Teaching team:

1.Mr. Uzziel Hategekimana (Gikondo) 0788620046

2.Mr. Benoit Kanyangira (Gikondo)07885165231
3.Mr. Mpambara Frederic (Huye) 0788856627
4.Mrs. Mwiza Yvette (Huye) 0788561560
5.Mrs. Nalubega Cisy (Nyagatare) 0788219639
6.Mr. Tumwine James (Nyagatare) 0788484804
7.Mr. Jean Claude Mbonimpa (Rusizi) 0735637119
Learning outcomes
 This topic aims at imparting students with
knowledge and skills on how to record financial
transactions of partnerships.
 After successful completion of this topic
students will be able to:
a) Know nature and accounting treatment of different
partnership transactions
b) Know and use of particular accounts for
partnerships
c) Prepare final accounts for partnerships
d) Account for changes in ownership of partnership
A. DEFINITION

A partnership is a relationship that subsists between two or more

persons carrying on a business in common with a view to making profit.

B. THE NEED FOR PARTNERSHIPS

 There are various reasons for multiple ownership:
 The capital required is more than one person can provide
 Many people want to share management instead of doing everything on
their won
 Partners will be members of the same family
 Two types of multiple ownership; partnership and limited
companies
C. NATURE OF PARTNERSHIPS

It has the following characteristics:

 It is formed to make profits
 It must obey the law as given in partnership
 Normally minimum of Two partners and a maximum of 20 partners

 Exceptions: banks not more than 10 partners; No limit for firms

of accountants, Solicitors, stock exchange members and other
professionals’ bodies.
 Each partner (except for limited partners) must pay their share of
any debts that the partnership could not pay. If necessary they could
be forced to sell all their private possessions to pay their share of the
debts. This can be said to be unlimited liability.


D. LIMITED PARTNERS(LPs)

 LPs are not liable for the debts. They have the following
characteristics:

 Their liability for the debts of the partnership is limited to the capital
they have put in. they can lose that capital, but they cannot be asked
for any more money to pay the debts.
 They are not allowed to take part in the management of the
partnership business.
 All the partners cannot be limited partners so that there must be at
least one partner with unlimited liability.
E. PARTNERSHIP DEED
A partnership deed is an agreement written showing the terms of the
partnership. This is to be point of reference in case there is there is a
dispute between the partners.
Contents of partnership agreement include:
1) Name(s) and address(s) of the partnership and the partners

2) Capital amount to be contributed by each partner

3) The profit sharing ratios that may be expressed as a fraction or as a

percentage. This is a rate of division of residual profit depending on
participation of the partners in the partnership
4) Interest on capital – is interest to be paid on capital contributed by
partners usually expressed as a percentage or a given rate.
5) Salaries to be paid to any partners who will be involved in the active
management of the business as a share of profit from the partnership has
to be stated
E. PARTNERSHIP DEED(Con’t)

5) Drawings – the maximum amount to be withdrawn by partners for

given period has to stated so that partners do not take the whole
capital.

6) Any interest to be charged on drawings made by the partners so as to

discourage the partners from drawings.

7) Procedures to be taken on the retirement, admission of a partner and

dissolution of partnership. Also procedures to be taken in case of
disputes
E. PARTNERSHIP DEED(Con’t)
In case a partnership deed is not prepared and yet persons operate as
partnership, then the provisions of The laws relating to companies will
be taken to operate. These are as follows:
 The capital of the partnership is to be contributed equally by the partners
 No interest is payable by the firm on capital introduced by the partners
 If a person lends additional money to the firm, he is entitled to interest at 5%
per annum
 Each partner is entitled to act in the management of affairs of the firm
 No partner is entitled to a salary for acting in this capacity as manager
 If a partner dies, his estate is entitled to his share of the capital that stands to
the credit of his capital account.
 If a partner retires and leaves his capital in the partnership, then he is entitled
to interest at 5% per annum on the amount
 If the partnership is dissolved, the creditors take priority over the partners.
Any funds available after settling the creditors’ claims are used to repay any
partners’ loans and then their capital.
 F. ACCOUNTING FOR PARTNERSHIP
 The interest of the partners in the business is either long term or short-
term.

