Partnership Accounts Notes
Partnership Accounts Notes
Partnership Accounts Notes
A business owned by 2-20 people called partners with an aim of making profit.
The nature/ features of a partnership business
- The business is formed to make profit
- Minimum of partners is two and maximum is 20, with the exception of the
bank where the maximum is 10 partners and there is no maximum for
professions such as accountants, solicitors, stock exchange member,
surveyors, auctioneers, valuers, estate agents, land agents, insurance
brokers etc.
- It has unlimited liability, meaning if the partnership fails to pay its debts, each
partner may be required to pay their share of debt and maybe forced to sell
their private possessions to settle the debt.
- Profit and losses shared
- A partnership agreement is usually drawn up to regulate the operations of the
business
- All partners must consent before decisions are made
- Usually formed by relatives or friends
The Importance of a partnership business
- Reduces risk of failure as losses can be shared by all the partners and
partners bring different expertise to the business
- More capital can be raised which can be used to expand the business
- Responsibilities are shared which leads to efficiency in the business
The Features of a Partnership Agreement
1. State the profit-sharing ratio; indicating the share of each partner in profits or
losses of partnership (not shared in proportion to capital contribution but
according to the agreement)
2. State salary if any to be paid to partners
3. It states the capital contribution to be made by each partner
4. States interest rate to be paid on partners’ capital contributions. Interest on
capital compensate partners who contribute more capital as profit sharing is
not based on capital contributions.
5. States the rate to be paid on drawings to discourage partners from making
excessive drawings from the partnership. Excessive drawings can result in
cashflow problems.
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6. States the terms of admission of a new partner (whether goodwill is to be
considered or not)
7. The procedure to be followed if one partner leaves the company (due to
death, retirement, leaving etc
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2. Explain the importance of appropriation account
3. Prepare profit and loss appropriation account
4. Differentiate between fixed and fluctuating capital accounts
5. Explain the importance of current account of partners
6. Prepare the capital and current account of partners in the ledger
7. Prepare the partners final accounts
8. Explain the meaning of goodwill
9. Prepare the accounting entries for goodwill on admission of a new partner
10. State the accounting entries between a sole trader and a partnership
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Less: Interest on capital
Taylor XXX
Clarke XXX XXX
Salary: Clarke ( earned by active partners only) XXX XXX
Commission received by a partner XXX
Balance of Profit to be shared
XXX
Taylor 2/5 of P222 XXX XXX
Clarke 3/5 of P222
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Steel 1500 6500
Salaries
Short 20 000
Steel 25 000 45 000 51 500
Balance of profit shared 60 500
Current Account
Records anything that increases or decreases capital
The importance of a current account
- Used to show each partner’s interest on capital
- Shows salaries earned by partners
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- Shows share of profits and losses
- Shows drawings
- Shows interest charged on drawings
When a partner has a negative (debit balance) it indicates that s/he is eating
into his fixed capital hence can decide to reduce drawings.
NB: Can show a credit/debit balance for a partner. Debit balance means the partner
is eating into his fixed capital hence a need to reduce drawings.
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Dece issued (if not
31 issued as cash)
Dece Xxx Xxx
xxx Xxx 31
Dece Balance b/d xxx xxx
31
2023
January
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Exercises to do
1. Lesego and Thuso
2. Ben & Amu
3. Gladys & Barbara
4. Benson &Boitshoko
5. Mercy &Laone
6. Macho & Neo
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GOODWILL
Objectives
1. Explain the meaning of goodwill
2. Prepare the accounting entries of goodwill on admission of a new partner
3. State the accounting differences between a sole trader and a partnership
NB: If the business has a bad reputation, inefficient labour force or any negative
characteristic, the owner would not be paid for goodwill on selling the business.
How Goodwill Is Calculated
There is no single way of calculating goodwill. Different industries/occupation have
own customary way of calculating goodwill.
i. Retail businesses normally value goodwill at the average weekly sales for
the past year multiplied by a given figure. The given figure differs between
types of business and often changes gradually in the same type of
business in the long term.
ii. Professional firms like accountants’ value goodwill as being the gross
annual fees times a given number.
iii. The average net annual profit for a specified past number of years
multiplied by an agreed number. This is often said to be X years purchase
of Net Profits.
iv. The super profits methods: what is left of the net profits after allowances
have been made for.
Goodwill in partnership; normally not entered in the books unless if it has been
purchased. However, partners own a share in goodwill in the same ratio in which
profits are shared. The account will be opened and closed.
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WHEN IS GOODWILL CALCULATED?
1. When a new partner is admitted
2. When a partner dies
3. When old partners change profit & loss sharing ratio
4. When the business is sold
The Accounting records: Date of admission used in accounts. End of year date not
used as goodwill account is NOT to be maintained.
