Lecture 2-Partnership Part 1

Bachelor of Accounting (Hons) UKAF1083 Financial
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Accounting II
Bachelor of Accounting (Hons)

Financial Accounting II
Partnership Accounts:
Introduction
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2
Accounting II
Partnership Accounts - Learning Objectives

To equip students with the knowledge of:
• The features and nature of partnership business
• The operations of partnership business
• The underlying concepts and preparation of
partnership accounts
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Accounting II
Partnership Accounts - Learning Outcomes

At the end of this lecture, students should be able to:
• Explain the features and nature of a partnership business
• Explain the rules and regulations governing the partnership
business
• Differentiate between limited partners and general partners
• Describe the key accounting contents of a partnership
agreement
• Explain the concept and calculation of “Goodwill”
• Explain the underlying practices governing profit/loss sharing in
partnership businesses
• Prepare accounting reports of partnership businesses
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Accounting II
What is a partnership?
Partnership
is “the relation that subsists
between persons carrying on a
business in common with a
view of profit”
(The Partnership Act 1961)
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Accounting II
What is a partnership?
• A Partnership is a relationship between parties, NOT
an organisation in its own right with a separate legal
personality
• Each partner is an agent of the partnership & sign
contract on the partnership’s behalf
• People who pool their business resources together to
operate a business are called partners
• Example of well-known partnerships – professional
accounting firms such as PWC, Deloitte Kassim
Chan, legal firms, medical firms, etc
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Accounting II
Benefits of a partnership
• Wider Capital base (compared to a sole proprietor)
• Resource/experience sharing (skills)
• Better decision making
• Business risk sharing
• Business growth strategy
• Higher business confidence
• Family level business
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Accounting II
Nature/characteristics: partnership
• Formed to make profits
• Governed by Partnership Act, 1961, or partnership
agreement
• Minimum 2, maximum 20 (but no limit for professionals)
• Unlimited liability. Each partner’s liability to the partnership
debts is unlimited. This partner is called a general partner.
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Accounting II
General partnership agreement

• Written agreements are not necessary, but preferred to
avoid future misunderstanding, confusion or problems
• A written agreement can be prepared by lawyers or
accountants
• Usual contents:
• Name of partners, date of agreement
• Capital contributions
• Profit/loss sharing ratio
• Rate of interest on capital contribution, loan from partners,
drawings, etc
• Salaries entitlement of partners
• Procedures for admission of new partners and retirement/death of
partners
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Accounting II
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Limited liability partnerships

• Partners whose liabilities are limited to the capital
they have put in (similar to a shareholder in limited
companies)
• Partners not allowed to withdraw contribution to
capital in the partnership
• They may participate in management
• Note: limited partnership is not allowed in Malaysia

except for offshore limited partnerships in Labuan,
under Labuan Offshore Limited Partnership Act
1997.
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Accounting II
Capital contributions & Profit/loss sharing

• Capital contributions need not be equal
• Capital contributions may be increased later on
• Profit sharing can be based on capital contribution
proportions, NOT reflecting partners’ work contributions to
business profits
• Example: Capital of Allen: $40,000, Beet: $20,000
(Allen=2/3, Beet=1/3)
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Accounting II
Example: Interest on capital and profit sharing

Year 1 2 3 total
Net profit $36,000 $48,000 $60,000 $144,000
Shared of profit:
Capital ratio
Allen ( 2/3 ) 24,000 32,000 40,000 96,000
Beet ( 1/3 ) 12,000 16,000 20,000 48,000
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Accounting II
Interest on capital
• Example: Profits shared:
• Allen $96,000
• Beet $48,000
• Diff $48,000 (Allen > Beet by $48,000)
• Not fair if both contribute to business equally
• HOW?
• Work contributions reward by salaries
• Capital contributions reward by interest
• Interest on capital is deducted prior to calculation of profits
• Rate of interest may be based on return had the capital
been invested elsewhere or at the market interest rate
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Accounting II
Example: Interest on capital and profit sharing
Year 1 2 3 total
Net profit 36,000 48,000 60,000 144,000
Interest on capital: 5%
Allen 40,000x5% 2,000 2,000 2,000 6,000
Beet 20,000x5% 1,000 1,000 1,000 3,000
Remainder shared:
Allen ( ½ ) 16,500 22,500 28,500 67,500
Beet ( ½ ) 16,500 22,500 28,500 67,500
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Accounting II
Summary (3 years) Allen Beet
Interest on capital 6,000 3,000
Balance of profit 67,500 67,500
Total 73,500 70,500