 The long-term interest is the capital contributed by each partner and

the balance is expected to remain fixed. It will only change when the
partners agree or in case of any changes in the partnership like admission
or retirement of a partner.

 The short-term interest is reflected in form of a current account, which

is affected by the business activities of the partnership (that is the profits
or losses) and any drawings made by the partners.

 Each partner’s short term and long-term interest must be shown

separately in his/her account.
 CAPITAL ACCOUNT
A B C A B C
FRw. FRw. FRw. FRw. FRw. FRw.
Balance b/d XX XX XX
Balance c/d XX XX XX Cashbook (Add XX XX XX
capital)
XX XX XX XX XX XX
Balance b/d XX XX XX

CURRENT ACCOUNT
A B C A B C
FRw. FRw FRw. FRw. FRw FRw.
. .
Balance b/d XX Balance b/d XX XX
Interest on XX XX XX Interest on capital XX XX XX
drawings
Drawings XX XX XX Salaries - XX XX
Share of profits XX XX XX
Loan interest - XX -
Balance c/d XX XX - Balance c/d - - XX
XX XX XX XX XX XX
Balance b/d - - XX Balance b/d XX XX -
F. ACCOUNTING FOR PARTNERSHIPS(Con’t)
Note that the current account is just like the capital account. It is
maintained separately to indicate the short-term interest.

It is possible to have a current account that has a debit balance like for
partner B at the start of period and partner C at the end of the period.

This shows that a partner has withdrawn more than what is

accumulated in the short-term interest.
INTEREST ON CAPITAL
This interest is treated as a deduction prior to the calculation of profits and
their distribution 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.

INTEREST ON DRAWINGS
In the best interest of the firm the cash is withdrawn from the firm by the
partners in accordance with the two basic principles:
 As little as possible
 As late as possible

To discourage the partners from taking out cash unnecessarily the concept
can be used of charging the partners interest on each withdrawal.
 The amount charged to them helps to increase the profits divisible
between the partners.
SALARIES TO PARTNERS

One partner may have more responsibility or tasks than others. As a

reward for this, rather than change profit and loss sharing ratio, he may
have a salary which is deducted before sharing the balance of profits.

PROFIT(LOSS) SHARING RATIOS

Partners can agree to share profits/losses in any ratio or any way that they may
wish.
Example: capital: John Rwf 2,000,000
Tom Rwf 1,000,000
They would share the profits in the ratio of ⅔ to ⅓

Alan, Bob and Colin shared profits in the ratio 3:2:1.

Fluctuating capital account

When the entries in the current account are passed through the capital account
then we have a fluctuating capital account. This is as follows:

FLUCTUATING CAPITAL ACCOUNTS

A B C A B C
FRw. FRw FRw. FRw. FRw. FRw.
.
Interest on drawings XX XX XX Balance b/d XX XX XX
Drawings XX XX XX Cashbook (Add) - XX -
Interest on capital XX XX XX
Salaries - XX XX
Share of profits XX XX XX
Balance c/d XX XX XX Loan interest - XX -
XX XX XX XX XX XX
Balance b/d XX XX XX
F. ACCOUNTING FOR PARTNERSHIPS(Con’t)
The entries on the credit side represent share of the profit from the business, which is
form of interest on capital, salaries to partners and share of residual profit. The
journal entries are as follows;
Debit Appropriation account
Credit Partners current accounts
With interest on capital, salaries and share of residual profit
Debit Income statement
Credit Partners current accounts
With interest on loan
Loan interest is an expense and not a share of profit. It is credited to the partners
current/capital account if not paid.
The entries on the debit side represent the charges to partners’ capital.
These include interest on drawings and drawings, which reduce capital just like for a
sole trader. The journal entries are as follows:
Debit Partners current accounts
Credit Appropriation account
With the amount of interest on drawings
Debit Partners current account
Credit Drawings
With the amount of drawings for the year
Division of profits and losses
Profit or loss is usually determined in the normal way like a sole trader. The difference comes in
when sharing out the profit or loss. An appropriation account is opened and the profit or loss for the
period is transferred to it. An appropriation account is an account that shows how profit or
loss is shared amongst the partners. It has the following format:
A, B and C Appropriation account for the year ended date
FRw. FRw
Net profit/(loss) XXX
Add:
Interest on drawings
A XX
B XX
C XX
Less:
Interest on capital
A XX
B XX
C XX
XX
Salaries
B XX
C XX
XX
Residual profit
XXX
A (Share Ratio or percentage for A) x Residual profit XX
B (Share Ratio or percentage for B) x Residual profit XX
C (Share Ratio or percentage for C) x Residual profit XX
XXX
Statement of financial position

