Chapter 10 Partnership Accounts

A partnership is a legally recognised association of between two and twenty people who have joined together to contribute the capital of a firm and share its profits. Partners must provide a written agreement, known as the Deed of Partnership. In such an agreement one finds: (1) How Profits and Losses are to be shared; (2) How much capital each partner is to contribute to the business; (3) The interest, if any, to be given to each partner on the capital invested. (4) Whether any partner is entitled to a salary or commission; (5) How much cash is to be withdrawn by each partner and the rate of interest, if any, to be charged on drawings. If no written agreement exists the partners must refer ton the Partnership Act of 1890. This states that: (1) Profits and Losses to be shared equally; (2) No partner is entitled to extra salary / commission; (3) No partner is entitled to interest on capital; (4) Any loan made to the business by a partner is to carry interest at the rate of 5% per annum. Partnership Final Accounts: These include: (1) The Trading Account; (2) The Profit and Loss Account; (3) The Profit and Loss Appropriation Account; (4) The Partners Current Account; (5) The Balance Sheet. One must note that when preparing final accounts in a vertical style format the Profit and Loss Account and the Appropriation Account are presented in one account, rather then, separately. On the other hand, as regards to the Current Account there are two options, either present it as a ledger account or else include it in the Financed By section of the Balance Sheet. These will be clearly demonstrated in the detailed examples below. Example 1 Smith and Jones are in partnership. According to their partnership agreement, they share profits and losses equally (1:1). Smith is entitled to a salary of Lm1,000 p.a. and Jones is given a commission of Lm500. Smith and Jones contributed Lm4,500 each as capital with an interest on capital of 10% p.a.
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During the year ending 31st December 2002 Smith and Jones mad drawings of Lm2,000 each. The rate of interest charged on such drawings being of 10% p.a. The balances on the partners current account on 1 January were: Smith Lm550 (Cr) and Jones Lm700 (Dr). The Net Profit registered for the year was Lm5,000. You are required to prepare: (a) The Profit and Loss Appropriation Account; (b) The Partners Current Account; (c) The Balance Sheet (extract) showing the current account balances only. (a) Profit and Loss Appropriation Account for the year ending 31 December 2002 Net Profit Interest on Drawings: Smith (10% x 2,000) 200 Jones (10% x 2,000) 200 Interest on Capital: Smith (10% x 4,500) Jones (10% x 4,500) Salary: Smith Commission: Jones Share of Profits: Smith (1/2 x 3,000) Jones (1/2 x 3,000) (b) Dr Smith Balance b/d Drawings Interest on drawings Balance c/d 2,000 200 1,300 Partners' Current Account Jones 700 2,000 200 Balance b/d Interest on Capital Salary Commission Share of Profits Balance c/d Balance b/d

5,000

Add

400 5,400

Less

450 450

900

Less

1,000

Less

500

2,400 3,000

1,500 1,500

3,000 Cr

Smith 550 450 1,000 1,500 3,500 1,300

Jones 450 500 1,500 450 2,900

3,500 Balance b/d

2,900 450

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The Balance in the Current Account may be either a credit or a debit balance. A Credit Balance is that part of profit for the year, which the partner has not yet taken. Therefore the partner is a creditor because the business owes money to the partner. A Debit Balance represents an excess of money taken by the partner over profits earned. This leaves the partner to be a debtor for the sum because the partner owes money to the business. (c) Balance Sheet (Extract) as at 31 December 2002 Financed by: Capital Account Balances: Smith Jones Current Account Balances Smith Jones

4,500 4,500

9,000

1,300 (450)

850 9,850

Notes:

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Example 2 Jimmy and Billy are in partnership and according to their partnership agreement they share profits and losses equally; interest is allowed on capital at 5% p.a. Jimmy is entitled to a salary of Lm500. The following Trial Balance is extracted from their books on 31 December 2001. Trial Balance as at 31 December 2001 Premises Carriage Bad Debts Purchases and Sales Returns Salaries Rates and Taxes Insurance Cash in hand Stock 1 January 2001 Fixtures and Fittings (cost) Wages Capital: Jimmy Billy Current: Jimmy Billy Drawings: Jimmy Billy Debtors and Creditors Provision for Bad Debts Discounts Office Expenses Dr Lm 6,000 100 50 16,000 80 1,400 400 140 700 3,500 4,500 2,600 Cr Lm