Thus, Allen has received RM3,000 more than Beet from
interest earned on his larger share of capital contribution
($48,000 more in previous example!)
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Accounting II
Interest on drawings
• Interest is charged on drawings for partner’s personal
use.
• Drawings is tantamount to borrowing from the business.
• Imposing interest on drawings is to discourage drawings.
• Drawings will affect the company’s cash flow and working
capital.
• The more cash the business has, the greater the
economies of bargains for cash discounts.
• Allen & Beet to charge interest on drawings at 5% pa (YE
31st December):
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Accounting II
Interest on drawings pro-rated

Allen
Drawings Interest
1 Jan 2,000 2000 x 5% x 12/12 mths 100
1 Mar 4,800 4800 x 5% x 10/12 mths 200
1 May 2,400 2400 x 5% x 8/12 mths 80
1 Jul 4,800 4800 x 5% x 6/12 mths 120
1 Oct 1,600 1600 x 5% x 3/12 mths 20
520
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Accounting II
Interest on drawings pro-rated

Beet
Drawings Interest
1 Jan 1,200 1200 x 5% x 12/12 mths 60
1 Aug 9,600 9600 x 5% x 5/12 mths 200
1 Dec 4,800 4800 x 5% x 1/12 mth 20
280
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Accounting II
Partner’s salaries
 Partners’ contributions to business should
be based on the level of responsibilities,
NOT on profit sharing ratio – pay salaries
 Unpaid salaries to be deducted from profit
before sharing the balance of profits
 The same for partners’ performance-
related payments, such as commissions
or bonuses
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Accounting II
Profit distribution - example

• Tan and Chandra are in partnership for one year
• Capital – Tan: $20,000, Chandra: $60,000
• Agreed terms and conditions:
• Profit sharing ratio - 3:2 (T:C)
• Interest on capital: 5% p.a.
• Chandra’s salary: $15,000 p.a.
• Interest on drawings: Tan $500, Chandra $1,000.
• Net profit for the year 2009 (before distribution): $50,000
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Accounting II
Profit and loss appropriation account

Net profit 50,000
Add interest on drawings:
Tan 500
Chandra 1,000 1,500
51,500
Less salaries – Chandra 15,000
Interest on capital: Tan 1,000
Chandra 3,000 (19,000)
Profit appropriation 32,500
Residual profit: Tan (3/5) 19,500
Chandra (2/5) 13,000
32,500
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Accounting II
The $50,000 net profit has been shared as follows:

Tan Chandra
Balance of profit (Profit shared) 19,500 13,000
Interest on capital 1,000 3,000
Salary 15,000
20,500 31,000
Less interest on drawings (500) (1,000)
20,000 30,000
50,000 21
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Accounting II
Fixed capital accounts

• Capital accounts remain fixed throughout the life of the
business
• Current accounts are maintained in addition to the capital
accounts
• The current accounts record profits, interest on capital,
salaries, drawings and interest on drawings where
applicable
• The balance of the current accounts then represents the
undrawn (withdrawn) portion of profits
• credit balance = undrawn (acceptable)
• Debit balance = overdrawn
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Accounting II
Capital accounts
Capital account (fixed) - Tan
1/1/09 Bank 20,000
Capital account (fixed) – Chandra

1/1/09 Bank 60,000
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Accounting II
Current accounts
Current account – Tan
Dec 09 Dec 09
Cash: Drawings 15,000 Int on capital (PL) 1,000
Int on drawings (PL) 500 Share of profit (PL) 19,500
Bal c/d 5,000
20,500 20,500
Jan 10
Bal b/d 5,000
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Accounting II
Current accounts
Current account – Chandra
Dec 09 Dec 09
Cash: Drawings 26,000 Salary (PL) 15,000
Int on drawings (PL) 1,000 Int on capital (PL) 3,000
Bal c/d 4,000 Share of profit (PL) 13,000
31,000 31,000
Jan 10
Bal b/d 4,000
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Accounting II
Current accounts combined

Current accounts
Tan Chandra Tan Chandra
Cash:Drawings 15,000 26,000 Salary - 15,000
Int. on 500 1,000 Int. on capital 1,000 3,000

drawings
Bal c/d 5,000 4,000 Share of profit 19,500 13,000
20,500 31,000 20,500 31,000
Bal b/d 5,000 4,000
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Accounting II
The SoFP (extract)