The income statement is completely the same as for a sole trader other
than the additional part of appropriation account as shown
previously.

 The Statement of financial position is also the same, as that for a sole
trader but the interest of each partner in the business should be
shown separately.

 That is the capital and current accounts balances for each partner are
shown separately. Any loan given by a partner to the firm is also
shown separately in the non- current liability section therefore, the
format will be as follows.
 Statement of financial position as at date

ASSETS FRw FRw FRw

Non-current assets Cost Dep’n Net
Land and buildings XX (XX) XX
Furniture and Equipment XX (XX) XX
Motor Vehicles XX (XX) XX
Investments XX - XX
XX
Current Assets XX
Inventory XX
Receivables (or accounts receivable)
Prepaid expense XX
Accrued income XX
Bank
XX
Cash
XX
TOTAL ASSETS XX
Capital accounts
A XX
B XX
C XX

XX

Current accounts
A XX
B XX
C (XX)

XX
TOTAL EQUITY
XX

Non-current liabilities
Loan from B XX
Current liabilities
Payables XX
Accrued expense XX
Prepaid income XX
Bank overdraft XX
TOTAL LIABILITIES XX
 Example
A and B own a grocery shop. Their first financial year ended on 31 December 2017. The
following balances were taken from the books on that date:
Capital:
A- FRw.60,000;
B - FRw.48,000.
Partnership salaries:
A - FRw.9,000;
B - FRw.6,000.
Drawings:
A - FRw.12,000;
B - FRw.13,400.
The firm’s net profit for the year ended 31 December 2017 was FRw.32,840.
Interest on capital is to be allowed at 10% per year. Profits and losses are to be shared
equally.
From the information above prepare the firm’s appropriation account and the partners’
current accounts.
SOLUTION
A& B partnship Appropriation account for the year ended 31 December 2017

FRw. FRw.
Net profit/(loss) 32,840
Less
Interest on capital
A 6,000

B 4,800
(10,800)
Salaries
B 9,000
C 6,000
(15,000)
Residual profit
7,040
A (1/2) x 7,040 3,520
B (1/2) x 7,040 3,520
7,040
 CURRENT ACCOUNTS
A B A B
FRw. FRw. FRw. FRw.
Drawings 12,860 13,400Interest on capital 6,000 4,800
Bal c/d 5,660 920Salaries 9,000 6,000
Profit share 3,520 3,520
18,520 14,320 18,520 14,320
Bal b/d 5,660 920
Example 2
Draw up an appropriation account for the year ended 31 December 2017 and
Statement of financial position extracts at the date, from the following:
(i) Net profits FRw.30,350
(ii) Interest to be charged on capitals: W FRw.2,000; P FRw.1,500;
H FRw.900
(iii) Interest to be charged on drawings; W FRw.240; P FRw.180;
H FRw.130
(iv) Salaries to be credited: P FRw.2,000; H FRw.3,500.
(v) Profits to be shared: W 50%; P 30%; H20%.
(vi) Current accounts: balances b/f W FRw.1,860; P FRw.946; H FRw.717
(vii) Capital accounts: balances b/f W FRw.40,000; P FRw.30,000;
H FRw.18,000
(viii) Drawings: W FRw.9,200; P FRw.7,100; H FRw.6,900.
 Appropriation account for the year ended 31 December 2017
FRw. FRw.
30,350
Net profit/(loss)
Add:
Interest on drawings
240
W
P 180
H 130 550
Less:
Interest on capital
W
2,000
P 1,500
H 900
(4,400)
Salaries
P 2,000
H 3,500
(5,500)
Residual profit 21,000
W (50% x 21,000) 10,500
P (30% x 21,000) 6,300
H (20% x 21,000) 4,200
21,000
 Current Account
W P H W P H
FRw. FRw. FRw. FRw. FRw. FRw.
Interest on drawings 240 180 130Balance b/d 1,860 946 717