28,000 60

6,000 6,000 100 150 800 900 8,000 100 110 45,480

5,000 250 20 45,480

Additional Information 1) Stock on 31 December 2001 was Lm2,800. 2) Lm60 of the carriage is for carriage in. 3) Depreciate Fixtures and Fittings by 10% p.a. 4) wages accrued Lm400. 5) Provision for Bad Debts to equal 10% of Debtors. You are required to prepare in vertical format: a) A Trading, Profit and Loss and Appropriation Account for the year ending 31 December 2001; b) A Current Account c) A Balance Sheet as at 31 December 2001.

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(a)

Jimmy and Billy

Trading, Profit and Loss and Appropriation Account for the year ending 31-Dec-01 Sales 28,000 Returns Inwards (80) Net Sales 27,920 Cost of sales Opening Stock 1 Jan 2001 3,500 Purchases 16,000 Returns Outwards ( 60) Net Purchases 15,940 Carriage Inwards 60 19,500 Closing Stock 31 December 2001 2,800 (16,700) Gross Profit 11,220 add Discount Received 20 11,240 Expenses: Discount Allowed 100 Office Expenses 110 Carriage Outwards 40 Bad Debts 50 Salaries 1,400 Rates 400 Wages (+400) 3,000 Insurance 140 Bad Debts Provision (800-250) 550 Depreciation (10% x4,500) 450 (6,240) Net Profit 5000 Interest on Capital: Jimmy: (5% x 6,000) 300 Billy: (5% x 6,000) 300 600 Salary: Jimmy 500 (1,100) 3,900 Share of Profits Jimmy (1/2 x 3,900) 1,950 Billy (1/2 x 3,900) 1,950 3,900 Notes:

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(b) Dr Balance b/d Drawings Balance c/d

Current Account Jimmy Billy Jimmy 100 Balance b/d 800 900 Interest on Capital 300 1,850 1,500 Salary 500 Share of Profits 1,950 2,750 2,400 2,750 Balance b/d 1,850

Cr Billy 150 300 1,950 2,400 1,500

(c)

Jimmy and Billy Balance Sheet as at 31 December 2001 Fixed Assets Cost Total Net Book Dep Value Lm Lm Lm Premises 6,000 Nil 6,000 Fixtures and Fittings 4,500 450 4,050 10,500 450 10,050 Current Assets Stock 31 December 2001 2,800 Debtors 8,000 Less Bad Debts Provision (800) 7,200 Cash in Hand 700 10,700 Current Liabilities Creditors 5,000 Wages Accrued 400 (5,400) Net Current Assets 5,300 Net Assets 15,350 Financed By: Capital Balances Current Balances Jimmy 6,000 1,850 7,850 Billy 6,000 1,500 7,500

15,350

Notes:

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Example 3 Jack and Richard are in partnership as retail grocers. Their partnership agreement allows interest on capital at 1 January 2001 at the rate of 8% p.a. Jack is allowed an annual salary of Lm5,000 and Richard, who works part-time a salary of Lm3,000. Profits or Losses are shared equally. The following Trial Balance was extracted from their books on 31 December 2001. Trial Balance as at 31 December 2001 Dr Cr Lm Lm Capital 1 January 2001: Jack 90,000 Richard 45,000 Current Account 1 January 2001 Jack 150 Richard 70 Sales 120,000 Stock 1 January 2001 2,500 Purchases 104,780 Premises 100,000 Delivery Van 15,000 Rates 1,500 Van Expenses 950 Insurance 360 Cash at Bank 3,500 Cash in Hand 60 Creditors 1,170 Repairs to Premises 12,300 Drawings: John 10,000 Richard 5,000 256,170 256,170 Taking into consideration the following: 1) Stock 31 December 2001 Lm4,600. 2) Insurance prepaid Lm90. 3) Depreciation of delivery van 10 of book value. 4) An extension costing Lm10,000 had been posted as repairs to premises. You are required to prepare: a) Trading and Profit and Loss Accounts, including the Appropriation section for the year ending 31 December 2001. b) Partners Current Account for the year ending 31 December 2001. c) A Balance Sheet as at 31 May 2001.

