners interest to be paid.
6. Salaries to be paid.
7. How profits or losses should be shared.
In the event of NO PARTNERSHIP DEED if a dispute should arise, the court should settle the
dispute by referring to section 24 of the partnership act of 1890 which states:
1. No interest should be paid on capital.
2. Profit and losses should be shared equally.
3. No interest should be charged on drawings.
4. No salaries should be paid.
Interest on Capital
This is the amount earned on capital invested in the partnership. Any interest allowed on
partners’ capital should be debited to the appropriation account and credited in the
current account.

Interest on Drawings
In order to prevent partners from taking too much money out of the business or taking it when
they don’t need it, the partnership agreement provide for them to be charged interest on their
drawings.
The interest charged on partners drawings should be debited to their current account and
credited to their appropriation account.

Salary/Commission Bonus
This is paid to partners to compensate them for undertaking extra work. The salary, commission
or bonus is debited in the appropriation account and credited in the current account.

2
Interest on Partnership Loan
Where a partner has lent money to the firm, any interest payable on such lending should be
charged to the profit and loss account as an expense and credited to the partner’s current
account. The loan itself should be shown as a liability in the first balance sheet.
Profit or Loss Sharing
Since there will be more than one owner of the business, profit and losses must be shared
between or among the different part owners as set out in the agreement. Partners' share of
profit should be debited to the appropriation account and credited to the current account.
However, if a loss should occur you would credit the appropriation account and debit the
current account.
NB
✔ Where no profit sharing ratio is given, profit or loss should be shared equally.

✔ Partners' drawings should be debited to their current account.

✔ Current accounts are credited unless otherwise stated.

✔ The current account should be prepared as an individual ‘T’ account or in

columnar form.
✔ The current account allows the partners to receive what is due to them on the
credit side and what is owed to the partners on the debit side.
✔ A credit balance in a current account means the business owes the partner or
profits not drawn.
✔ A debit balance in a current account means that the partners owe the partnership
or drawings in excess of the profits to which the partner was entitled/drawings are
more than income.

3
 Capital Account
Only the original amount of capital invested by the partner will be shown in this account. The
amount will therefore remain fixed throughout the life of the partnership.
Eg. Capital a/c
2015 $
Jan 1 Cash 4000

FORMAT OF A PROFIT & LOSS APPROPRIATION ACCOUNT

Sheena and Aneita

Profit and Loss Appropriation account for the year ended 31 Dec 2019
Net Profit 50000
Add interest on drawings
Sheena 10000
Aneita 5000 15000
65000
Less interest on Capital
Sheena 1000
Aneita 2000 3000

Salaries to Partner
Sheena 500
Aneita 2000 2500

Bonus /commission- Sheena 500

Aneita 500 1000 6500
Balance of Profit to be shared 58500

Share of Profit
Sheena (1/2 *58500) 29250
Aneita (1/2*58500) 29250 58500

NB Formula to use when asked to share their profit according to their capital invested.

Individual/Partners Capital x Balance to be shared

Total Capital of All the Partners

4
Format of Balance sheet starting from Financed by:

Sheena and Aneita

Balance Sheet extract as at 31 December 2019
$ $ $

Financed by;
Sheena Capital 30000
Aneita Capital 30000 60000

Add Current a/c Sheena Aneita

Balance b/f 100 200
Add interest on capital 1000 2000
Salary 500 2000
Bonus/commission 500 500
Share of Profit 29250 29250
31350 33950 +
Less Drawings (4000) (3000)
Interest on Drawings (10000) (5000)
17350 + 25950 43300
103300

NB use this format when asked to write up the Appropriation account and Balance sheet ONLY
(No current account was required/done)

5
Format of Balance Sheet starting from Fixed Assets

Sheena and Aneita

Balance Sheet as at 31 December 2019
CP AD NBV

$ $ $

Fixed Asset 47000 - 47000

Current Assets

Stock 3000

Debtor 5500

8500

Less Current Liabilities

Creditors 6000

Bank Overdraft 2600 8600

Working Capital (100)

46900

Less Long Term Liabilities

Bank loan(6 years) 15000

31900

Financed by:

