Formed to make profit
Comply with the Partnership Act
Minimum of two partners
Each partner must pay their share of liabilities that
the partnership could not pay.
• Partnership Accounting
What is a Partnership?
• A partnership is defined as the relationship that exists between persons carrying on a business. These persons agree to
combine some or all of their property, labour, and skills. This relationship is based on a contract.
What are the Advantages and Disadvantages of Partnerships?
a) Partnerships allow for a greater amount of money, skill, and other resources to be pooled.
b) They are relatively easy to organize.
c) They are subject to limited government regulations and do not face high tax rates.
a) Partnerships have a limited life.
b) Each partner is subject to unlimited liability. This means that if the company fails, creditors can take
action against both the partnership and the persons who are in it.
c) Partners have mutual agency. This means that one partner can make decisions without consulting the other(s).
“You will never change your life until you change
your belief about what you are capable of.”
Capital to be contributed
Ratio of Profit/loss sharing
Rate of Interest to be paid on capital before
profits are shared
Rate of Interest to be charged on drawings.
Salaries to be paid to partners
Arrangement to the admission of new partners
Procedures to be carried out when partners
retire or die.
Partners contribute an agreed amount. Partners
need not contribute the equal amounts.
Partners can increase/decrease their capital
contribution any time during the partnership
depending on what has been agreed.
The purpose of a partnership is to make profit.
Profits/losses of a partnership are shared in any ratio they
The profit sharing may not be based on capital contributed,
especially where partners ‘s duties are the same.
Interest on capital contributed is used to compensate partners
who contribute more capital.
Interest on Capital is deducted before sharing of
The two basic business principle are that cash withdrawn must be;
◦ As little as possible
◦ As late as possible.
Liquidity/cash is the blood of the business
To deter partners from taking cash out of the business, partners are
charged interest on withdrawals. Interest charged must be sufficient
to deter partners.
The charge is computed as Rate X Amount Withdrawn X Period in
a year the partnership will forgo the use of the money.
Used to increase profits
Treatment- add before sharing of Profit.
Partnership Salaries will be paid according to
This salary is deducted before sharing of profit
Salaries and Performance based pay are treated
• Accounting for Partnerships
Each partner must use a Capital and a Withdrawals
account to record changes in their financial positions.
They must allocate for division of profits and/or losses
Allocation of Earnings
There are three methods of dividing earnings.
1.0 Stated fractional basis
2.0 Ratio of capital investment,
3.0 Use of salary and interest allowances.
• Net Profit (P/L Account) xxx
Add Interest on drawings xx
Less partners’ salary bonus or (xx)
less Interest on Capital (xx)
Balance of profit shared xxx
Partner A xx
Partner B xx xxx
Two methods available for accounting for
◦ Fixed Capital plus Current Account
◦ Fluctuating Capital Accounts
Two Accounts are opened;
Capital Account- This account records the capital injected by
the partner. This account remains the same year on year
unless new capital is injected.
Current Account- This account records all transactions that
affect the capital account these are
Profits/Loss – which increases or decreases the capital
Interest on Capital earned
Interest on Drawings Charged
The balance in the Current represent the amount
profit/loss that should be added to capital.
- A debit means the partners has
overdrawn profits and he can be
- A credit means there is remaining
This is mix of Capital and Current accounts. The
method is discouraged.
Frame and French are in partnership sharing
profits and losses at a ratio of 3/5 and 2/5.The
following is their Trial Balance;
Buildings(cost 210 000) 160,000
Fixture at Cost 8,200
Provision for Depreciation Fixtures 4,200
Cash at Bank 6,130
Stocks at 30 Set 2004 62,740
Carriage Outwards 3,410
Discount allowed 620
Loan Interest: P Prince 3,900
Office Expenses 4,760
Salaries and Wages 57,809
Bad Debts 1,632
Provision for Doubtful debts 1,400
Loan from : P Prince 65,000
Capital: Frame 100,000
Stock, 30th June 2009, 74 210
Expenses Accrued Office 215,Wages 720
Depreciation fixtures 15% on reducing balance method, Building 5000.
Reduce provision of DB to 1250
Partner ship Salary 30 000 to Frame not yet entered
Interest on Drawings Frame 900,French 600
Interest on Capital at 5%.
Prepare Trading and Profit and Loss Appropriation Account
Trading and Profit and Loss Account for the year ended 30 September
Less Cost of Goods sold
Opening Sock 62,740
Closing Stock 74,210-
Gross Profit 164,581
Reduction in Provision for DB 150
Salaries (57 809+720) 58,529
Office Expenses (4760+215) 4,975
Carriage Outwards 3,410
Discount Allowed 620
Bad Debts 1,632
Loan Interest 3,900
- Buildings 5,000
Net Profit 86,065
Frame amd Franch Partnership
Add Interest on drawings: Frame 900
French 600 1,500
Less Interest on Capital : Frame 5,000
French 3,750 8,750
Salaries Frame 30,000
Balance of Profits 48,815