Drawings 9,200 7,100 6,900Interest on capital 2,000 1,500 900

Salaries ------ 2,000 3,500

Balance c/d 4,920 3,466 2,287Share of profits 10,500 6,300 4,200

14,360 10,746 9,317 14,360 10,746 9,317

Statement of financial position (extract) as at 31 December 2017

FRw FRw
Capital accounts
W 40,000
P 30,000
H 18,000
88,000

Current accounts
W 4,920
P 3,466
H 2,287
10,673
98,673
PARTNERSHIP ACCOUNTS

EXERCISES(Q2, Q3, Q4)

CHANGES IN OWNERSHIP OF PARTNERSHIP

 These include:
 1. Admission of a partner;
 2. Retirement/Death of a partner;
 3. Amalgamation of sole traders;
 4. Dissolution;
 5. Conversion into a limited liability company; and
 6. Changes in agreement among existing partners.
Admission of a partner
A new partner(s) can be introduced after all partners are in agreement to this
effect. The old partnership ceases to exist and a new partnership starts.

The accounts of the old partnership can be closed then a new set of accounts
prepared for the new partnership. This is really followed. So admission of a
partner merely entails addition of a capital column for the new partner and
the following entries thereafter:

 Dr Asset accounts
 Cr Capital account (with assets received from the joining partner which can be
cash) However, both admission and retirement/death bring about the
following additional issues:

 1. Goodwill;
 2. Revaluations;
 3. Changes taking place partway through the year.
 Goodwill
 Goodwill is the benefit arising from connection and reputation in
respect of continuing business.

 It arises due to the good relationship a business has with the

customers. It also arises due to the good staff.

 It cannot be separated from the business. It is intangible since it has

no physical existence. For a partnership

 it is usually introduced after being determined by the partners as an

asset to compensate the partners for its existence.
 Goodwill will be recorded during any change in ownership as follows:

Dr Goodwill account
Cr Capital accounts (in old profit sharing ratio)

 This can remain in the accounts like this or it can be eliminated. If it

remains in the accounts then the partners’ capital would have
increased.
 Goodwill can be eliminated as soon as transition in ownership is
complete by:
Dr Capital accounts (in new profit sharing ratio)
Cr Goodwill
 This is of course, subject to continuance of the business. Goodwill
will not be eliminated if there is no business continuance like in
dissolution.
 This process ensures that the joining partner pays for the goodwill
that had already existed. This is because the new profit share ratio
will include the new partner.
Revaluation account
Revaluation of assets and liabilities are usually carried out during changes in ownership. In
such cases a account will be opened. After opening the revaluation account is just to find
increase or decrease due to revaluation, which is dealt with in the following way
Dr Revaluation account X X
Cr Assets accounts
Decrease of the assets amounts that have been revalued
Dr Liabilities accounts X
Cr Revaluation account X
Decrease of the liabilities amounts that have been revalued
Dr Assets account X
Cr Revaluation accounts X
Increase in assets amounts that have been revalued
Dr Revaluation accounts X
Cr Liabilities account X
Increase in liabilities amounts that have been revalued

If a credit balance remains this is a profit on revaluation

Dr Revaluation account X
Cr Current accounts X
Profit from revaluation (using the old profit sharing ratios)

If a debit balance remains the this is a loss on revaluation

Dr Current accounts X
Cr Revaluation account X
Example
Bikeke and Wasonga are partners who share profits and losses equally. On 31st December 2018,
the Statement of financial position of the firm appeared as follows
Bikeke and Wasonga
Statement of financial position As at 31st December 2018
‘