Financed by: $ $
Capital – Tan 20,000
Chandra 60,000
Current account – Tan 5,000
Chandra 4,000
9,000
89,000
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Accounting II
Fluctuating capital accounts

• A fluctuating capital account does not have current
account
• Therefore all items relating to current accounts are posted
to the capital account instead
• The capital account balance will change from year to year
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Accounting II
Fluctuating capital accounts

Capital accounts (Fluctuating)
Tan Chandra Tan Chandra
Cash: 15,000 26,000 Bank 20,000 60,000
Drawings
Int. on 500 1,000 Salary 15,000
drawings
Bal c/d 25,000 64,000 Int. on capital 1,000 3,000
Share of profit 19,500 13,000
20,500 91,000 40,500 91,000

Bal b/d 25,000 64,000
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Accounting II
Fixed capital account vs fluctuating capital account

• Fixed capital account with current account is preferred
• This is because when partners are withdrawing their
share of profits, overdrawing can be detected through the
current account (it will have a debit balance instead).
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Accounting II
Where no partnership agreement exists

• When this happens, the Partnership Act 1961 applies,
with the following pertinent features:
• Profit/loss to be shared equally
• No interest allowed on capital
• No interest allowed on drawings
• No partners salary allowed
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Accounting II
Sole General LLP Company

proprietor partnership
Ownership of Sole proprietor partners Limited liability Shareholders
business partners
Legal status Not a separate Not a separate Separate legal Separate legal
legal entity legal entity entity entity
Liable for debts Sole proprietor Partners with Partners with Company with
of business with full full liabilities limited liabilities full liabilities
liabilities
Management Sole proprietor Partners Partners Directors
Regulatory Minimal Minimal Minimal High
compliance
Access to From From partners’ From partners’ Access to
finance proprietor’s personal personal capital market
personal investment/ investment/
investment/ borrowing borrowing
borrowing
Profit sharing 100% proprietor Shared by Shared by Shareholders

partners partners may be given
dividends
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Accounting II
Quiz
Which one of the following is not a benefit of partnership
business:
A. Pool of resources
B. Growth strategy
C. Risk sharing
D. Limited liability
E. Better decision making
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Accounting II
Quiz
Why is there a need for partnership agreement?
A. To follow standard business practice
B. It is required under the Partnership Act, 1961
C. To avoid misunderstanding and confusion
D. To protect the partners against unlimited
liability
E. As a form of business growth strategy
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Accounting II
Quiz
1. State the benefits of the use of current account instead
of a fluctuating capital account in partnership
accounting.
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Accounting II
Quiz
Ali and Lim have been in partnership for one year and they
have agreed on the following terms and conditions:
• Profit sharing ratio: 1:2 respectively
• 10% p.a. interest on capital (Ali contributed RM50,000
and Lim RM100,000)
• Lim’s salary: RM12,000
• Interest on drawings: Ali RM1,000, Lim RM1,200.
• Net profit for the year 2007: RM149,900
Required:
Prepare the Profit and Loss Appropriation Account to show
how profit is shared among the two partners.
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Accounting II
Profit and loss appropriation account ftye 31/12/x7

Net profit 149,900
Add interest on drawings:
Ali 1,000
Lim 1,200
2,200
Less salaries - Lim (12,000)
Interest on capital: Ali 5,000
Lim 10,000 (15,000)
Profit for appropriation 125,100
Shared: Ali (1/3) 41,700
Lim (2/3) 83,400
125,100
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Accounting II
Goodwill
“Goodwill is an asset representing the future
economic benefits arising from other assets
acquired in a business combination that are not
individually identified and separately recognized
(MFRS3).
• It is the difference (+ or -) between the cost of
acquisition and the fair value of the net
identifiable assets of the business acquired”
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Accounting II
Nature of goodwill
• Goodwill can only exist if the business was
purchased and the amount paid was greater
than the value of the net assets
• Goodwill represents the value of the business at
the time it was purchased
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Attributes of goodwill
• The reputation of a business and/or its products and thus
the likelihood that past customers will buy from the
business in future.
• Existing contracts for the supply of goods in the future.
• The location of the business premises and other forms of
captive customers.
• Patents, trademarks, brand names and previous
expenditure on advertising, training, R&D, etc. (may be
separate assets).
• Known sources of supply of goods and services including
the availability of trade credit.
• Existing staff including particular management skills.
• Other set-up factors.
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Types of goodwill
Acquired goodwill is ‘the residual cost of the business