Sheena Capital 10000

Aneita Capital 20000 30000

Sheena Aneita

Add Current Account (2000) 3900 1900

31900
6
 NB (1) Figures in bold should have a double line

(2) Use this format when asked to write up an Appropriation account, Current account and
Balance sheet.
(3) Opening balance/ balance b/f should NOT be placed in bracket if there is a credit balance b/d
in the current account.
(4) Opening balance/ balance b/f SHOULD be placed in bracket if there is a debit balance b/d in
the current account.
Current Account
Each partner’s current account will reflect or show the temporary changes in the owner's equity
or capital account. Items recorded in this account include:

Debit Credit
✔ Balance brought forward Balance brought forward

✔ Partners drawings Partners salary

✔ Interest charged on drawings Interest charged on capital

✔ Share of losses Share of profits

NB Current account is treated same as capital when decrease you debit the account and
when increase you credit the account.

FORMAT OF A CURRENT ACCOUNT (“T” Account Form)

Sheena
Current Account
$ $
Drawings 4000 Balance b/f 100
Interest on Drawings 10000 Int on Capital 1000
Balance c/d 17350 Salary 500
Bonus/ commission 500
Share of Profit 29250
31350 31350
Balance b/d 17350

7
 Aneita
Current Account
$ $
Drawings 3000 Balance b/f 200
Interest on Drawings 5000 Int on Capital 2000
Balance c/d 25950 Salary 2000
Bonus/ commission 500
Share of Profit 29250
33950 33950
Balance b/d 25950

Format of a Current Account (Columnar Form)

Details Sheena Aneita Details Sheena Aneita

$ $ $ $
Drawings 4000 3000 Balance b/f 100 200
Int on Drawings 10000 5000 Int on Capital 1000 2000
Balance c/d 17350 25950 Salary 500 2000
Bonus/Commission 500 500
Share of Profit 29250 29250
Balance c/d
31350 33950 31350 33950
Balance b/d 17350 25950

NB credit items on the account signifies an increase in the Partners’ net worth or capital.
While debit items in the account signifies a decrease.

8
Worked Example
Kereen and Tallian
Profit and Loss Appropriation Account for the year ended 31 December 2012
$ $ $
Net Profit 47900
Add interest on Drawings:
Kereen 700
Tallian 900 1600
49500
Less Interest on Capital:
Kereen 2500
Tallian 3500 6000

Less Salaries:
Kereen 15000
Tallian 8000
23000 29000
Balance of Profit to be Shared 20500

Share of Profit
Kereen (3/5 X 20500) 12300
Tallian (2/5 X 20500) 8200 20500

Kereen and Tallian

Current Accounts
Details Kereen Tallian Details Kereen Tallian
$ $ $ $
Balance b/d -- 1700 Balance b/d 3000 --
Drawings 14000 18000 Interest on Capital 2500 3500
Interest on Drawings 700 900 Salary 15000 8000
Balance c/d 18100 -- Share of Profit 12300 8200
Balance c/d -- 900
32800 20600 32800 20600
Balance b/d -- 900 Balance b/d 18100 --

9
 ▪ Kereens’ balance (Cr)- have enough profit to withdraw from. (The
business/Partnership owes the partner)
▪ Tallian’s balance (Dr) – has withdrawn more than his profit. (The partners owe
the Partnership)

Exercise 1

Andrew, Chris and Steve are partners. They share profits and losses in the ratios of 2/5,
2/5, and 1/5 respectively.
For the year ended 31 December 2006, their capital accounts remained fixed at the
following amounts:
$
Andrew 6000
Chris 4000
Steve 2000
They have agreed to give each other 10% interest per annum on their capital accounts.
In addition to the above, partnership salaries of $3000 for Chris and for Steve$1000 are
to be charged.
The net profit of the partnership, before taking any of the above into account was $25200
Required to:
Draw up the appropriation account of the partnership for the year ended 31 December 2014.
Exercise 2

Draw up a profit and loss appropriation account for the year ended 31 December 2013 and
balance sheet at that date from the following

1. Net profit $30,350

2. Interest to be charged on capitals: D’Janay $2000; D’Aundre $1,500; D’Anna $900
3. Interest to be charged on drawings: D’Janay $240; D’Andre $180; D’Anna $130
4. Salaries to be credited: D’Aundre $2000; D’Anna$3500
5. Profits to be shared: D’Janay 50%; D’Aundre 30%; D’Anna 20%
6. Current Accounts: D’Janay $1860; D’Aundre$946; D’Anna $717
7. Capital: D’Janay $40,000; D’Aundre $30,000; D’Anna $18,000

