BOOK KEEPING O LEVEL(FORM FOUR) NOTES – PARTNERSHIP ACCOUNT

PARTNERSHIP ACCOUNT

Partnership may be defined as relationship between persons carrying on a business in common with a view of profit.

In a business partnership two or more persons jointly run a business.

Partnership may be defined as an association of two to twenty persons carrying on business in common with the view profit.

PARTNERSHIP AGREEMENT (ARTICLES OF PARTNERSHIP )

The points usually covered by such agreement are as follows

The duration of the partnership
The name of the partnership
The sum to be contributed as capital by each partner
The ratio of profit or losses should be noticed or stated
The rate of interest if any to be allowed on capital (interest on capital )
The rate of interest on drawings
Address or place of the business
The date of starting the
business

IN THE ABSENCE OF ANY PARTNERSHIP AGREEMENT

a) All profit or losses are to be shared equally between the partners.

b) All partners entitled to share equality in the capital (equal contribution of capital).

c) No partner is entitled to interest on capital on his capital before profit are ascertained.

THE USUALLY ACCOUNTING REQUIREMENT:-

(i)The capital to be contributed by each partnership.

(ii)The rate of interest, if any to be given on capital.

(iii)The ratio in which profit or loss to be shared.

(iv)The rate of interest, if any to be charged on partners to Drawings.

(v) Salaries to be paid to partners.

INTEREST OF CAPITAL

It is a reward to the partners for investing their private capital in the business. Since the partner investing the most is taking the greatest risk.

INTEREST ON DRAWING:

Act as a penalty to the partner to deter them from taking out more money from partnership in anticipation of profit than necessary.

The main purpose of this interest is to discourage the partners to withdraw money unnecessarily.

SALARIES:-

Are given for investing more time for management in partnership. A partner may responsible to perform some extra duties as compared to the other partners, Then the only one partners works in the firm he/she may received salary allocated from profi
t.

PROFIT:-

Profit can be shared according:-

– To the capital which is contributed.

– Profit can be shared Equally

– Can be shared according to partner’s agreement (deed) E.g.; 2:3:1: etc

This means A, B and C will be given two sixth, three sixth and one sixth.

CURRENT ACCOUNT

For each partner credited with profits interest on capital and salaries and Debited with drawing and interest on drawings. The balance of this A/C at the end of financial year will represented the amount of undraw (credit balance) or withdraw profit (Debited balance).

The debit balance of current A/C shows Assets while credit balance shows liabilities.

RESERVES:-

This is voluntary appropriation in order to strength the financial position of the business.

The amount settled for reserve can be debited to profit & loss appropriation A/C.

THE ACCOUNT ENTRIES

PROFIT & LOSS APPROPRIATION A/C

(i) Net profit: DR: Profit & Loss A/c

CR: Appreciation of P + L A/C

(ii)Interest of capital: DR: Appropriation A/C

CR: Current A/c

(iii)Interest salaries: DR: Current A/c

CR: Appropriation a/c

(iv)Partners Salaries: DR: Appropriation a/c

CR: Current A/c

NOTE: If salaries have already been paid then cash A/C had a ready been credited.

Means: DR: Appropriation A/C

CR: Cash A/c

(v)Share of profit:-

DR: Appropriation a/c

CR: Current A/c

(vi)Share of loss (if any)

DR: Current a/c

CR: Appropriation A/c

(vii)Drawing:-

DR: Current a/c

CR: Drawing A/c for each partner

EXAMPLE:-

Karim and Rashid are in partnership sharing P & L on the ratio of 3:2.
They are entitled to 5% interest on capital.

Karim’s capital……………………………… 40,000/=

Rashid’s capital………………………………120,000/=

Karim receives a salary of 5,000, Interest on drawing:-

Karim 1,000

Rashid 2,000

Net profit 100,000

Required. Show up (a) Profit & Loss Appropriation A/C

(a) Partners current A/C

Solution:-

DR PROFIT & LOSS APPROPRIATION A/C CR

Interest on capital :-		Net profit	100,000
Karim	2,000	Interest on drawings:
Rashid	6,000	Karim	1,000
Salaries: Karim	5,000	Rashid	2,000
Share of profit: Karim 3/5 x 90,000	54,000
Rashid 2/5 x 90,000	36,000

	103,000		103,000

DR. PARTNERS CURRENT A/C CR

Details	KARIM	RASHID	Details	KARIM	RASHID
Interest on drawing	1,000	2,000	Share of profit	54,000	36,000
			Salaries	5,000	–
Balance c/d	60,000	40,000	Interest on capital	2,000	6,000
	61,000	42,000		61,000	42,000
			Balance b/d	60,000	40,000

EXERCISE

Ally and Bakari are in Partnership sharing profit & Loss equally. They are entitled 6% interest on capital and 10% interest on Drawings.