combination after recognising the acquiree’s identifiable
assets, liabilities and contingent liabilities’ (IASB, IFRS 3,
2008)
Non-acquired goodwill is ‘the internally generated

goodwill of a business’ (IASB, IFRS 3, 2008), often
described as the inherent or internally generated goodwill.
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The recognition of goodwill
in the financial statements
Acquired purchased goodwill should be capitalised and
classified as a non-current asset on the statement of
financial performance. (IASB, IFRS 3, 2008)
Non-acquired goodwill should not be recognised as an
asset since its valuation is not sufficiently objective/reliable.
Goodwill should be reviewed for impairment and written
down to impairment value if relevant. (IASB, IFRS 3, 2008)
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Accounting II
Goodwill computation
Assume that a business has the following assets and
liabilities:
Building 225,000
Machinery 75,000
Debtors 60,000
Stocks 40,000
Creditors (72,000)
Net asset value (NAV) 328,000
A buyer wishes to buy over the business for RM400,000 :
Goodwill = $400,000-$328,000=$72,000
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Calculation of Goodwill
• Subjective Judgement
• Average Sales/Fees/Profits Method
• Super Profit Method
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Subjective Judgement
• Estimate the value of goodwill with reference to
some intangible factors and according to their
professional judgement
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Average Sales/Fees/Profit Method

• It can be calculated on gross average or weight average
Goodwill = Average annual sales/fees/profits over a stated
number of years * a factor
The factor is usually stated as a certain number
of years’ purchase of the average
sales/fees/profits
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Example Super profit method

Statement Calculating Super Profit
RM RM
Average net profit
(5000+6500+6500+7000)/4 6250
Less: Management fee 500
Expected rate of return
on net tangible assets 5000 (5500)
Super profit 750
Goodwill= $750 X 3(given factor)

= $2250
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Accounting II
Accounting for goodwill

• Not normally reflected in the financial statements
unless the business has been purchased
• Unless agreed otherwise, partners own a share in
the goodwill in the same profit/loss sharing ratio
EVEN if there is no goodwill account
• Goodwill ownership changes when:
• Existing partners change profit/loss sharing ratios,
• A new partner is introduced,
• A partner retiring or dying
• The change may involve Cash, or adjustment in
the accounts
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Accounting II
Goodwill on Change in profit sharing ratio -

Example
• E, F and G share profits equally (1/3 each)
• Agreed changes (Profit sharing ratio) wef
01/01/10:
• E: 2/5
• F: 2/5
• G: 1/5
• Current capital contributions:
• E $30,000; F $18,000; G $22,000 (Total = $70,000)
• Agreed that goodwill = $30,000.
• Required: show accounting for goodwill:
• If Goodwill account is opened
• If Goodwill account is NOT opened 49
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Accounting II
Change in profit sharing ratio - Example (Goodwill

account opened)
Dr. Goodwill 30,000 (SOFP; NCA)
Cr. Capital 30,000
Goodwill
Capital – E 10,000 Balance c/d 30,000
F 10,000
G 10,000
30,000 30,000
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Accounting II

account opened)
Capital accounts
E F G E F G
Bal c/d 40,000 28,000 32,000 Bal b/d 30,000 18,000 22,000
Goodwill 10,000 10,000 10,000
40,000 28,000 32,000 40,000 28,000 32,000
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Accounting II

account opened)
SOFP extract as at 31.12.09
Before After
Other assets 70,000 70,000
Goodwill - 30,000
70,000 100,000
Capital: E 30,000 40,000
F 18,000 28,000
G 22,000 32,000
70,000 100,000
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Accounting II

account not opened)
Goodwill sharing:
Before After Gain Action
/ Loss
E 1/3 10,000 E 2/5 12,000 2,000 Dr. E’s
capital
F 1/3 10,000 F 2/5 12,000 2,000 Dr. F’s
capital
G 1/3 10,000 G 1/5 6,000 (4,000) Cr. G’s
capital
30,000 30,000
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Accounting II

account not opened)
Capital accounts
E F G E F G
goodwill 2,000 2,000 Bal b/d 30,000 18,000 22,000

adjust.
Bal c/d 28,000 16,000 26,000 goodwill 4,000

adjust.
30,000 18,000 26,000 30,000 18,000 26,000
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Accounting II
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Or…. Goodwill account not opened).
Capital accounts
E F G E F G
Goodwill 12,000 12,000 6,000 Bal b/d 30,000 18,000 22,000

