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    Partnership

    Uploaded by

    Yati Shaiful
    Accounting

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    © All Rights Reserved
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    Partnership

    Uploaded by

    Yati Shaiful
    3 views25 pages
    Accounting

    Original Title

    2. Partnership

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    © © All Rights Reserved

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    Accounting

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    3 views25 pages

    Partnership

    Uploaded by

    Yati Shaiful
    Accounting

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 25

    ACCOUNT ING 2

    PART NE RSH I P
    Learning Outcomes

    • Identify the partnership form of business organization


    • Explain the accounting entries for the formation of a partnership
    • Identify the bases for dividing net profit or net loss
    • Describe the form and content of partnership financial statements
    Partnership

    •The partnership act - A partnership as ‘the


    relationship which subsists between
    persons carrying on business in
    common with a view of profit’.
    •Partners - people who own a partnership.
    •Do not have to be based or work in the
    same place, though most do.
    Partnership

    •Maintain one set of accounting


    records and share the profits and
    losses.
    •Relationship is based on a contract.
    Characteristics of
    Partnership

    • Formed to make profits.


    • Must obey Partnership Act 1961.
    • If there is a limited partner, it must also comply with the Limited Liability Partnership (LLP) Act 2012.
    • Minimum of 2 partners and maximum of 20 partners.
    • Exception
    • Banks - cannot be more than 10 partners
    • Accountants, solicitors, stock exchange, surveyors, auctioneers, valuers, estate agents' firms etc - unlimited
    Characteristics of
    Partnership

    • Each partner (except for limited partners) must pay their


    share of any debts that the partnership could not pay.
    • Unlimited liability partner
    • Could be forced to sell their privates' possessions
    to pay their share of the debts.
    • General partners - partners who are not limited partners.
    Limited Partnership

    • Partnerships containing one or more limited partners.


    • Must be registered with the Registrar of Companies.
    • Limited partners are not liable for the debts.
    • Liability limited to the capital they have put in.
    • Can lose that capital but cannot be asked for additional
    money to pay the debts unless they contravene the
    regulations relating to their involvement in the
    partnership.
    Limited Partnership
    • Not allowed to
    contribution to
    take out any part of their
    the partnership during its
    lifetime.
    • Not allowed to take part in the management or
    to have the power to make the partnership
    take a decision.
    • Ifandtheyobligations
    do, they become liable for all the debts
    of the partnership up to the
    amount taken out or received back or incurred
    while taking part in the management of the
    partnership.
    Limited Partnership
    • There must be at least one general partner
    with unlimited liability.
    Advantages

    • Spreading of business risk


    • Different partners can develop special skills
    because each partner can focus on one skill
    • Some partners have more ability to invest
    capital resources than other partners
    Disadvantages

    • Disputes between partners on business


    matters
    • All are ‘jointly and severally liable’ for his
    partners. If one partner incurs a liability, then
    the others will also share it.
    The Deed of Partnership

    • Partners in a partnership are largely free to make whatever


    agreements between themselves that they wish to cover their mutual
    relationships.
    • The powers and rights of the partners between themselves are
    governed by any written agreement they may make.
    • Prepared to avoid misunderstanding between partners.

    It states the followings:

    1) The capital to be contributed by each partner


    2) The ratio in which profits (or losses) are to be
    shared
    3) The rate of interest, if any, to be paid on capital
    before the profits are shared
    The Deed of Partnership

    4) The rate of interest, if any, to be charged on


    partners’ drawing
    5) Salaries to be paid to partners

    6) Arrangements for the admission of new partners.

    7) Procedures to be carried out when a partner retires


    or dies.
    No Partnership Agreement

    • Profit and losses are to be shared equally


    • No interest allowed on capital
    • No interest to be charged on drawings
    • Salaries are not allowed
    • Partners who put a sum of money into a partnership in excess of the capital they have agreed to
    subscribe are entitled to interest at the rate of 5% per annum on such an advance.
    Sole Trader vs Partnership (Accounting
    Entries)
    Sole Trader Partnership
    1) Only Capital Account 1) Two accounts:
    - Capital invested, Drawings a) Partners’ Fixed Capital
    and Profit / Loss are closed Account
    to the Capital Account Contains only amount of
    capital invested.
    b) Partners’ Current A/C
    Contains each partner’s
    Drawings and share of
    Profit / Loss
    Sole Trader vs Partnership (Accounting
    Entries)

    Sole Trader Partnership


    2) No division of profit 2) Profit is put into
    – all belongs to the Appropriation A/C –
    Sole Trader divided according to
    the Profit Sharing
    ratio to each partner
    The differences between Sole Trader and
    Partnership in terms of accounting entries
    Capital and Current Accounts
    In the accounts of sole trader, there would be a capital account
    and usually a drawing account. In the books of a partnership,
    there will be:

    1) A Capital Account for each partner. Unlike the


    capital account of a sole trader, this will only contain
    the original capital put into the business plus any
    further capital introduced later. It is fixed in nature and
    used to record:
    Capital introduced or withdrawn by new/retiring
    partners.
    The differences between Sole Trader and
    Partnership in terms of accounting entries

    Capital and Current Accounts (continues)

    2) A Current Account for each partner recording:


    a) drawings of money or goods taken by the partner for
    his or her own use (debit)
    b) interest charged on drawings (debit)
    c) interest on loans to the partnership (credit)
    d) salary (credit)
    e) interest on capital (credit)
    f) the partner’s share of the residual profit and loss
    The differences between Sole Trader and
    Partnership in terms of accounting entries
    The following factors have to be taken into consideration, before
    any profits are divided:

    a) Interest on capital
    Partners can agree to credit themselves with Interest on
    Capital.

    b) Salaries
    Partners can agree to credit themselves with fixed salaries,
    e.g. for a partner who contributes valuable service to the
    Partnership.

    c) Share of Residual Profits (or Losses)


    Partners can share out the remaining Profit and Loss after
    allowing for (a) and (b) above (Interest and Salaries), according
    to the profit and sharing ratio.
    The preparation of final accounts for
    partnership

    Appropriation Account for the year ended 31 Dec 2022


    RM RM RM
    The preparation of final accounts for
    partnership
    Once the Appropriation account has been completed, then we
    should record those amounts in the Partners’ Current Account.
    (continues Example 1)

    Partners’ Capital Account

    Partners’ Current Account


    The preparation of final accounts for
    partnership
    In conclusion, the flow of preparing the whole set of partnership
    account is as follow:

    Step 1: A trial balance

    Step 2: SoPL / Profit and Loss Account / SOCI

    Step 3: Appropriation Account

    Step 4: Partners’ Current Account

    Step 5: SoFP
    A and B
    Profit and Loss Appropriation Account for the year ended 31 December 2023
    RM RM RM
    Net Profit(from the Profit and Loss Account) 50,000
    Add interest on drawings :
    A 500
    B 1,000 1,500
    51,500
    Less Salary : B 15,000
    Interest on Capitals : A 1,000
    B 3,000 4,000 19,000
    32,500
    Balance of profits shared :
    A (3/5) 19,500
    B (2/5) 13,000 32,500
    Current Account

    2023 A B 2023 A B
    Dec 31 Drawings 15,000 26,000 Dec 31 Salary 15,000
    31 Interest 500 1,000 31 Interest 1,000 3,000
    on on capital
    drawings
    31 Balance 5,000 4,000 31 Share of 19500 13000
    c/d profits
    20,500 31,000 20,500 31,000
    2007
    Jan 1 Balance 5,000 4,000
    b/d
    Current Account

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