Capital: Ally 500,000, Bakari 700,000

Drawing: – Ally 250,000, Bakari 300,000

Bakari receives salaries of 150,000

The net profit was 400,000

Required: – (a) Partners current A/C

(b) Partners capital A/C

DR. PARTNERS CURRENT A/C CR

Details	ALLY	BAKARI	Details	ALLY	BAKARI
Int Interest on drawing	25,000	30,000	Share of profit	122,500	122,500
Ba Balance c/d	139,500	260,500	Salaries	–	150,000
			Interest on capital	42,000	18,000
	164,500	290,500		164,500	290,500
			Balance b/d	139,500	260,500

DR. PARTNERS CURRENT A/C CR

Details	ALLY	BAKARI	Details	ALLY	BAKARI
Ba balance c/d	500,000	700,000	Cash	500,000	700,000
			Balance b/d	500,000	700,000

DR PROFIT & LOSS APPROPRIATION A/C CR

In interest on capital :-		Net profit	400,000
Ally	42,000	Interest on drawings:
Bakari	18,000	Ally	25,000
Salary; Bakari	150,000	Bakari	30,000
Share of profit: Ally (1/2) 122,500
Bakari (1/2) 122,500	245,000
	455,000		455,000

METHOD OF CAPITAL IN PARTNERSHIP A/C

Partner’s capital account can be maintained either in:-

(i) Fixed capital method

(ii) Fluctuating capital method

(i) FIXED CAPITAL METHOD:-

In case of fixed capital method there are two accounts:-

– Partners capital A/C

– Partners current A/C

In this method the capital A/c for each partner remains by year at the figure of capital put into the firm by the partner.

The profit, interest on capital and salaries to which the partner may entitle are then credited to the separate current A/C for the partner and drawings and interest on drawings are debited to it.

EXAMPLE:-

Twalib and Kassim have been in partnership for one year sharing profit and loss in the ratio of Twalib 3/5, of Kassim 2/5, they entitled 5% interest on capital, Twalib having 200,000 capitals and 600,000 Kassim.

Kassim is to have salary of 50,000

They are charged interest on drawing, Twalib being charged 5,000 and Kassim 10,000.

The net profit before any distribution to the partners amounted to 500,000 for the ended 31st Dec 2012.

NB: Drawing of 200,000 for each will appear.

Required: Show the necessary entries use the fixed capital method.

DR. PARTNERS CAPITAL A/C CR

Details	ALLY	BAKARI	Details	ALLY	BAKARI
Balance c/d	200,000	600,000	Balance b/d	200,000	600,000
			Balance b/d	200,000	600,000

DR PROFIT & LOSS APPROPRIATION A/C CR

Details	Amount	Details	Amount
Salaries Kassim	50,000	Net profit	500,000
Interest on : Kassim	30,000	Interest on drawings:
Twalib	10,000	Twalib	5,000
		Kassim	10,000
Share of profit:
T: ¾ x 425,000 = 255,000
K: 2/5 x 425,000 = 170,000	425,000
	515,000		515,000
	Also Read: BOOK KEEPING O LEVEL(FORM ONE) NOTES - INTRODUCTION OF BOOK KEEPING BOOK KEEPING O LEVEL(FORM FOUR) NOTES - DEPARTMENT ACCOUNT

DR. PARTNERS CURRENT ACCOUNT CR

Details	TWALIB	KASSIM	Details	TWALIB	KASSIM
Drawings	200,000	200,000	Salary		50,000
Interest on drawing	5,000	10,000	Interest on capital	10,000	30,000
Balance c/d	60,000	40,000	Share of profit	255,000	170,000
	265,000	250,000		265,000	250,000
			Balance b/d	60,000	40,000

(ii) FLUCTUATING CAPITAL METHOD:-

In case of fluctuating capital method there is only one account is termed as capital A/C. The distribution of profit would be credited to the capital account and the drawings and interest on drawings debited.

Therefore the balance on the capital A/C will charge each year. I.e. it will be fluctuate the system is therefore called fluctuating capital method.