NON-CURRENT ASSETS Net Dep’n Net

Freehold property 2,100
CURRENT ASSETS
Inventory 850
Receivables 960
Cash 340 2,150
4,250
Capital accounts: Bikeke 2,170
Wasonga 1,490 3,660
CURRENT LIABILITIES
Payables 590
4,250
On this date they agreed to admit a new partner, Gisore. It was agreed however, that the above assets
are to be taken at the following valuations:
Freehold property Frw1,960 ; Inventory Frw 810
A provision of 5% is to be provided on the Receivables; Goodwill is agreed at FRw 80,000 and it is not
to be maintained in the accounts. These adjustments are to be carried out before the admission of the
new partner. The new partner is to introduce FRw 500,000 cash and Inventory valued FRw 400,000.
The new partnership profit/loss sharing ratios are to be 3:3:2
Required: a) Show the journal entries required ;
b) Show the Statement of financial position just after the admission
Solution
It will be better to deal with the goodwill first
Dr FRw Cr FRw
Dr Goodwill account 80,000
Cr Capital account- Bikeke ½ X 80,000 40,000
Capital account- Wasonga ½ X 80,000 40,000
To introduce goodwill (old profit share ratio)
Dr Capital account- Bikeke 3/8 X 80,000 30,000
30,000
Capital account- Wasonga 3/8 X 80,000
20,000
Capital account- Gisore 2/8 X 80,000
80,000
Cr Goodwill account
To write off the goodwill (new profit share ratio)
To deal with the revaluation of assets, using the first method
Dr Revaluation account 3,910
Cr Freehold property account 2,100
Inventory 850
Receivables 960
Book value of the assets that have been revalued
Dr Freehold property account 1,960
Inventory 810
Receivables (960,000-(5%X960,000)) 912
Cr Revaluation account 3,682
Revalued amounts of the assets that have been revalued
Dr Capital accounts- Bikeke ½X(3,682,000-3,910,000) 114
Capital accounts- Wasonga ½X(3,682,000-3,910,000) 114
Cr Revaluation account (3,682,000-3,910,000) 228
Loss from revaluation (using the old profit sharing ratios)
To show introduction of capital by Gisore
Dr Cash account 500
Inventory 400
Cr Capital account- Gisore 900
To introduce Capital in form of assets
The Statement of financial position just after admission of Gisore will look as follows:
Bikeke, Wasonga and Gisore
Statement of financial position As at 31st December 2018

NON-CURRENT ASSETS Net Dep’n Net

Freehold property (W3) 1,960
CURRENT ASSETS
Inventory (W2) 1,210
Receivables 960
Provision for bad debts 48 912
Cash (W1) 840 2,962
4,922
TOTAL ASSETS

Capital accounts: Bikeke (W5) 2,066

Wasonga(W5) 1,386
Gisore (W5) 880 4,332

CURRENT LIABILITIES
Payables 590

TOTAL EQUITY AND LIABILITIES 4,922

’ W1 _______________Cash account ____________________________
Balance b/f 340
Capital account- Gisore 500 Balance c/f 840
840 840

W2 Inventory account_____________________

Balance b/f 850 Revaluation 850

Revaluation 810
Capital account- Gisore 400 Balance c/f 1,210
2,060 2,060

W3 Freehold property account

Balance b/f 2,100 Revaluation 2,100
Revaluation Balance c/f 1,960
1,960
4,060 4,060
 W4 Revaluation account
FRw‘000’ FRw‘000’
Freehold property 2,100 Freehold property 1,960
Inventory 850 Inventory 810
Receivables 960 Receivables 912
Capital account-Bikeke 114
Wasonga
114
3,910 3,910

W5 Capital accounts
B G B W G
W FRw FRw FRw
FRw FRw FR ‘000’ ‘000’ ‘000’
‘000’ ‘000’ ‘000’

Goodwill 30 30 20 Bal b/f 2,170 1,490 -

Revaluation 114 Gdwill 40 40 -
114
-

Cash - - 500
Bal c/d 2,066 1,386 880 Inventory - - 400

2,210 1,530 900 2,210 1,530 900

ii) Retirement/Death of a partner
 Retirement or death is the opposite of admission. If the partnership continues
without the retiring or dead partner, all amounts of profit/loss up to the date
of retirement or death is distributed to the partners.