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Trading, Profit and Loss and Appropriation Accounts for the year ending 31-Dec-01 Lm Lm Lm Sales 120,000 Cost of Sales Opening Stock 1 Jan 2001 2,500 Purchases 104,780 107,280 Closing Stock 31 Dec 2001 (4,600) (102,680) Gross Profit 17,320 Expenses Rates 1,500 Van Expenses 950 Insurance (-90) 270 Repairs to Premises (-10,000) 1,500 Depreciation (10% x 15,000) 1,500 (6,520) Net Profit 10,800 Interest on Capital: less Jack (8% x 90,000) 7,200 Richard (8% x 45,000) 3,600 10,800 less Salary: Jack Richard Share of Loss Jack (1/2 x 8,000) Richard ( 1/2 x 8,000) Dr Balance b/d Drawings Share of Loss Balance b/d Notes: Partners' Current Account Jack Richard 150 70 Int. on Capital 10,000 5,000 Salary 4,000 4,000 Balance c/d 14,150 9,070 1,950 2,470

5,000 3,000

8,000

(18,800) (8,000)

4,000 4,000

(8,000)

Jack 7,200 5,000 1,950 14,150

Cr Richard 3,600 3,000 2,470 9,070

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Jack and Richard Balance Sheet as at 31 December 2001 Fixed Assets Premises (+10,000) Delivery Van Current Assets Stock 31 Dec 2001 Cash at Bank Cash in Hand Insurance Prepaid Current Liabilities Creditors Net Current Assets Net Assets Financed by: Capital Current Jack Richard 90,000 45,000 135,000 (1,950) (2,470) (4,420) 130,580 Cost 110,000 15,000 125,000 Total Dep 1,500 1,500 1,500 4,600 3,500 60 90 8,250 (1,170) 7,080 130,580 Net Book Value 110,000 13,500 123,500

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Exercises
1. Sandro and Stephen are in partnership. According to their partnership

agreement, they share profits or losses in the ratio Sandro : Stephen 3:2. Stephen is entitled to a Salary of Lm5,000 p.a. Both partners are entitled to 5% Interest on capital. During the year ended 31 October 1996, Sandro made Drawings of Lm13,500 and Stephen of Lm9750. A 10 % interest on drawings is charged. Net Profit for the year was Lm23,200. The balances on the partners Capital and Current Accounts at 1 November 1995 were: Sandro Lm 60,500 2,475 Cr Stephen Lm 27,500 (860) Dr

Capital Account : Current Account : You are asked to prepare: a. b. c. 2.

the Appropriation Account for the year ended 31 October 1996 for Sandro and Stephen; the Partners Current Account for the year ended 31 October 1996. the Balance Sheet Extract as at 31 October 1996.

Peter and Paul are partners in a retail business. Their partnership agreement provides for : a. Profits or losses to be shared equally; b. Interest to be paid on Fixed Capital at 5%p.a.; c. Peter to receive a salary of Lm10,000 p.a. The following information is also available : i. Capital Accounts 1 January 1996: Peter Lm20,000 Paul Lm15,000 Current Account Balances 1 January 1996: Peter Lm500 (Cr) Paul Lm800 (Cr) Drawings for the year 1996: Peter Lm11,000 Paul Lm 5,000 Net Profit for the year ending 1996 Lm18,100.

ii.

iii.

iv.

Prepare: Appropriation, Current A/cs and Balance Sheet (Extract).

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3.