EXAMPLE:-

Refer example 1
above:-

DR. PARTNERS CAPITAL A/C CR

Details	TWALIB	KASSIM	Details	TWALIB	KASSIM
Drawings	200,000	200,000	Balance b/d	200,000	200,000
Interest on drawing	5,000	10,000	Interest on capital	10,000	30,000
			Salary	–	50,000
Balance c/d	260,000	640,000	Share of profit	255,000	170,000
	465,000	850,000		465,000	850,000
			Balance b/d	260,000	640,000

EXAMPLE 2

Yusuph and Christopher began to trade in partnership on Jan 1980 Yusuph contributed Tshs 3000/= and Christopher 1000/= in cash they agreed as follows

– To share profit equally

– To allow interest on capital 6% p.a

– Christopher to get salary of Tshs 400/=

– Drawings Yusuph Tshs 400/= on 1st July and Christopher Tshs 200/= on 1st April, 1st July and 1st October

– To charge interest on drawings 6% p.a the net profit Tshs 2500/=

Show

a) Appropriation account

b) Partners capital

c) Partners current account

Workings

a) Interest drawings

Yusuph 6 x 400 x 6 = 12

100 12

Christopher

6 x 200 x 9 = 9

100 12

6 x 200 x 6 = 6

100 12

6 x 200 x 3 = 3

100 12

Therefore total interest on drawings from Christopher is 9+ 6+ 3= 18

b) Interest on capital

Yusuph = 6 x 3000 = 180

100

Christopher 6 x 1000= 60

100

EXERCISE 1

The partnership agreement between A, B and C contains the following agreement

a) The partnership fixed capital shall be A 10,000/= B 8000/= C 6000/=

b) A and B are each to n receive a salary of 600/= a year

c) Interest on capital is to be calculated at 5% per annum

d) A ,B , and C are to share profit and losses in the ratio of 3:2:1

e) No interest to be allowed on drawings or current account

On 1st Jan 1978 the balance on current account were A credit balance 500/= B credit 200/= credit 350/=

During the year the drawing were A 4500/= B 3000 and C 5000/= the profit and losses account for the year showed a net profit of 14500/=

Before charging interest on capital and partners salaries

Required

a) Capital account of A,B, and C

b) Partners current account

c) Profit and loss appropriation on a/c

EXERCISE 2

Record the following facts on the personal account of A and B. two partners who are share profit and loss in the ratio of 5 to 3 and allow interest on capital at the rate of 4 percent per annum no interest is to be allowed or current on charges or drawings

B. is to be credited with a salary of 300/= for the year

A. B.

1st Jan capital account 4000 3000

30th Jan addition capital brought 1000 –

1st Jan current account 72 DR 100 CR

1st Jan – 31st Dec drawings 3650 3650/=

The partnership total divisible for the year after charging the salary was 7188/=

Required

a) Partners capital account

b) Partners current account

c) Profit and loss appropriation account

FINAL ACCOUNT IN PARTNERSHIP:-

(1) Profit and Loss Appropriation A/C

(2) Capital account for each partner (carrying the fixed capital and Fluctuating capital).

(3) Current Account

(4) Balance sheet

Example: – 1

Mohamed and Mcharo are in partnership sharing profit and Loss equally. The following is their Trial balance as at 30th June 2010.

TRIAL BALANCE AS AT 30th JUNE 2010

Stock at 30th 2010
Required:

Prepare Trading and Profit and Loss, Appropriation account for the year ended 30th June 2010 and the Balance sheet as at that date:-

(a) Expenses to be accrued: Office exp 96.

(b) Depreciation Fixture 10% on reducing balance basis building Tshs. 1,000

(d) Partnership salaries Tshs. 800 to Mohamed not yet entered.

(e) Interest on drawing Mohamed 180 and Mcharo 120.

(f) Interest on capital account balance at 10%

WORKING:-

Interest on capital:

Mohamed = 35,000 x 10/100 = 3,500

Mcharo = 29,500 x 10/100 = 2,950

DR TRADING AND PROFIT &LOSS A/C YEAR ENDED 30th June 2010 CR

DR PROFIT & LOSS APPROPRIATION
CR

Salaries: Mohamed	800	Net Profit	23,370
Interest on Cap: Mohamed	3,500	Interest on Drawn:
Mcharo	2,950	Mohamed	180
Share of profit:-		Mcharo	120
Mohamed = ½ x 16,420 =	8,210
Mcharo = ½ 16,420 =	8,210
	23,670		23,670

DR. PARTNERS CURRENT A/C CR

Details	MOH’D	MCHARO	Details	MOH’D	MCHARO
Drawings	6,400	5,650	Balance b/d	1,306	298
Interest on drawings	180	120	Share of profit	8,210	8,210
Balance c/d	7,236	5,688	Salaries	800	–
			Interest on capital	3,500	2,950
	13,816	11,458		13,816	11,458
			Balance b/d	7236	5688

ADMISSION OF A NEW PARTNER

New partner may be admitted and usually for one of two reasons:-
I. For the sake of increasing capital
II. For the sake of management (supervision)

III. As an extra partner, either because the firm has growth or someone needed with different skills.

IV. To replace partners who are leaving the firm, this might because of retired or death of a partner

V. To avoid competition
In admitting a new partner two major problems arise:-

(i) Treatment of premium of goodwill of the firm.