10
 8. Drawings: D’Janay $9200; D’Aundre $7100; D’Anna $6900

Exercise 3

Draw up a profit and loss appropriation account for Rajae, Chrisanae, and Davian for the
year ended 31 December 2012 and balance sheet extract at that date from the following:

1. Net profits $184800

2. Interest to be charged on capitals: Rajae $3600; Chrisanae $2700; Davian $2100.
3. Interest to be charged on drawings: Rajae$1200; Chrisanae $960; Davian $500
4. Salaries to be credited: Chrisanae $22000; Davian $28000
5. Profits to be shared: Rajae 55% Chrisanae25%; Davian 20%
6. Current accounts: Rajae $18000; Chrisanae $8000; Davian $6000.
7. Capital accounts: Rajae$60000; Chrisanae$45000; Davian $35000.
8. Drawings: Rajae $27000; Chrisanae $23000; Davian $17000

11
 PAST PAPER QUESTIONS

Question 1

Mark, Karl, Sean are in partnership sharing profit and losses in proportion to their respective
capitals. The following relates to their business during the year ended December 31, 2013.

Balance as at January 1, 2013:

Capital a/c Current a/c
$ $
Mark 26000 26000Cr
Karl 39000 3250 Cr
Sean 32500 650Dr

Annual Salaries Drawings

Mark 16250 2600 for 6mth
Karl - 650 for 6mth
Sean 18200 1950 for year

Interest on capital per annum is 5%

Interest on Drawings person annum is 10%
Net profit for the year $65000

You are required to prepare:

1. The appropriation account for the partnership for the year ended December 31, 2013.
2. The current account of the partners as at December 31, 2013.
3. State the total investment owned by each partner as at December 31, 2013.

12
Question 2
Margaret and Rose are in partnership and have agreed to share profits and losses on the basis of
their fixed capitals. At the ended of the financial year June 30, 1999 information relating to their
accounts revealed the following:
Debit Credit
$ $
Capital Accounts: Margaret 20000
Rose 40000

Current Accounts: Margaret 1000

Rose 700

Drawings for the year: Margaret 15000

Rose 25500

Fixed assets 94000

Stock 6000
Debtors 11000
Creditors 12000
Bank overdraft 5200
Bank loan (6 years) 30000
Net profit 46000
153200 153200
Other information is as follows:
1. Interest is to be paid on capital at 5%
2. A salary is to be paid to Rose who works full-time in the business - $10000 annually.

Prepare for Partnership the:

1. Profit and Loss Appropriation Account for the year ended June 30, 1999.
2. Partners’ Current Accounts at June 30, 1999.
3. Balance Sheet as at June 30, 1999.

13
Question 3
Chester and Norbert have been in Partnership for several years. Their partnership agreement
provides the following:
1. Partners are to receive interest at the rate of 10% per annum on their opening capital
balances.
2. Interest at a rate of 5% per annum is to be paid on partners drawings during the year.
3. Norbert is to receive a salary of $1500 per month
4. Profits and losses are to be shared equally.

The following information has been extracted from their books:

Partners’ Capital Accounts at January 1, 2010:
$
Chester 250000
Norbert 150000
Partners’ Current Accounts at January 1, 2010
$
Chester 24000
Norbert (15000)

On July 1, 2010, halfway through the year, Chester and Norbert admitted Telford to the
Partnership, Telford brought $40000 in cash, a motor car valued at $35000 and equipment valued
at $25000.
a. Prepare the Journal entry to record the admission of Telford into the Partnership. (3mks)

Between January 1, 2010 and December 2010 the following activities occurred:

Partners’ Drawings:
$
Chester 6400
Norbert 7000

Net Income of $122330 was earned evenly throughout the year.