Karl and Kurt are in Partnership. Their agreement allows them 10% interest per annum on Capital, Karl is to have a salary of Lm6,000 and Profits or Losses to be shared equally. On 31 May 1998 their accounts showed the following : 1 June 1997 CAPITAL: Karl Lm20,000 Kurt Lm 7,000 CURRENT: Karl Lm 470 (Cr) Kurt Lm 300 (Cr) Year ended 31 May 1998: Drawings for year: Karl Kurt The Net Profit for the year was Lm 14,700 From the information given above: a. b. c. Write up the Partners Profit and Loss Appropriation Account for the year ended 31 May 1998. Write up the Partners Current Account for the year ended 31 May 1998. Draw up the Balance Sheet (Extract ) as at 31 May 1998.

Cash Lm8,000 Lm4,000

Goods Lm700 Lm900

4.

Gorg and Mario have been partners in business for several years. The terms of Partnership agreement include: i. interest on fixed capital to be 10% p.a. ii. Profits to be shared between Gorg and Mario in the ratio 1:1 iii. Mario is to receive an annual salary of Lm8000. i.v. Interest on drawings is 5% p.a. The following information relates to the year ended 31 December 1999. a. Balances at 1 January 1999: Capital Accounts: Lm Gorg 10,000 Mario 12,000 Current Accounts: Gorg 150 Dr Mario 230 Cr b. Drawings during the year were: Cash Gorg Lm5000 Mario Lm8000 The Net Profit for the year was Lm60,500.

Goods Lm400 Lm1000

c.

You are required to: i) Prepare the Profit and Loss Appropriation Account for the year ending 31 December1999. ii) Prepare the current account for the year ending 31 December1999.

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5.

Tom and Jerry are in partnership, sharing profits in the ratio Tom:Jerry 3:2, after allowing for interest on capital of 10% p.a. and a salary for Jerry of Lm12,000 p.a. The following is their Trial Balance for the year ended 30 April 1999: Dr (Lm) Cr (Lm) 90,000 60,000 Tom Jerry 2,700 1,340 15,500 21,250 116,240 39,920 5,350 2,300 1,270 600 1,900 130,000 123,450 17,930 34,200 40,000 551,250 Additional information is also available: a. b. c. d. e. A provision for doubtful debts is to be created at 2% of debtors Depreciation on office equipment is calculated at 10% p.a. using the straight line method. An amount of Lm650 for the repair of Toms private car has been included in car expenses. Lm2,100 is owing for employees salaries at 30 April 1999, and an insurance premium of Lm160 for the year beginning on 1 May 1999 has already been paid. Stock at 30 April 1999 was Lm20,170.

Trial Balance as at 30 April 1999 Capital at 1 May 1998 : Tom Jerry Current Account Balances 1 May1998: Drawings : Tom Jerry Employees Salaries General Expenses Car Expenses including repairs Advertising Insurance Carriage Inwards Returns Inwards Premises Purchases and Sales Stock at 1 May 1998 Office Equipment (Cost) Provision for Depreciation : Office Equipment 1 May 1998 Debtors and Creditors Bank Overdraft

343,300

13,600 36,400 5,250 551,250

You are required to prepare: Trading and Profit and Loss accounts, including Appropriation section, for the year ended 30 April 1999 for Tom and Jerry, together with the Balance Sheet as at 30 April 1999.

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6.

Rita and Sonya are in partnership owning a Hairdressing Salon. Their partnership agreement allows for Profit to be shared in the ratio 3:2 to Rita and Sonya respectively; interest to be paid on fixed capital at 10% p.a.; and Sonya to receive a Salary of Lm5,000 p.a. The following balances relating to the year ending 30 April 1999 were extracted from their books. Trial Balance at 30 April 1999 Dr Lm Cr Lm 6,000 4,000 500 300 2,500 4,000 15,000 6,500 95 1,200 6,500 1,300 535 25,000 150 840 3,200 30 4,500 1,850 42,000

Capital Amount : Rita Sonya Current Account : Rita Sonya Drawings : Rita Sonya Equipment at Cost Fixtures and Fittings at Cost Stock of Hairdressing Lotions 1 May 1998 Purchases of Hairdressing Lotions Rent Laundry Charges Telephone Receipts from clients Creditors Electricity Bank Cash in hand Provision for Depreciation : Equipment Fixtures and Fittings

42,000

The following additional information is available : 1. Stock of Hairdressing Lotions held on 30 April 1999 was Lm125. These lotions are used only in the Salon and are not sold to customers. 2. An invoice Lm300 for the purchase of a Hairdryer on 30 April 1999 from Electrical Supplies Ltd. had not been entered in the books. 3. Both equipment and fixtures and fittings are depreciated by 10% p.a. of the cost of the assets held on 30 April 1999. 4. Laundry charges unpaid at 30 April 1999 amounted to Lm275. (i) a. b. c. (ii) a. From the above information prepare for the partners for the year ending 30 April 1999: Profit and Loss Account; Appropriation Account; Current Account.