(ii) Revolution of Assets and liabilities of the old firm.

Condition of new partner:
i. To bring capital
ii To bring premium or goodwill

Example:

YUSUPH and Christopher began to trade in partnership on Jan 1980 Yusuph contributed Tshs 3000/= and Christopher 1000/= in cash they agreed as follows

– To share profit equally

– To allow interest on capital 6% p.a

– Christopher to get salary of Tshs 400/=

– Drawings Yusuph Tshs 400/= on 1st July and Christopher Tshs 200/= on 1st April, 1st July and 1st October

– To charge interest on drawings 6% p.a the net profit Tshs 2500/=

Show:

a) Appropriation account

b) Partners capital

c) Partners current account

Workings:

a) Interest drawings

Yusuph 6 x 400 x 6 = 12

6 x 200 x 6 = 6

100 12

6 x 200 x 3 = 3

100 12

Therefore total interest on drawings from Christopher is 9+ 6+ 3= 18

b) Interest on capital

Yusuph = 6 x 3000 = 180

100

Christopher 6 x 1000= 60

100

EXERCISE 1

The partnership agreement between A, B and C contains the following agreement

a) The partnership fixed capital shall be A 10,000/= B 8000/= C 6000/=

b) A and B are each to n receive a salary of 600/= a year

c) Interest on capital is to be calculated at 5% per annum

d) A ,B , and C are to share profit and losses in the ratio of 3:2:1

e) No interest to be allowed on drawings or current account

On 1st Jan 1978 the balance on current account were A credit balance 500/= B credit 200/= credit 350/=

During the year the drawing were A 4500/= B 3000 and C 5000/= the profit and losses account for the year showed a net profit of 14500/=

Before charging interest on capital and partners salaries

Required

a) Capital account of A,B, and C

b) Partners current account

c) Profit and loss appropriation on a/c

EXERCISE 2

B. is to be credited with a salary of 300/= for the year

A. B.

1st Jan capital account 4000 3000

30th Jan addition capital brought 1000 –

1st Jan current account 72 DR 100 CR

1st Jan – 31st Dec drawings 3650 3650/=

The partnership total divisible for the year after charging the salary was 7188/=

Required

a) Partners capital account

b) Partners current account

c) Profit and loss appropriation account

TREATMENT OF PREMIUM OR GOODWILL

The new partner is required to pay some premium for goodwill as compensation to the old partners.

The amount in different to the amount paid in a business as a capital.

Premium for goodwill may be looked as a compensation paid by a new partner in a established business to the old performance to bring the business to its presents state.

There are five methods of dealing with questions of goodwill upon the admission of a new partner;-

(1) When goodwill is raised:-

If the new partner may have no cash resources beyond the capital introduced, hence the old partner agrees to raise the goodwill A/C.

Accounting entries:-

(a) When a new partner introduce capital

DR Bank / Cash A/c

CR: New partner capital A/c

(b) When goodwill raised :

DR: Goodwill A/C
CR: Old partner capital A/C

EXAMPLE:-

Mill and Salum are in partnership sharing profit and loss in proportion to the capital invested. Mill capital is 180,000 and Salum capital is 120,000.

They agreed to admit Nassor as a new partner but have no other sources a part from 60,000 he is contribute as capital. It is as ranged that goodwill of 45,000 be raised and the capital A/C of the old partner be created in the proportion in which they share profits. The profit on future is to be shared in the ration of 3: 2: 1 respectively.

Make journal entries to admit Nassor.