(new
ratio)
Bal c/d 28,000 16,000 26,000 Goodwill 10,000 10,000 10,000
(old
ratio)
40,000 28,000 32,000 40,000 28,000 32,000
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Accounting II
Change in profit sharing ratio - Example

(Goodwill account not opened)
SOFP extract as at 31.12.09
Before After
Other assets 70,000 70,000
Goodwill - -
70,000 70,000
Capital: E 30,000 28,000
F 18,000 16,000
G 22,000 26,000
70,000 70,000
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Goodwill on the admission of a new partner

• The new partner is required to pay for his share
of the tangible assets as well as the goodwill,
according to the profit-sharing ratio
• On the admission of a new partner, goodwill must
be revalued
• However, not all business keep a goodwill
account in their books. Goodwill adjustments can
be done:
• Goodwill account opened
• Goodwill account not opened
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Goodwill account opened

• The value of the goodwill will be credited to the
old partners’ capital accounts, which represents
an increase in the resources they own, while the
new partner will not have a share of the goodwill
Dr Goodwill account With the value of goodwill
Cr Capital account ( old partners With their share of goodwill in old
only ratio
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Goodwill account not opened

• Goodwill cannot be disposed of separately. Therefore,
some businesses prefer not to maintain a goodwill
account
• The new partner may be required to pay extra cash, or
have his capital balance reduced, for his share of goodwill
Dr Goodwill account Share goodwill among old partners in old

Cr Capital account (old profit-sharing ratio
partners only)
Dr Capital account ( all Written off goodwill among all partners
partners) in the new profit-sharing ratio
Cr Goodwill account
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Example
• Chan and Wong were partners sharing profits and losses

equally.
• On 1 January 2015, they admitted Lee as a new partner
who was required to introduce RM600 as capital. The
profits are now to be shared among Chan, Wong and Lee
equally.
• Goodwill is valued at RM300. The SOFP before the
admission of the new partner is shown as follows:
Chan and Wong
SOFP at 31 December 2014
Assets 1,200 Capital
Chan 600
Wong 600
1,200 1,200
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Goodwill
Capital: Chan (1/2) 150 Balance c/f 300
Wong (1/2) 150
300 300
Capital
Chan Wong Lee Chan Wong Lee

Balance c/f 750 750 600 Balance b/f 600 600
Goodwill 150 150
Cash 600
750 750 600 750 750 600
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SOFP as at 31 December 2015
Assets Capital
Goodwill 300 Chan 750
Other Assets (1,200 + 600) 1,800 Wong 750
Lee 600
New capital balance
2,100 2,100
Capital
Chan Wong Lee Chan Wong Lee
Goodwill : Balance b/f 600 600
new ratio 100 100 100 Goodwill: old ratio 150 150
Balance c/f 650 650 500 Cash 600
750 750 600 750 750 600
Before admission After admission

Partner Old ratio Share of New ratio Share of
goodwill goodwill
Chan 1/2 $150 1/3 $100
Wong 1/2 $150 1/3 $100
Lee 1/3 $100
$300 $300
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SOFP as at 31 December 2015
Assets Capital
Assets (1,200 + 600) 1,800 Chan 650
Wong 650
Lee 500
1,800 1,800
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Accounting II
Goodwill on Withdrawal or death of partners

• If no goodwill exists when a partner withdraws,
goodwill of the business should be valued for the
benefit of the outgoing partner
• Example:
• H, I and J as business partners sharing profits equally
• J is leaving the partnership, I & H will share profits
equally after that
• Each partner’s capital is $50,000.
• Goodwill is valued at $45,000.
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Accounting II
Withdrawal or death of partners – Example

• If Goodwill A/C exists:
• with correct valuation - NO further action needed
• With incorrect valuation –
• Undervalued:
Dr Goodwill A/C for increase needed
Cr Old partners capital a/c for increase needed
• Overvalued:
Dr Old partners capital a/c for reduction needed
Cr Goodwill for reduction needed
• If NO Goodwill A/C: see next slide
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Goodwill
Capital – H 15,000 Bal c/d 45,000
Capital – I 15,000
Capital – J 15,000
45,000 45,000
Bal b/d 45,000
Capital accounts
H I J H I J
Cash 65,000 Bal b/d 50000 50000 50000
Bal c/d 65000 65000 nil Goodwill 15000 15000 15000
65000 65000 65000 65000 65000 65000
Bal b/d 65000 65000 nil

