Accounts Partnership Project

PARTNERSHI
P
ACCOUNTS
BY PALAK SANGHVI
CLASS 12
INDEX
Formation of a partnership
Partnership Agreement
Partnership Act 1890
Advantages of partnership
Disadvantages of partnership
Limited liability partner
Partnership accounts
Profit distribution
Profit and loss appropriation account
Admission of a new partner
Recording goodwill
Revaluation of assets
Partnership desolution
FORMATION OF A PARTNERSHIP
According to the Partnership Act pf 1890, it is defined as the relationship between two
or more people engaging in business for profit .
Three important factors must be present in a partnership:
1)Partners must be carrying on a business ,not one isolated business transaction
2)Must be an agreement between two or more legally competent people who must be
the business co-owners
3)Partners must have an intent to make a profit.
 Owners capital account are kept for each individual
partner
 Partnerships are separate accounting entities to the partners (Each partner has the
right to share in the profits and manage the business.
PARTNERSHIP AGREEMENT
 Doesn’t always exist, making it difficult to establish if a partnership actually exists.

 If there is no formal partnership agreement then the Partnership Act applies.
 An agreement is essential because partnerships:
a) Have unlimited liability
b) Have limited life
-death of partner
–insolvency of partner
-retirement if partner
 Name of business  Drawings and interest on drawings
 Interest on capital
 Details of each partner  Voting and decision making procedures
 Nature of business
 Admission of new partners
 Division of profits and losses
 Resolution of disputes
 Capital contributions
 Bankruptcy, death or retirement of
 Authority, Rights and duties of partners
partners
 Details of salaries
PARTNERSHIP ACT 1890
 If there is no partnership or agreement in writing, or if it does not cover an area of dispute,
matters may be resolved by reference to the Partnership Act
 Eg- the act states that all profits and losses are to be shared equally, so if the partnership
agreement does not specify the profit sharing ratio ,then profits and losses ae to be divided
equally, ie the act is applied .
 Partners will receive interest at 5% on excess capital(ie above and over which that they have
agreed to contribute
 No interest on drawings
 No salaries
ADVANTAGES OF PARTNERSHIP
 Creation and dissolution is easier than a company
 Minimal statutory regulations
 Resources can be pooled
 Expertise can be utilized
 Co-ownership of assets
 Duties and responsibilities are shared
DISADVANTAGES OF PARTNERSHIP
 Liability is unlimited
 Partnership may cease if a partner dies, retires or becomes bankrupt
 Disagreements between partners can occur
 Limits to raising large amounts of capital
 Partners can be sued by creditors, jointly or individually
 Partners are likely to pay higher income tax
LIMITED LIABILITY PARTNER
 Governed by the Limited Liability Partnership Act 1907
Liability is limited to the amount of capital invested by the partner
 A limited partner has no say in the management of the partnership business
PARTNERSHIP ACCOUNTS
CURRENT ACCOUNTS
Working accounts containing details of profit ,loss , drawings and interest on capital
invested or charged on drawings
CAPITAL ACCOUNTS
Partners original capital put into the business is considered to be fixed
Capital account of each partner is usually unchanged unless additional capital is
invested.
CREATION OF PARTNERSHIP ACCOUNTS
 CAN BE CREATED IN TWO WAYS-
-The introduction of cash only, entered in the cash account
-The introduction of cash and other asset accounts and the partners capital account
PROFIT DISTRIBUTION
 Profits and losses are shared in the way partners feel most appropriate
 Profit share can be determined in various ways:
-Amounts are shared on the basis of the amount of capital contributed by each partner
-Higher profit may go to the partner bringing in something of particular value to the
business, such as specialized expertise
PROFIT AND LOSS APPROPRIATION
ACCOUNT
 Net profit or loss is transferred to this account from the profit and loss account
 Additions are made for interest on drawings as it discourages partners from making
drawings from the business
 Deductions are made for interest on capital or any salaries paid to partners
 Residual Profits are then shared as agreed, according to profit sharing ratios
PROFIT DISTRIBUTION
 ALLOCATION AS PER PARTNERSHIP AGREEMENT
 Interest on capital may be payable
 Interest may be charged for drawings taken out of the business
 There may be provision for the payment of a salary of a particular partner
 Interest may be payable on loans to partners by the business or loans to business by
the partner
PROFIT DISTRIBUTION
LOAN ACCOUNTS
Where partner makes a loan to the business, the debit is to bank and credit to loan
account in the partners name
DRAWINGS
Where a partner withdraws cash from the business in anticipation of profits earned,
the current account is debited and cash/bank is credited
ADMISSION OF A NEW PARTNER
REASONS FOR A NEW PARTNER
-May bring in products and/or customers to the business
-May bring specialized expertise to the business
-Allows business access to further capital
-May bring in additional assets
-May provide new business contacts
-May be required due to death, retirement or bankruptsy of an existing partner

NEW PARTNERSHIPAGREEMENT
ADJUSTING THE EXISTING BUSINESS

-All existing partners must agree on the admission of a new partner
-Assets of the business should be revalued before a new partner is admitted
-Liabilities need to be reviewed for accuracy in valution
--Gains and losses to existing partner from new business value will be made at
existing profit sharing ratio
STEPS TO ADMIT A NEW PARTNER
 Revalue of assets
 Consider inclusion of goodwill
 Record changes in ledger accounts
 Open a goodwill account and adjust the existing partners capital accounts according to their existing
profit sharing ratio
 Prepare opening ledger entries for new partner

 Calculate partners new profit sharing ratio
 Prepare a new statement of financial position ie balance sheet
GOODWILL
-Goodwill can be defined as future benefits from assets that cannot be individually identified e.g.
reputation, customer database, management ability, product, location
-Goodwill is an asset and as such appears in the balance sheet as an intangible asset
RECORDING A GOODWILL
When a partnership is revalued:
Debit the Goodwill accountwith the value of the increase in the value of the business (premium)
-Credit the existing partners Capital accounts according to the profit sharing ratio
REVALUATIONOF ASSETS
 Before admitting a new partner to the business, assets should be revalued:
-E.g. Buildings may have appreciated in the values
-E.g. Machinery may not be worth as much as the net book value in the balance sheet,
perhaps insufficient amounts for depreciation has been written off over the years
PARTNERSHIP DISSOLUTION
REASONS FOR DISSOLVING A PARTNERSHIP

-Partner(s) may give notice of intention to dissolve
-Insolvency of partner
-Ownership changes E.G. CONVERTING TO A COMPANY
-Inability to trade profitably
-Death of partner
-Voluntary agreement by partners
-Courts may also rule to terminate the partnership
KEY TERMS
 Capital Accounts  Partnership Act
 Capital Adjustment Account  Partnership Agreement
 Current Account  Profit and Loss Appropriation
 Revaluation of Fixed Assets Account
 Fixed Capital Account

 Profit Sharing Ratios
 Interest on capial
 Interest on drawings
THANKYOU

Accounts Partnership Project

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PARTNERSHI

 Doesn’t always exist, making it difficult to establish if a partnership actually exists.

-May be required due to death, retirement or bankruptsy of an existing partner

ADJUSTING THE EXISTING BUSINESS

 Prepare opening ledger entries for new partner

REASONS FOR DISSOLVING A PARTNERSHIP

 Fixed Capital Account

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