The ONLY CHANGE in the partnership agreement provides for profit or loss to be
shared among the partners in the ratio Chester 3: Norbert 2 :Telford 1

b. Prepare an extract of the Partnership Appropriation Account up to the share of remaining

profit for the year ended December 31, 2010. (10mks)
c. Prepare the Current Accounts of the partners as at December 31, 2010 (7mks)
(Total 20mks)

14
Question 4
Frank Anderson and Lara had agreed to become partners on 1 May, 2004. The business would
be called Frank ‘N’ Lara Enterprises. Frank invested $70000, paying by cheque. Lara
contributed the following assets:
$
Motor vehicle 30000
Office Supplies 18000
Prepaid rent 2000
a. Prepare the journal entry to record the start of the partnership of Frank Anderson and
Lara Gibson. (4mks)
b. State ONE reason why Lara chose to establish a partnership with Frank. (1mk)

Frank and Lara had agreed to the following terms of their partnership:
Equal shares of profit
10% interest on capital per year
Salary to Lara of $30000 per year
Interest on drawings 8% of the amount withdrawn

By the end of the first year ended 30 April 2005, the partners had the following balances in their
respective current accounts: Frank $2000(DR), Lara $3000(CR)
At the end of the second year ended 30 April 2006, Frank ‘N’ Lara Enterprises had the following
balances in their books:
$
Cost of goods sold 220000
Miscellaneous expenses 90000
Sales 400000
Other revenues 30000
Drawings: Frank 28000
Lara 24000
Prepare for the partnership for the year ended 30 April 2006:
1. The trading and profit and loss account (4mks)
2. The appropriation of profit account (5mks)
3. Current accounts for each partner (6mks)
(Total 20mks)

15
Question 5

Chris and Dorcas are in Partnership. Their capital and current accounts as at January 1, 2004 are
as follows:
Capital Balances Current Balances Drawings
$ $ $
Chris 40000 5000(credit) Chris 17000(on June 30)
Dorcas 60000 3000(credit) Chris 17000(on Dec 30)
Dorcas 12000(on April 30)
Dorcas 12000(on August 31)
Dorcas 12000(on Dec 31)

The partnership agreement provides for the following:

1. Profits and losses are shared between Chris and Dorcas in the same ratio as their capital.
2. Chris is to be credited with a salary of $6000 per annum.
3. Interest on capital at 8 percent per annum is allowed.
4. Interest on drawings is charged at 10 percent per annum.
5. The profit for the year is $95950

a) Prepare the partnership profit and loss appropriation account for the year ended
December 31, 2004. (10mks)
b) Prepare the partnership capital and current accounts as at December 31, 2004.
(9mks)
c) Explain the meaning of a debit balance on a partner’s current account. (1mk)

16
Question 6
Khary and Kwame operate a travel agency as a partnership. Khary put in capital of $40000 and
Kwame $25000. During the year Kwame loaned the partnership $16000. The partnership
agreement states that:
Interest on loans is 12% p.a.
Interest on capital is 10% p.a.
Partnership salaries are Khary $40000 p.a.
Kwame $48000 p.a.
The interest on loan has not been paid.
The trial balance at December 31, 1996 is shown below.
Dr Cr
Sales 540000
Operating expenses 350000
Khary’s Capital 40000
Kwame’s Capital 25000
Khary’s Current a/c 2000
Kwame 4000
Loan Account Kwame 16000
Drawings Khary 60000
Kwame 42000
Fixed Assets (net) 160000
Debtors 20000
Creditors 15000
Bank Balance 6000
640000 640000
You are required to prepare:
1. The profit and loss and appropriation accounts. (11mks)
2. The Current Accounts (10mks)
3. The Balance Sheet at December 31,1996 (9mks)

17
 Question 7
(a) List THREE distinguishing features of a partnership concern.
(3 marks)
(b) Skerritt and Cymbal are in Partnership sharing profits and losses in the ratio of their
capital balances. The following balances were left over in their books after the
preparation of the Trading and Profit and Loss Account on September 30,2006.
$
Capital Accounts Skerritt 30 000
Cymbal 40 000

Current Accounts Skerritt (300)

Cymbal 15 000

Drawings Skerritt 12 000

Cymbal 5 000

Motor Vehicles at cost 43 000

Buildings at cost 232 000
Debtors 23 300
Creditors 17 000
Stock at September 30, 2006 18 000
Cash at bank 27 000

Additional information to be taken into consideration:

1. The net profit for the year ended September 30, 2006 is $250 000.
2. Each partner earns an annual salary of $60 000.
3. Interest on capital is to be paid at the rate of 5% per annum.
4. Interest on drawings is to be charged at the rate of 10% per annum. Skerritt
drew cash on October 31, 2005 and Cymbal drew cash on March 31,2006.
5. Accumulated depreciation on Motor Vehicles to September 30,2006 is $8 600.
Required:
(i) Prepare the Profit and Loss Appropriation Account of Skerritt and Cymbal for the year
ended September 30,2006. (6 marks)
(ii) Prepare the Current Accounts of Skerritt and Cymbal on September 30, 2006. (5 marks)
18
(iii) Prepare the Balance Sheet of Skerritt and Cymbal as at September 30, 2006,showing the
working capital. (Do not show details of the current accounts in the Balance Sheet. Transfer
only the Closing balances from the partners' current accounts.) (6 marks)

Question 8
2. (a) State TWO distinguishing features of a partnership.

………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
(2 marks)
(b) Barney and Swiper are in partnership. Their Current Account balances as at 31 March 2015
before appropriation were:
Current Accounts $
Barney 2 500
Swiper (600)
State the significance of the brought down balance on EACH partner’s current account.
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
(2 marks)
(c) Other balances extracted from the books of Barney and Swiper include:
$
Capital Accounts Barney 60 000
Swiper 35 000
Drawings Barney (01 October 2014 to 31 March 2015) 4 000
Swiper (01 January 2015 to March 2015) 12 000

Additional information:
● The net income for the year ended 31 March 2015 is $82 000.
● Barney earns an annual salary of $36 000.
● Interest on capital is to be paid at the rate of 5% per annum.
● Interest on drawings is to be charged at the rate of 10% per year.
● Barney and Swiper share profits and losses in the ratio of 3:2 respectively.

Prepare the Profit and Loss Appropriation Account of Barney and Swiper for the year ended 31
March 2015. (9 marks)

Prepare the Current Account

19
Question 9
Smith and Wheaton, separate sole traders, agreed to close their individual businesses and form a
partnership. They named the business Smith & Wheaton Ltd. It was located on Wheaton’s
premises using his assets.

Wheaton brought to the new business the following assets:

$
Cash 10 000
Fixtures 15 000
Equipment 25 000
Land and Buildings 40 000

Smith sold his assets and brought to the new business cash of $100 000.

Prepare opening journal entries to show the capitals of the partners on January 1, 2007.
(7 marks)

b. After a successful year of trading the partnership made a profit of $75 000. The
partnership agreement provides for the following:
1. Interest on drawings is to be charged at the rate of 3% per annum.
2. Interest on capital is to be paid at the rate of 5% per annum.
3. A salary of $3 000 monthly is to be paid to Wheaton.
4. Profits or losses are to be shared equally.

Wheaton withdrew $6 000 on March 1, 2007 and Smith withdrew $7 000 on September 1, 2007.
(i).Prepare the partners’ Profit and Loss Appropriation Account for the year ended
December 31, 2007. (8 marks)
(ii) Prepare the partners’ Current Accounts as at December 31, 2007. (5 marks)

20
Question 10

The following information has been extracted from the books of Frankie and Patto for the year
ended 31 December 2018

Capital Accounts Frankie $140000

Patto $100000

Drawings for the year Frankie $4800

Patto $6000

Net Profit for the year $70880

The partnership agreement between frankie and Patto provides that the following should be
applied:

1 Interest on Capital account balances 10% per annum

2 Interest on Partner’s Drawing 25% per annum

3 Net Profit/(Loss) sharing ratio between Frankie and Patto 2:1 respectively
Required:

a. Prepare the partnership’s AppropriationAccount for the year ended 31 December 2018.
All figures are to be rounded off to the nearest whole number.
b. Prepare the current Account for the partnership on 31 December 2018. Use the columnar
format
c. At 31 December 2018 the partners admitted Soso into the partnership. Soso contributed
$100 000 as his capital. It was agreed that any profits or losses realized would henceforth
be shared among partners in proportion to their capital Account balances.

The Current Account balances of Frankie and Patto were transferred to their Capital
Accounts.

Calculate the new percentages for sharing profits or losses among the three partners in the
partnership. Show all working clearly

The End!!!

21