FINANCIAL ACCOUNTING II

Dr NSUBILI ISAGA
SCHOOL OF BUSINESS (DAF)
Partnership
Accounting
Lecture two
Revaluation of partnership assets
 The revaluation of assets
• The sale price of an asset is likely to differ from its
book value and so there will be a profit or loss on
the sale.
• This will be shared by the partners in their profit
sharing ratios.
• This will happen when the partnership is sold, when
a partner is admitted or leaves the firm or when
partners change the profit sharing ratios.
• The gains or losses need to be recorded.
 Profit or loss on revaluation
• If the new valuation of assets is more than the
old valuation, there is a gain on revaluation.

• If the new valuation of assets is less than the

old valuation, there is a loss on revaluation.
 Accounting for revaluation
• To record an asset showing a gain on revaluation:
Debit the asset’s account with the gain
Credit the revaluation account

• To record an asset showing a loss on revaluation

Debit the revaluation account
Credit the asset’s account with the loss
 Accounting for revaluation (Continued)
• To record an increase in the total valuation of assets
Debit the profit to the revaluation account
Credit the old partners’ capital accounts in the
old profit sharing ratios

• To record a decrease in the total valuation of assets

Debit the old partners’ capital accounts in the
old profit sharing ratios
Credit the loss to the revaluation account
Activity
Activity (Continued)
 Learning outcomes
You should have now learnt:
1.How to make the entries arising from
revaluations of partnership assets
2.That when a new partner joins a firm, or a
partner retires or dies, the partnership assets
should be revalued
3.That revaluation of assets should also occur
when there is a change in the profit and loss
sharing ratios of partners
 Learning outcomes (Continued)
4. That profits on revaluation of assets are credited
to the old partners’ capital accounts in the old
profit and loss sharing ratios
5. That losses on revaluation of assets are debited to
the old partners’ capital accounts in the old profit
and loss sharing ratios
6. That the asset accounts also show the revalued
amounts. Losses will have been credited to them
and profits debited.
 Question
Fitch and Wall have been in partnership for
many years sharing profit and losses in the
ration 5:3 respectively. The following was their
balance sheet as at 31st Dec 20-2
 Required
• The ledger entries dealing with above in the
following accounts
Goodwill account, Revaluation accounts,
capital accounts.
• The balance sheet of the partnership
immediately after the admission of Home
Soln
Partnership dissolution
 The need for dissolution
A partnership is dissolved when:
• The partnership is no longer profitable or
there is no reason to carry on trading.
• The partners cannot agree on how to operate
the partnership and so decide to finish the
partnership.
• Factors such as ill-health or old age bring
about the close of the partnership.
 What happens upon dissolution
In accordance with the Partnership Act 1890:
• The assets are disposed of
• The liabilities of the firm are paid
• The partners are repaid their advances
• The partners are paid the final amounts due to them
on their capital accounts. Any profits are shared in
the profit sharing ratios but any losses would reduce
the capitals payable. A deficit on a capital account
means the partner owes the partnership
Accounting for partnership dissolution

The statement of financial position of X and Y,

who share profits X two-thirds and Y one-third,
is shown. On this date they dissolve the
partnership.
Accounting for partnership
dissolution (Continued)
 Accounting for partnership
dissolution (Continued)
• The buildings were sold for £105,000.
• The inventory was sold for £4,600.
• £6,800 was collected from debtors.
• The motor vehicle was taken over by X for
£9,400, but he did not pay cash for it.
• £5,000 was paid to settle the accounts
payable.
• The £400 cost of dissolution was paid.
 Accounting for partnership
dissolution (Continued)
The accounting entries needed are:
(A) Transfer the book values of all assets to the
realisation account.
Debit realisation account, credit assets
(B) Enter the amounts received from the
disposal of assets.
Debit bank, credit realisation account
 Accounting for partnership
dissolution (Continued)
(C) Enter the values of the assets taken over by
the partner without payment.
Debit the partner’s capital account, credit
realisation account

(D) Show the creditors as paid.

Debit accounts payable, credit bank
 Accounting for partnership
dissolution (Continued)
(E) Enter the costs of dissolution.
Debit realisation account, credit bank

(F) Show the profit/loss on realisation to be shared

between the partners in profit and loss sharing
ratios.
If a profit – Debit realisation, credit partners’
capital accounts
If a loss – Debit partners’ capital accounts, credit
realisation
 Accounting for partnership
dissolution (Continued)
(G) Pay the partners their final balances on their
capital accounts;
Debit capital accounts, credit bank
Accounting for partnership
dissolution (Continued)
Accounting for partnership
dissolution (Continued)
 The Garner v Murray rule
• If a partner’s capital account has a debit
balance, the partner usually pays in money to
clear his debt.
• If a partner cannot clear the balance, the
Garner v Murray rule states that the other
partners will bear this loss in the ratios of their
last agreed capitals and not their profit and
loss sharing ratios.
• A partnership agreement can overrule this
• The rule does not apply in Scotland.
 Learning outcomes
You should have now learnt:

1.How to calculate the amounts due to and from

each partner when a partnership is dissolved
2.How to record partnership dissolution in the
ledger accounts
 Learning outcomes (Continued)
3. That upon dissolution, a partnership stops
trading or operating, any profit or loss on
dissolution being shared by the partners in
their profit sharing ratio
4. That the Garner v Murray rule does not apply
to partnerships in Scotland.