PARTNERSHIP ACCOUNT

In the Gambia, the Partnership Act contained in Volume 15 Cap 94 Revised Laws of the Gambia
(hereinafter referred to as the “PA”), Section 3 (1) defines a partnership as “the relation which subsists
between persons carrying on a business in common with a view to profit”.

According to the partnership act of 1890 of UK, Partnership is defined as an association of from two to
twenty partners carrying a business in common with a view of making a profit. Such people may have
joined in partnership for reasons such as:

 A business may require capital too large for one person to provide
 A business may require many skills, abilities and experience that cannot be provided by one
person alone
 Many people want to share the management responsibilities of a business with others

PARTNERSHIP DEED
Partners in business are guided by a form of document called partnership agreement or partnership
deed. This document contains a mutual understanding between the partners and it can be either oral or
written. To avoid conflicts and misunderstandings between partners, it is recommended that the
partnership deed be written and signed by all partners. The content of the partnership deed may
include:

 Capital to be contributed by each partner

 Profit and loss sharing ratio
 Rate of interest (if any) to be paid on capital put in by partners
 Rate of interest (if any) to be charge on drawings by partners
 Salaries (if any) to be paid to partners for some business services
 Procedures of admitting a new partner

According to the partnership, if there is no partnership agreement then;

 profit and loss should be share equally;

 no interest be charge on partners drawings,
 no interest to be paid on capital put in by partners and no salary for partners etc.

GENERAL AND LIMITED PARTNERSHIP

The Act provides for two kinds of partnerships, the general partnership and the limited
partnership.

General partnership - The Act defines a general partnership as a partnership that is not a limited
partnership and section 53 PA provides that a partnership not formed and registered as a limited
partnership in accordance with the Act is deemed to be a general partnership and every partner is
deemed to be a general partner.
Limited Partnership – Section 47 of the Partnership Act defines what a limited partnership is. This kind
of partnership as the word “limited” connotes shares several characteristics with the company as a
business organization. It indicates that the limited partner is separate from the partnership. He or she
will not be personally liable for the debts of the partnership. He or she is liable only to the extent of his
unpaid contribution (section 68 PA).

Except for one partner (i.e., limited partner) each partner is liable to the full extent of his personal
possession for the whole of the debt of the partnership firm should the firm be unable to pay them. The
limited partner’s liability is limited to the amount of capital invested by him. A limited partner cannot
take part in the administration of the partnership business and therefore there must be one general
partner in a limited partnership.

FINAL ACCOUNTS FOR A PARTNERSHIP BUSINESS

 PARTNER’S TRADING PROFIT OR LOSS, AND APPROPRIATION ACCOUNT

The partner’s trading, profit and loss account is the same as that of a sole proprietorship, except for the
addition of one section, called the Profit and Loss Appropriation Account. This section is use to adjust for
partnership’s transaction with the partners and distribute the adjusted net profit or loss among the
partners. This account will be credited with the net profit and interest on drawings; and debited with
interest on capital and partners salary. If the profit and loss account show a net loss, it will be shown on
the debit side of the profit and loss appropriation account. After these adjustments have been made,
the profit and loss appropriation account will show the amount of profit or loss, which shall be
distributed among the partners in the agreed profit-sharing ratio.

 PARTNER’S STATEMENT OF FINANCIAL POSITION

The balance sheet of a partnership is normally prepared in the same manner as that of that of a sole
proprietorship; the only difference is in the capital account. There are two methods by which the capital
account of partners can be maintained. They are:

 Fluctuating capital method: under this method, only one account called the capital account for
each partner is maintained. It records all items affecting the partner’s account like interest on
capital, interest on drawings, salary of partner and share of profit or loss. As a result, the
balance of this account keeps on fluctuating.
Under this method, the capital account is credited with: capital introduce or opening balance,
additional capital made during the year, interest on capital, salary to partners and share of profit
While it is debited with: drawings made during the year, interest on drawings and share of loss.

 Fixed capital account: under this method, the capitals of the partners shall remain fixed unless
some additional capital is introduced. Hence all other items like interest on capital, drawings,
interest on drawings, salary, share of profit and loss are shown in the capital account instead
they are shown on a separate account called Partner’s Current account. Thus, under this
method two accounts are maintained: the capital account and the current account.

Note: A credit balance in the current account reflects a liability to the business because the business
owes money to the partners. While a debit balance means that partners owe the business money.

Interest on capital is paid to compensate a partner for investing extra capital. It serves as a motivation
for partners to invest more capital into the business. The interest is deducted prior to the calculation of
the profit and their distribution. The rate of interest is normally between the partners e.g. If the partners
profit is D50000. Capital contributed by partners are: A- D70000, B- D40000 and C- D20000. The
partners agree that interest on capital will be 10%. Profit is share in the ratio 5:3:2. Prepare the
appropriation account.

Interest charged on withdrawal (drawings) is intended to deter partners from unnecessary taking out
cash from the business. The interest charges increase the profit divisible between the partners. The rate
of interest is normally agreed between the partners.

A partner is paid salary for having a particular responsibility and or extra task that the others have not
got. This salary is deductible before arriving at the balance of the profit/loss to be shared between the
partners.