 Amounts from the current account are transferred to the capital account. Any
balance in the capital account of the retiring/dead partner is paid to the
retiring partner or the estate of the dead partner.

 Such balance may also remain in the partnership if there is no enough cash or
assets to pay out. Such amounts are taken, as loan and will earn interest.

 Retirement/death involves making entries to the reverse of those required for

admission, as follows:
 Dr Capital accounts
 Cr Asset account (with asset given or paid to the retiring partner or
beneficiaries of the demised partner).
Example
 Jana, Kariz and Limo are in partnership sharing profit and losses in the ratio of 2:2:1
respectively. Partner Jana decides to retire on 31 December 2018 when the partnership
Statement of financial position is as follows:

Jana, Kariz and Limo

Statement of financial position As at 31st December 2018
FRw FRw
NET ASSETS
100,000

Capital accounts: Jana 35,000

Kariz 45,000
Limo 20,000 100,000

Goodwill is agreed at a valuation of FRw.30,000. Kariz and Limo are to continue in partnership
and will share profits and losses in the ratio of 2:1 respectively. Jana agrees to leave FRw.20,000
of the amount due to him as a loan to the new partnership.
Required:
(a) Show necessary journal entries
(b)Capital accounts
(c) Statement of financial position after the retirement of Jana
Solution
The journal entries on retirement of Jana from the partnership are as follows:
Dr FRw Cr FRw
Dr Goodwill account 30,000
Cr Capital account- Jana 2/5 X 30,000
12,000
Capital account- Kariz 2/5 X 30,000
12,000
Capital account- Limo 1/5 X 30,000
6,000
To introduce goodwill (old profit share ratio)
Dr Capital account- Kariz 2/3 X 30,000 20,000
Capital account- Limo 1/3 X 30,000 10,000
Cr Goodwill account 30,000
To write off goodwill (new profit share ratio)
 The capital accounts will then look as follows
_____Capital account____________________

Jana Kariz Limo Jana Kariz Lim

FRw FRw FRw FRw FRw FRw

‘000’ '000’ ‘000’ ‘000' ‘000' ‘000'
Goodwill - 20 10 Bal b/f 35 45 20

Loan-Jana 20 Goodwill 12 12 6

Bank 27
Bal c/d - 37 16

47 57 26 47 57 26

Note;
After recording goodwill, the balance of Jana’s capital account is FRw 47,000 (that is FRw 35,000 +
FRw.12,000, being her share of goodwill). Of this, FRw 20,000 will be retained in the business as a
loan, and FRw.27,000 will be paid to her from the partnership bank account.
 The Statement of financial position, after the retirement of Jana, appears as
follows

Kariz and Limo

Statement of financial position As at 31st December January 2018
ASSETS (100,000- 27,000) 73,000

Capital accounts: Kariz 37,000

Limo 16,000 53,000
Loan- Jana 20,000
73,000

The effect of this is that the remaining partners have bought out Jana’s FRw.12,000 share of
goodwill of the business (costing FRw.8,000 to Kariz and FRw.4,000 to Limo)

If the business was to be sold later, Kariz and Limo would share the goodwill obtained from the sale
in their new profit sharing ratio.
Example 2
Ali, Kimani and Wambua had been in partnership, sharing profits and losses
equally after allowing interest on capital at 10% per annum. Wambua retired from
the partnership on 31December 2018 and Ali and Kimani agreed to continue
with the business sharing profits and losses in the ratios 3/5 and 2/5
respectively after allowing interest on capital as before.

Wambua agreed that repayment of his capital be delayed for three years and the
outstanding amount be subject of interest at the rate of 15% per annum.
Any balance on Wambua’s current account is to be held in a separate account and
be payable on demand.
On 31 December 2018, a valuation of goodwill was carried out and agreed at
FRw.1,440,000 but this was not to be reflected in the books. The land and
buildings were revalued at the same date at FRw.2,760,000 and were to be
adjusted in the books to this figure.