1. Immediately before the admission of the new partner, the amount of goodwill
that the old partners have built up must be recognized and shared between
the partners using the old profit & loss ratio.
- Dr goodwill account with the estimated amount of goodwill
- Cr old partner’s capital accounts with the old profit-sharing ratio
2. The new partner will then be admitted and the cash that s/he brings into
partnership is accounted for by;
- Dr Cas/Bank account
- Cr new partner’s capital account
3. Finally, the goodwill must be eliminated from the books and this is done by
- Dr new partners’ capital accounts in new profit-sharing ratio
- Cr the goodwill account with the value of goodwill
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EXAMPLE
Peter and Paul have been in a partnership for several years sharing profits equally.
The balance in Peter’s capital account is P100 000 and for Paul is P80 000. They
decided to admit a new partner, Phill, on 5th April to their partnership. Phill will
contribute P60 000 in cash and the new profit-sharing ratio will be 2:2:1. The
goodwill in the partnership is estimated to be P30 000 and the goodwill account is
not to be maintained.
Required
Write up the partners ‘capital accounts to reflect admission of Phill.
Goodwill Account
Date Details P Date Details P
2023 2023
April 5 Capital: Peter 15 000 April 5 Capital: Peter 12 000
Paul 15 000 Paul 12 000
Phill 6 000
Capital Account
Date Details Peter Paul Phill Date Details Peter Paul Phill
P P P P P P
2023 2023
April 5 Goodwill 12000 12000 6000 April Balance b/d 100000 800000
1
April 5 Balance 103000 83000 54000 April
c/d 5 Goodwill 15 000 15 000
April
5 Bank 60000
115000 95000 60000 115000 95000 60000
April
6 Balance b/d 103000 83000 54000
Cash Account
Date Details P Date Details P
2023
April 5 Phill 60 000
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Initial cash introduced : Peter P100 000
Paul P80 0000
Journal Entries
Date Details Dr Cr
P P
2023
April 5 Goodwill 30 000
Capital: Peter 15 000
Paul 15 000
Being goodwill shared by old partners
April 5 Cash 60 000
Capital: Phill 60 000
Being capital introduced by Phill on admission
April 5 Capital: Peter 12000
Paul 12000
Phill 6000
Goodwill 30 000
Being goodwill written off after admission of
Phill
Exercises to do
1. Mokone and Chawa 92005)
2. Kagiso and Tapiwa
3. Maame and Lucy( goodwill amount not stated but the new partner’s share of
goodwill stated)
4. Lebo and Marang (2018)
5. Khumo and Thuto(2020)
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2. Calculate the goodwill and adjust for the revaluation of assets for a business
purchased
3. Explain the need to revalue some of the assets of a business purchased
4. Differentiate between the purchase of a business by a sole trader and the
amalgamation of two sole traders ‘s businesses
5. Record the purchase of a business in the buyer’s books of account
6. Prepare the statement of financial position which has bought another
business or two businesses which have amalgamated.
Valuation must be done so that the value of assets and liabilities become realistic
hence when calculating goodwill and preparing final statements use new
values.
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- The gain/loss made on revaluation is shared between old partners in their old
profit-sharing ratio
- If the revaluation shows no difference in assets values, no further action is
needed.
If it’s a loss
New total valuation of assets P40 000
Less: Old total valuation of assets (P50 000)
Loss on revaluation (P10 000)
Revaluation Account: an account used to record gains and losses when assets are
revalued. ( Frank wood, 14th edition chapter 34)
Step 1
Step 2
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- Add the two sides of the revaluation account
- If credit side is more than the debit side, there is profit on revaluation, share it
among the old partners using the old profit ratio.
Dr Revaluation account with “profit on revaluation”, showing how it was shared
between old partners
Cr Old partner’s capital accounts (as profit increases their capital share)
- If the Dr side is more than the Cr side, it means there is loss on revaluation,
share it among old partners using old profit-sharing ratio
Dr old partners’ capital accounts (current accounts- to reduce their capital share)
Cr loss to revaluation account, showing how it was shared among old partners.
SUMMARY
- Profits on revaluation of assets are credited to old partners’ accounts in the
old profit & loss sharing ratio as it increases their capital share
- Losses on revaluation of assets are debited to old partners’ capital accounts
in the old profit & loss sharing ratios as they decrease their profit share
- Assets accounts also show revalued amounts, profits will be debited as
(revaluation: increase, and losses credited as revaluation: reduction)
RATIONALE OF SHARING GAINS/LOSSES ON REVALUATION AMOMG
PARTNERS
The new partner should not enjoy the gains or suffer the losses that occurred before
his/her admission.