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Accounting II
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Summary : How is goodwill treated?
The first step is to create the asset of goodwill. This is a debit entry
for the value of the goodwill in the goodwill account. The double
entry is completed with credit entries in the old partners’ capital
accounts. The value of each entry is calculated by sharing the value
of the goodwill between the partners in the old profit and loss
sharing ratio. If goodwill is to be retained in the partnership
(sometimes referred to as ‘carried in the books’) no further entries
are required.
If goodwill is not to be carried in the books, it is eliminated

by a credit entry in the goodwill account. The double entry
is completed with debit entries in the partners’ capital
accounts. The value of each entry is calculated by sharing
the value of the goodwill between the new partners in the
new profit and loss sharing ratio.
Admission of a New Partner
The new partner is required to pay for his share of the tangible assets as well as
the goodwill according to the profit-sharing ratio. Therefore goodwill must be
revaluated.
(1) Goodwill Account Opened

‧Goodwill account will be shown in the SOFP under Non-
Current Asset.
‧Accounting entries ︰
Dr-Goodwill Account With the value of goodwill

Cr-Capital Accounts(old With their share of goodwill
partners only in old ratio
(2)Goodwill Account Not Opened
‧Goodwill account will not be shown in the SOFP.
‧Accounting entries ︰
Dr-Goodwill Account Share goodwill among all partners in
Cr-Capital Accounts(old partners the old profit-sharing ratio.
only
Dr-Capital Accounts(all partner) Write off goodwill among all

Cr-Goodwill Account partners in the new profit-sharing
ratio.
‧The new partner may be required to pay extra cash, or have his capital balance
reduced, for his share of goodwill.
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Accounting II
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If goodwill account is opened (capital extraction)
Capital
A B A B
Bal c/d 15,000 12,000 Bal b/d 10,000 7,000
Goodwill 5,000 5,000 old ratio 1:1
15,000 12,000 15,000 12,000
If goodwill account is not opened (capital extraction)
New partner joined C invested RM 8,000
New ratio 2:2:1

Capital
A B C A B C
new ratio Goodwill 4,000 4,000 2,000 b/d 10,000 7,000
c/d 11,000 8,000 6,000 Bank 8000
Goodwill 5,000 5,000 old ratio 1:1

15,000 12,000 8,000 15,000 12,000 8,000
Retirement of a partner
(1)Goodwill Account Opened
Dr-Goodwill Account With the increase in the value of

Cr-Capital Account (all Partners) goodwill ， shared in the old ratio.
or
Cr-Goodwill Account With the decrease in the value of
goodwill ， shared in the old ratio
Dr-Current Account (leaving partner)

Cr-Capital Account (leaving partner) Transfer the balance in the current
or account of the leaving partner to the
Dr-Capital Account (leaving partner) capital account.
Cr-Current Account (leaving partner)
Dr-Capital Account (leaving partner) Cash paid to the leaving partner or

Cr-Cash / Bank / Loan the leaving partner retains the
balance as a loan to the firm.

Cr-Capital Account (all Partners) goodwill ， shared in the old ratio.
Dr-Capital Account (remaining Write off the goodwill ， in new ratio.

partner)
Cr-Goodwill Account
Dr-Current Account (leaving partner)
Cr-Capital Account (leaving partner) Transfer the balance in the current
or account of the leaving partner to the
Dr-Capital Account (leaving partner) capital account.
Cr-Current Account (leaving partner)
Dr-Capital Account (leaving partner) Cash paid to leaving partner or the

Cr-Cash / Bank / Loan leaving partner or the leaving partner
retains the balance as a loan to the
firm.
10/06/2020
Accounting II
74
Example :
Old partner capital RM5k each. New partner joins Z,

invested RM4,000.
Goodwill RM9,000, old ratio between X and Y; 2:1
Y decided to retire, Balance current account of partner
Y RM2,000 (Dr). New ratio sharing 3:2
Capital Account
X Y Z X Y Z
Goodwill 5,400 - 3,600 Bal b/d 5,000 5,000
Current 2,000 Cash/bank 4,000
Account : Addition
Bank 6,000 Goodwill 6,000 3,000
Bal c/d 5,600 - 400
11,000 8,000 4,000 11,000 8,000 4,000
Change in the Profit-sharing Ratio
(1)Goodwill Account Opened

Cr-Capital Account(all partners) goodwill ， shared in the old ratio.