The firm prepared its accounts annually to 31 March, and at the time the
following trial balance was extracted, the above adjustments relating to the change
in partnership had not been made
 Trial balance as at 31 March 2019

FRw FRw
Capital accounts: Ali 720,000
Kimani 960,000
Wambua 720,000
Current accounts: Ali 180,000
Kimani 240,000
Wambua 120,000
Drawings : Ali 660,000
Kimani 780,000
Wambua 480,000
Land and buildings (cost) 2,040,000
Plant and machinery (net as at March 2012) 720,000
Inventories 540,000
Receivables and Payables 360,000 660,000
Bank balance 180,000
Net profit for the year (after depreciation) ???????
5,760,000 5,760,000
Required:
(a)Profit and loss and appropriation account for the year ended 31 March 2019
(b)Statement of financial position as at 31 March 2019(Assume profit accrued evenly over the year)
Solution
Ali & Kimani
Profit and Loss appropriation a/c for the year ended 31 Marc 2019
9 months 31 Dec2018 3 months 31 Mar2019
Year

Net profit FRw FRw FRw FRw FRw

‘000’ ‘000’ ‘000’ ‘000’ ‘000’
1,620 540 2,160
Loan interest (W1) - (45) (45)
1,620 495 2115
Interest on capital: (W1)
Ali 54 8.4 62.4
Kimani 72 21.6 93.6
Wambua 54 - 54
(180) (30) (210)
1,440 465 1,905
Profit share: (W1)
Ali 480 279 759
Kimani 480 186 666
Wambua 480 - 480
1,440 465 1,905
Ali and Kimani Statement of financial position As at 31st March 2019

NON-CURRENT ASSETS

Land and buildings 2,760

Plant and machinery 720
3,480
CURRENT ASSETS
Inventory 540
Receivables 360
Cash 180 1,080
4,560

Capital accounts: Ali 336

Kimani 864 1,200
Current accounts:
Ali 581.4
Kimani 459.6 1,041
NON-CURRENT LIABILITIES
Long term loan: (Wambua)
1,200
CURRENT LIABILITIES
Payables
660
Accrued loan interest(Wambua) 45
Short term loan (Wambua) 414 1,119
4,560
 Workings

Profit for 9 months (9/12 x 2,160,000 = 1,620,000) 1,620

Interest on capital: Ali (10% x 720,000 x 9/12) 54

Kimani (10% x 960,000 x 9/12) 72

Wambua (10% x 720,000 x 9/12) 54_____

180
Share of Profit: Ali (1/3 x 1,440,000) 480
Kimani (1/3 x 1,440,000) 480
Wambua (1/3 x 1,440,000) 480 1,440

Profit for 3 months (3/12 x 2,160,000 = 540,000) 540

Loan interest: (15% x 1,200,000 x 3/12) 45

Interest on capital: Ali (10% x 336,000 x 3/12) 8.4

Kimani (10% x 864,000 x 3/12) 21.6
30
Share of profit: Ali (3/5 x 465,000) 279
Kimani (2/5 x 465,000) 186
465
 Capital accounts
A K W A K W
FRw FRw FRw ‘000’ FRw FRw FRw
‘000’ 000’ ‘000’ ‘000’ ‘000’
Goodwill 864 576 - Balance 720 960 720
b/f
Loan a/c - - 1,200 Goodwill 480 480 480
Balance 336 864 -
c/f
1,200 1,440 1,200 1,200 1,440 1,200

iii)Dissolution

A partnership is terminated and is dissolved in the following circumstances:

1. When the fixed time in the partnership agreement expires
2. On the death of a partner
3. On the bankruptcy of a partner
4. If it becomes illegal in its operations
5. By the order of a court
6. On expulsion of partner
When a partnership is terminated the business can be run by other partners
(already considered earlier), sold as a going concern to other owners like
conversion to a company or even the assets sold to clear the business
completely.
Accounting procedures in dissolution of a partnership

1. Close all the accounts of assets and liabilities sold or taken over by
partners or other owners to realization account (this will assist
determine the profit or loss from dissolution).