Revaluation Account
Date Details P Date Details P
2019 2019
January 1 Motor vehicle 13000 January 1 Buildings 75 000
January 1 Inventory 1900
January 1 Office fittings 1700
January 1 Profit on revaluation
Cox P29 200
Fox P17 520
Lock P11 680 58 400
75 000 75 000
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Workings : Revalued assets
a. Buildings
New value P250 000
Less; Old value P175 000
Gain on evaluation 75 000
b. Motor vehicles
New value P30 000
Less; old value P43 000
Loss on valuation P13 000
c. Inventory
New value P14 000
Less; old value P15 900
Loss on revaluation P1 900
d. Office fittings
New value P3 000
Less; old value P4 700
Loss on revaluation P1 700
The credit side is of the revaluation account is more than the debit side; hence profit
on revaluation.
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Fox 3/10 * P58 400 = P17 520
Lock 2/10* P58 400 = P11 680
Buildings Account
Date Details P Date Details P
2019 2019
January 1 Balance b/d 175 000 January 1 Balance c/d 150 000
January 1 Revaluation: increase 75 000
150 000 150 000
January 2 Balance b/d 150 000
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Inventory Account
Date Details P Date Details P
2019 2019
January 1 Balance b/d 15 900 January 1 Revaluation: reduction 1 900
January 1 Balance c/d 14 000
15 900 15 900
January 2 Balance b/d 14 000
Jan 16920
2 0
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COX, FOX, & LOCK
BALANCE SHEET AS AT 1 JANUARY 2019
P P P
NON-CURRENTS ASSETS
Buildings at valuation 250 000
Motor vehicle at valuation 30 000
Office fittings at valuation 3 000
283 000
CURRENT ASSETS
Inventory at valuation 14 000
Accounts receivable 22 200
Bank 3 600 39 800
322 800
Capitals:
Cox 169 200
Fox 97 520
Lock 56 080
322 800
JOURNAL ENTRIES
Date Details Dr Cr
2019 P P
January 1 Buildings 75 000
Revaluation 75 000
Being increase in value of buildings to change profit &
loss sharing ratio of partners
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Office fittings 1700
Being decrease in value of office fittings to change profit
& loss sharing ratio of partners
Revaluation Exercises
1. 34.2A
2. 34.4A
Accounting entries
Step 1:
- Dr Purchase of business account with the purchase price offered
- Cr the vendor Account ( seller- trade payable)
Step 2
- Dr purchase of business account with liabilities taken over at their new values
if they have been revalued
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- Cr the liabilities account to reflect the increase in revaluation( If liabilities
accounts and revaluation accounts are to be opened)
Step 3.
- Cr purchase of business account with all the assets taken over at their new
values if they have been revalued.
- Dr the assets account to reflect increase in revaluation ( if assets accounts
and revaluation accounts are to be opened)
Step 4.
Total the account to determine Goodwill or capital reserve
- If the debit side is more than the credit side , the difference is recorded on the
Cr side as Goodwill.
- If the credit side is more than the Dr side, record the difference as capital
reserve on the Dr side. In that case there is negative goodwill
NB: Purchase of business account does not have a balance; it is closed off. It
represents the accounting equation. Assets acquired when a business is bought
must be equal to liabilities and capital taken over.
You can also use a formula to determine goodwill or capital reserve on purchase of a
business.
The purchase price must be compared with the net assets acquired. If the amount
paid exceeds the net assets acquired, then the excess amount is to be debited to
goodwill account.
In certain cases, the purchase price may be less than the net assets acquired.
Therefore, the excess amount(capital profit) is to be credited to the capital reserve
account.
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4. Thebe and Kitso
5. Khupe and Pongo
6. Botho
AMALGAMATION
It is the joining of two or more businesses to form one business.
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CAPITAL ACCOUNT- Thato
Date Details P Date Details P
2023 2023
July 1 Trade payables 1000 July 1 Premises 12 000
July 1 Balance c/d 17 925 July 1 Equipment 3 400
July 1 Trade receivables 1 425
July 1 Bank 100
July 1 Goodwill 2 000
18 925 18 925
Balance b/d 17 925
CAPITAL ACCOUNT- Kavinda
Date Details P Date Details P
2023 2023
July 1 Trade payables 600 July 1 Equipment 4 950
July 1 Balance c/d 9 725 July 1 Fixtures 3 300
July 1 Inventory 1 600
July 1 Trade receivable 475
10 325 10 325
Balance b/d 9 725
Non-current assets
Premises 12 000 - 12 000
Equipment (3400+ 4950) 8 900 550 8 350
3 300 - 3 300
24 200 550 26 650
Current Assets
Inventory 1 600
Trade receivable (1500+500) 2000
Less: Provision for bad debts (5 % P2000) 100 1900
Bank 100
3 600
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Less: Current Liabilities
Trade payables ( P1000 + P600) 1 600
Net Current Assets 2000
Net Total Assets 27 650
Financed by:
Capital: Thato 17 925
Kavinda 9 725 27 650
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