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Partnership Accounting 2

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Partnership Accounting 2

  1. 1. An Introduction
  2. 2.  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.  Unlimited liability.
  3. 3. • 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? Advantages: 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. Disadvantages: 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).  
  4. 4.  “You will never change your life until you change your belief about what you are capable of.” Robin Cow
  5. 5.  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.
  6. 6.  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.
  7. 7.  The purpose of a partnership is to make profit.  Profits/losses of a partnership are shared in any ratio they wish.  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 Profit
  8. 8.  The two basic business principle are that cash withdrawn must be; ◦ As little as possible ◦ As late as possible.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.
  9. 9.  Partnership Salaries will be paid according to responsibility.  This salary is deducted before sharing of profit  Salaries and Performance based pay are treated the same.
  10. 10. • 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 amongst themselves.   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.  
  11. 11. • Net Profit (P/L Account) xxx Add Interest on drawings xx Less partners’ salary bonus or (xx) commission less Interest on Capital (xx) Balance of profit shared xxx Partner A xx Partner B xx xxx
  12. 12.  Two methods available for accounting for partnership Capital ◦ Fixed Capital plus Current Account ◦ Fluctuating Capital Accounts
  13. 13.  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  Partners salaries
  14. 14.  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 warned. - A credit means there is remaining profit
  15. 15.  This is mix of Capital and Current accounts. The method is discouraged.
  16. 16.  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;
  17. 17. Example 1 DR CR Buildings(cost 210 000) 160,000 Fixture at Cost 8,200 Provision for Depreciation Fixtures 4,200 Debtors 61,400 Creditors 26,590 Cash at Bank 6,130 Stocks at 30 Set 2004 62,740 Sales 363,111 Purchases 210,000 Carriage Outwards 3,410 Discount allowed 620 Loan Interest: P Prince 3,900 Office Expenses 4,760
  18. 18. 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 French 75,000 Current Accounts Frame 4,100 French 1,200 Drawings Frame 31,800 French 28,200 640,601 640,601
  19. 19. 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%. Require: Prepare Trading and Profit and Loss Appropriation Account Balance Sheet
  20. 20. Trading and Profit and Loss Account for the year ended 30 September Sales 363,111 Less Cost of Goods sold Opening Sock 62,740 Purchases 210,000 Closing Stock 74,210- 198,530 Gross Profit 164,581 Reduction in Provision for DB 150 Less 164,731 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 Depreciation-Fixtures 600 - Buildings 5,000 78,666 Net Profit 86,065 Frame amd Franch Partnership
  21. 21. 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 Frame 29,289 French 19,526 48,815

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