Cr-Capital Account(all partners) goodwill ， shared in the old ratio.
Dr-Capital Accounts Write off the goodwill ， in new

Cr-Goodwill Account ratio.
10/06/2020
Accounting II
76
10/06/2020 78
Accounting II
Quiz
Where there is no partnership agreement then
profits and losses …
A. Must be shared in same proportion as capitals
B. Must be shared equally
C. Must be shared equally after adjusting for
interest on capital
D. Must be shared based on old profit sharing
ratio
78
10/06/2020 79
Accounting II
Quiz
Which of the following is not true of goodwill?
A. it is the premium paid on the cost of the
business
B. it arises from the disposal of a business
C. it represents the intrinsic value of the business
D. it is measured by the net asset value of the
business
79
10/06/2020 80
Accounting II
Quiz
Profit sharing ratio is likely to change under the following
conditions EXCEPT
A. When the partnership is dissolved
B. When a new partner is admitted
C. When capital contribution portion changes
D. When a partner is doing much more for the business
than in the past
80

Lecture 2-Partnership Part 1

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Bachelor of Accounting (Hons) UKAF1083 Financial

Bachelor of Accounting (Hons)

Partnership Accounts - Learning Objectives

Partnership Accounts - Learning Outcomes

General partnership agreement

Limited liability partnerships

• Note: limited partnership is not allowed in Malaysia

Capital contributions & Profit/loss sharing

Example: Interest on capital and profit sharing

Net profit $36,000 $48,000 $60,000 $144,000

Beet ( 1/3 ) 12,000 16,000 20,000 48,000

Example: Interest on capital and profit sharing

Net profit 36,000 48,000 60,000 144,000

Allen 40,000x5% 2,000 2,000 2,000 6,000

Beet 20,000x5% 1,000 1,000 1,000 3,000

Allen ( ½ ) 16,500 22,500 28,500 67,500

Beet ( ½ ) 16,500 22,500 28,500 67,500

Summary (3 years) Allen Beet

Interest on capital 6,000 3,000

Balance of profit 67,500 67,500

Total 73,500 70,500

Interest on drawings pro-rated

1 May 2,400 2400 x 5% x 8/12 mths 80

1 Jul 4,800 4800 x 5% x 6/12 mths 120

1 Oct 1,600 1600 x 5% x 3/12 mths 20

Interest on drawings pro-rated

1 Dec 4,800 4800 x 5% x 1/12 mth 20

Profit distribution - example

Profit and loss appropriation account

The $50,000 net profit has been shared as follows:

Fixed capital accounts

Capital account (fixed) – Chandra

Current accounts combined

Tan Chandra Tan Chandra

Cash:Drawings 15,000 26,000 Salary - 15,000

Int. on 500 1,000 Int. on capital 1,000 3,000

20,500 31,000 20,500 31,000

Bal b/d 5,000 4,000

The SoFP (extract)

Fluctuating capital accounts

Fluctuating capital accounts

20,500 91,000 40,500 91,000

Fixed capital account vs fluctuating capital account

Where no partnership agreement exists

Sole General LLP Company

Profit sharing 100% proprietor Shared by Shared by Shareholders

Profit and loss appropriation account ftye 31/12/x7

Acquired goodwill is ‘the residual cost of the business

Non-acquired goodwill is ‘the internally generated

Average Sales/Fees/Profit Method

Example Super profit method

Goodwill= $750 X 3(given factor)

Accounting for goodwill

Goodwill on Change in profit sharing ratio -

Change in profit sharing ratio - Example (Goodwill

Change in profit sharing ratio - Example (Goodwill

Goodwill 10,000 10,000 10,000

40,000 28,000 32,000 40,000 28,000 32,000

Change in profit sharing ratio - Example (Goodwill

Change in profit sharing ratio - Example (Goodwill

Change in profit sharing ratio - Example (Goodwill

goodwill 2,000 2,000 Bal b/d 30,000 18,000 22,000

Bal c/d 28,000 16,000 26,000 goodwill 4,000