Example 1:

partners Drawings (D) profit/loss sharing ratio

Capital (D)
A 20,000 5,000 5
B 10,000 3,000 3
C 5.000 1,000 2

Interest on capital is 10%, interest on drawings is 15%, profit is D50,000 and assumes that C is paid a
salary of D8000. Prepare the profit and loss appropriation, capital and current account for the partners.

Exercise
1: Mariama Suwaneh and Mariama Busso entered into a partnership to run a retail shop. On 31st March,
2000, the following balances were extracted from their books.

D D
Capital Account:
Mariama Suwaneh 5000
Mariama Busso 5000
Long term loan 5000
DRAWINGS:
Mariama Suwaneh 2400
Mariama Busso 2400
Net Profit 8500
Stock at closing date 1000
Debtors and Creditors 1600 300
Cash at bank and in hand 9890
Business Premises less 4750
Depreciation D250
Furniture & Fittings less 1800
Depreciation D200
Bad debt provision 80
Accrued expenses 20
Prepaid expenses 60
Total 23900 23900
The following information were given:

i) The trading profit and loss account had been prepaid before the figures shown above were
arrived at.
ii) oMariama Busso is also due for a salary of D1000
iii) Mariama Suwaneh and Mariama Busso share profit & loss equally

Required: Prepare an Appropriation Account and a Balance Sheet for the partners as at 31st March,
2000

2. Binta and Kolleh are in partnership sharing profit and loss equally. Their trial balance as at 31 March
2010 is as follows:

Dr Cr

D D

Building at cost 50000s

Fixtures at cost 11000

Provision for depreciation: fixtures 3300

Debtors 16243

Creditors 11150

Cash at bank 677

Stock at 31 march 2009 41979

Sales 123650

Purchases 85416

Carriage inwards 1288

Discount allowed 115

Loan interest: fatou 4000

Office expenses 2416

Salaries and wages 18917

Bad debts 503

Provision for bad debts 400

Loan from fatou 40000

Capital: Binta 35000

Kolleh 29500

Current accounts: Binta 1306

Kolleh 298

Drawings: Binta 6400

Kolleh 5650

Total 244604 244604

Prepare a trading profit and loss and appropriation account for the year ended 31 march 2010 and a
balance sheet as at that date. The following information is also available:

a) Stock 30 march 2010 D56340

b) Expenses accrued: office expenses D96, wages D200

c) Depreciate fixtures 10% on reducing balancing basis

d) Reduce provision for bad debts to D320

e) Partnership salary : D800 to Binta not yet paid

f) Interest on drawings: Binta D180, Kolleh D120

g) Interest on capital account balances at 10%

3. Fatou and Rohey are in partnership as ‘Never Fail’. The following Trial Balance was

extracted from the firm’s book at 31st August 2012:

Dr (£) Cr (£)

Capital Accounts:

Fatou …………………………………………………………………………………………..15,000

Rohey……………………………………………………… …………………………………10,000

Current Accounts:

Fatou……………………………………………………… ……………………………………2,450

Rohey ………………………………………………………....................................750

Freehold Property at cost …………………………………..30,000

Fixture & Fittings (cost £3,300) …………………………..2,640

Motor vehicle (cost £4,000) ……………………………….3,200

Drawings:

Fatou ……………………………………… …………………….3,500

Rohey ………………………………………………………………2,000

Sales ……………………………………………………………………………………………20,000

Stock at 1 July 2011 ………………………………………….1,100

Purchase……………………………………………………………7,900

Rates…………………………………………………………………1,100

Insurance……………………………………………………………220

Electricity…………………………………………………………..310

Telephone…………………………………………………………260

Motor expenses ………………………………………………..640

Partner’s salary – Fatou …………………………………….1,000

General expenses ……………………………………………….170

Loan account – Fatou…………………………………………5,000

Trade Debtors and Creditors ……………………………….140……………………..250

Bank overdraft ……………………………………………………………………………..730

54,180 54,180

The partnership agreement provides that:

A. Partners are entitled to interest on their fixed capital at 8% per annum and are charged 5% per
annum on their cash drawings.
B. Interest on any loan made by a partner is allowed at 10% per annum.
C. Fatou is to receive an annual salary of £2,500 and £1,000 of her salary has been paid during the
year.
D. Profits and losses are to be shared: Fatou two-thirds, Rohey one-third

The following information should also be taken into consideration:

I. Depreciation is to be charged at 10% per annum on fixtures and fitting using the straight-line
method, and at 20% per annum on the motor vehicle using the reducing balance method.
II. On 31st August 2012, insurance premium prepaid was £54, an electricity bill of £80 was due but
unpaid and stock was valued at £1,000.
 III. Fatou made her total drawings on 1 December 2011 and Rohey made half of her drawing on 1
September 2011 and the remainder on 1 March 2012.
IV. Motor expenses (including depreciation) chargeable to the partners for their private use of the
firm’s vehicle are: Fatou £100 Rohey £150
V. The loan from Fatou was made in one single payment on 1 March 2012.

Required:

1. Prepare the Income Statement (including the appropriation section) for ‘Never Fail’ for the year
ended 31 August 2012.
2. Prepare the Balance sheet as at 31 August 2012.
3. Partners’ current account showing balances to be carried down at 31 August 2012.