Balance Sheet as at 30 April 1999.

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7.

Farrugia and Fenech are partners in an accounting practice, sharing profits and losses in the ratio Farrugia: Fenech 3:2 after allowing for interest on Capital at 10% per annum and a salary for Fenech of Lm18,000 per annum. Interest is charges on drawings at the rate of 10% per annum. The partnership had produced the following Trial Balance at 30 April 1999: Dr Lm Cr Lm 140,000 110,000 30,000

Trial Balance as at 30 April 1999 Capital at 1 May 1998 : Farrugia Fenech Current accounts at 1 May 1998 : Farrugia Fenech Premises Motor Vehicles Provision for Depreciation on Motor Vehicles 1 May 1998 Office Equipment Provision for Depreciation on Office Equipment 1 May 1998 Debtors and Creditors Bank Fees received from clients Rent received from tenant Office employees Salaries Insurance Heating and Lighting Postage Telephone Sundry Expenses Drawings : Farrugia Fenech Motor Vehicle Expenses

10,000 182,500 40,000 25,600 85,000 45,000 22,700 134,300 2,600 1,900 2,150 2,880 4,970 57,000 34,000 2,500 627,500 25,500 12,500 277,900 6,000

627,500

The Partners also provide the following information: i. ii. Depreciation on Motor Vehicles is charged at 40% per annum using the Reducing Balance Method. Depreciation on office Equipment is charged at 10% per annum on cost. iii. iv. v. Lm600 of the insurance is prepaid. At 30 April 1999 the rent received owing Lm2,000. Fenech had drawn an additional Lm3000 from the business bank account which has not yet been entered into the accounts. vi. Motor Vehicle Expenses include an amount of Lm400 for the repair of Farrugias private car. You are required to prepare: a. Profit and Loss Account for the year ended 30 April1999.

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b. c.

Appropriation and Current Accounts for the year ended 30 April1999. The Balance Sheet as at 30 April 1999.

8.

Joe and Charles are partners in a retail business selling cameras and photographic equipment. Their partnership agreement provides that profits and losses are to be shared in the ratio 3:1 to Joe and Charles respectively; that interest on fixed capital be allowed at 5% p.a. ; and that Charles be paid on annual salary of Lm8000. The following Trial Balance was extracted from their books on 30 April 1999, the end of the financial year of the Partnership. Trial Balance as at 30 April 1999 Dr Lm Cr Lm 20,000 10,000 300 4,500 9,000 5,300 10,000 21,000 12,100 2,500 8,000 9,000

Capital accounts : Joe Charles Current accounts : Joe Charles Drawings : Joe Charles Bank Wages to Assistants Debtors and Creditors General Expenses Returns Inwards Motor Vehicles at Cost Fixtures and Fittings at Cost Provision for Depreciation : Motor Vehicles Fixtures and Fittings Purchases and Sales Stock 1 May 1998 Loan from Joe Rent

500

12,000

87,400 25,000 8,000 202,300

2,000 3,000 145,000 10,000 202,300

Additional Information: 1. Stock at 30 April 1999 was Lm27,500. 2. The Motor Vehicles and Fixtures and Fittings are to be depreciated by 10% of cost per annum. 3. Interest at 10% p.a. on the loan is to be paid to Joe, through his current account. 4. Goods costing, Lm1,200 have been taken by Charles for his own use but no entries have been made in the accounts. 5. General Expenses Lm400 had not been paid at 30 April 1999. From the above information, prepare the partnership set of final accounts.

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