JOURNAL ENTRIES

DATE	DETAILS	DEBIT	CREDIT
	Cash Nassor capital A/C -Being capital contributed by Nassor:	60,000 45,000	60,000 27,000 18,000
	Goodwill A/C Mill capital Salum capital -Being Goodwill is raised	60,000 45,000	60,000 27,000 18,000

DR. PARTNERS CAPITAL ACCOUNT CR

DETAILS	MILL	SALUM	NASSOR	DETAILS	MILL	SALUM	NASSOR
Balance c/d	207,000	138,000	60,000	Balance b/d	180,000	120,000	—–
				cash	——-	——	60,000
				goodwill	27,000	18,000	—-
	207,000	138,000	60,000		207,000	138,000	60,000
				Balance b/d	207,000	138,000	60,000

DR GOODWILL A/C CR

Mills capital	27,000	Balance b/d	45,000
Salum capital	18,000
	45,000		45,000

2) When goodwill paid and with drawn by the old partners:-

Accounting entries:-

(a) When goodwill paid

DR: Cash A/C

CR: Goodwill A/C

(b) When goodwill shared by the old partner

DR: Goods will A/C

CR: Old partner capital A/C

DR: Partners capital A/C

CR: Cash A/C

EXAMPLE:

Hamis and Ally are in partnership sharing profit and losses in proportional to their capital which are Tshs. 150,000 and 90,000 respectively.

They admit Ponda as a partner on bringing into the business Tshs. 100,000 which was dully paid into the firms bank A/C.

If this sum Tshs. 60,000 represented Ponda’s capital and Tshs. 40,000 is the goodwill for the admission into business.

The goodwill is taken out by the old partner. They agreed new share ration should be 5:3:2 respectively.

-Show the necessary entries for the admission of Ponda:

Solution

DR JOURNAL ENTRIES CR

DATE	DETAILS	DR	CR
	Bank	100,000
	Ponda’s capital		60,000
	Goodwill		40,000
	Being capital & Goodwill contribute by new partner
	Goodwill	40,000
	Hamis’s capital		25,000
	Ally’s capital		15,000
	Being: Goodwill shared by the old partners
	Hamisi	25,000
	Ally	10,000
	Bank		40,000
	Being goodwill drawn by new partners

DR. PARTNERS CAPITAL A/C CR

DETAILS	HAMIS	ALLY	PONDA	DETAILS	HAMIS	ALLY	PONDA
B Bank	25,000	25,000	–	Balance b/d	150,000	90,000	–
B Balance c/d	150,000	75,000	60,000	Bank	–	–	60,000
				Goodwill	25,000	10,000	–
	175,000	100,000	60,000		175,000	100,000	ecolebooks.com 60,000
				Balance b/d	150,000	100,000	60,000

3) When goodwill retained within a business:-

In this method the new partner paid a premium and the old partners decide to leave it in the business.

Account entries:-

When goodwill paid in cash

DR: Cash A/C

CR: Old partner capital A/C

EXAMPLE

On 1st Jan Juma and Hamis are in the partnership , each with capital of 15000/= and sharing profit equally decide to admit Hamada as a partner on condition that he brings in shs 10,000/= as capital and pays them a premium of 10,000/=

The profit in future are to be shares as follows juma 2/5 hamis 2/5 and hamadi 1/5

Record the above transaction showing the admission of hamadi and how the premium remains in the partnership firms

X , y, and z are in partnership sharing profit and losses in the ratio of 3: 3: 2 their balance sheet as at 1st Jan 1980 was as follows

EXAMPLE 2

On the above data they agreed to admit P into partnership on condition that contributes Tshs 18,000/= as his capital for a fourth share in the future profit in addition to that he must pay Tshs 12000/= has goodwill which remain in the business

Required show the necessary entries for P’s admission and how the goodwill remains in the business or partnership

(4) When goodwill is raised and immediately written off:-

This is when new partner does not pay any cash into the business as a goodwill rather than capital and the old partner decided to write off.

Account entries:-

(i) When goodwill is written off:-

DR: All partner capital A/C
CR: Goodwill A/C

(ii) When goodwill is written off:-

DR: All partner capital A/C
CR: Goodwill A/C

Example:–

Tamim and Nuhu are in partnership with capital of 400,000 cash, sharing profit and loss equally they agreed to admit Ally as a third partner in condition that all pay 400,000 as capital since Ally cannot raise any more fund. The partner decided that the goodwill of the business be valued at 150,000 and written off immediately. The new profit sharing ratio be 1/3 for each partner.

-Show the entries for the above transactions:-

Solution

DR PARTNERS CAPITAL A/C CR

DETAILS	T	N	A	DETAILS	T	N	A
Goodwill	50,000	50,000	50,000	Balance b/d	400,000	400,000	–
Balance c/d	425,000	425,000	350,000	Cash	–	–	400,000
				Goodwill	75,000	75,000	–
	475,000	475,000	400,000		475,000	475,000	400,000
				Balance b/d	425,000	425,000	350,000