2. Credit the realization account with any cash received for the assets and
liabilities (consideration for them)

3. Any expenses of realization should be debited the realization account

4. Liabilities should be paid for. If a partner has loan with the partnership
then it is paid.

5. Any balance in the realization account is transferred to capital

accounts in profit sharing ratios.

6. The balance in the capital accounts is then paid or a partner is asked to

pay the partnership
To open a realization account : The journal entries to be followed are: -
Dr Realization account X
Cr Assets accounts X
Book value of the assets
Dr Liabilities accounts X
Cr Realization account X
Book values of those liabilities taken over
Dr. Realization X
Cr Cash/bank X
With expenses of realization

Sales proceeds from the sale of the assets and liabilities

Dr Cash X
Cr Realization account X
Amount received for the sale of the assets and liabilities

The liabilities of the partnership if not taken over by the buyer

Dr Liabilities accounts X
Cr cash account. X
Payment of liabilities

Assets taken over by any partner

Dr Partner's capital account X
Cr Realization account X
With the agreed value
 Balance in the realization account (if credit is a profit on realization)
Dr Realization account X
Cr Partner capital accounts X
Share of profit from realization in profit sharing ratios

Balance in the realization account (if debit is a loss on realization)

Dr Partner capital accounts X
Cr Realization account X
Share of loss from realization in profit sharing ratios

If any partner had advanced a loan to the partnership

Dr Loan account X
Cr Cash/bank account X
Payment of loan to a partner

Note. The net balance in the capital account will always be equal to the balance in the cashbook.
Partners are paid for any credit balance in their capital accounts; partners with debit balances
will be required to pay to the firm a sum of money equal to the debit balance.

If a partner is unable to clear the deficiency in his capital account, the solvent partners will
bear the deficiency among themselves in the proportion of their last agreed capital (Garner V.
Murray). That is the balance in their capital accounts before the dissolution of the partnership.
 Example
The following is the Statement of financial position of Jabari and Sagini on 31st December 2019,
on which date the partners decide to dissolve the partnership. They share profits and losses in the
proportion of two thirds Jabari and one thirds Sagini.

NON-CURRENT ASSETS
Fixtures and fittings 2,760

CURRENT ASSETS
Inventory 7,410
Receivables 3,480
Cash 990 11,180
14,640
Capital accounts: Jabari 5,600
Sagini 3,060 8,660
CURRENT LIABILITIES
Payables 5,980
14,640

The fixtures and fittings realize FRw.2,400,000, Inventory FRw.5,960,000 and Receivables
FRw.3,220,000. The expenses of realization are FRw.120,000
Required
Prepare the necessary accounts to show the dissolution of the partnership
Solution
1. The asset accounts other than the cash are transferred to the
realization account
2. The amounts realized from them is credited to the realization
account and debited to the cash book
3. The realization expense is then debited to the realization account.
4. The Payables are then paid
5. The balance in the realization account is then transferred to the
capital accounts.
6. The balance in the capital is then settled by cash
The accounts are as follows
 Realization account
FRw‘000’ FRw‘000’
Fixtures and fittings 2,760 Cash (Fixtures and fittings) 2,400
Inventory 7,410 Cash (Inventory) 5,960
Receivables 3,480 Cash (Receivables) 3,220
Cash (Realisation expense) 120 Loss:
Capital: Jabari 2/3 X 2,190,000 1,460
Capital: Sagini 1/3 X 2,190,000 730
13,770 13,770
Cash account
Balance b/f 990 Realization (Realization expense) 120
Realisation (Fixtures & fittings) 2,400 Payables 5,980
Realisation (Inventory) 5,960 Capital: Jabari 4,140
Realisation (Receivables) 3,220 Capital: Sagini 2,330
12,570 12,570

Capital accounts
Jabari Sagini Jabari Sagini
FRw.‘000’ FRw.‘000’ FRw.‘000’ FRw.‘000
’
Realization 1,460 730 Balance 5,600 3,060
b/f
Cash 4,140 2,330
5,600 3,060 5,600 3,060