CHAPTER TWO

PARTNERSHIP ACCOUNT

2.1 Meaning of Partnership

The partnership Act of 1890 defined partnership as ‘the relation which exists between
persons carrying on a business in common with a view of profit. Partnership can be formed
by two to twenty persons. The owners of partnership business are called partners.

2.2 Partnership Agreement

This refers to rules and regulations put in place by the partners for smooth operation
of the partnership business. The guiding rules will be contained in a written agreement known
as partnership deed. The agreement must be signed by the partners in the presence of a
lawyer. The contents of a partnership agreement include the following;
a. The capital to be contributed by each partner.
b. The rate of interest on capital.
c. The rate of interest on drawings.
d. The division of profits and losses.
e. Partners’ salaries, commissions and other remunerations.
f. Valuation of goodwill on the death or retirement of a partner.
Where there is no specific arrangement pertaining to the partnership agreement, the
following provisions of the partnership Act of 1890 must be applied. Section 24 of the Act
lays down the following:
i. No interest on capital
ii. No remuneration or salary
iii. Profits and losses are to be shared equally
iv. 5% interest a year on loans made by partners in excess of the agreed capitals
v. No interest is to be allowed on drawings

2.3 Accounting entries

In partnership accounting, the following accounts are prepared: Trading, Profit and
Loss account; Appropriation account; Current and Capital account and a Balance sheet as at
the end of the financial year.

2.3.1 Appropriation Account

This is the account where the profits are distributed to the partners in their profit
sharing ratio. The net profit found in the profit and loss account will be carried down into the
appropriation account. Major items include;

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a. Drawings: Partners can withdraw at regular or irregular intervals, from the sum they are
entitled to at the end of the year. The total drawings is credited to the cash book and
debited to current accounts.
b. Interest on Drawings: This is the interest charged on drawings made by the partners. In
order to discourage or reduce the amount of cash withdrawn, a fixed sum or rate will be
charged as interest. The interest on drawings will increase net profit and discourage
drawings.
c. Partner’s Salary: The agreement made provision for salary to be paid to active partners.
Active partners help in day to day running of the business.
d. Capital: Capital may be introduced by some or all the partners and this will be credited to
the capital accounts. The Partnership can maintain any of these:
i. Capital account without current account otherwise called fluctuating capital account.
ii. Fixed capital account with current account.
e. Interest on Capitals: Partners contribute different amount as capitals. Interest is allowed
to compensate partners for capitals contributed and to encourage them to bring in more
capitals into the business.

Dr FORMAT OF AN AAPROPRIATION ACCOUNT Cr

₦ ₦ ₦ ₦
Parteners’ salary Net profit b/d XX
Interest on capital: Interest on drawings :
A XX A XX
B XX XX B XX XX
Share of profit:
A (1/2 X) XX
B (1/2 X) XX XX
XX XX

Example 1:
James and Joy are in partnership sharing profits and losses in the ratio of 3:2 respectively.
They are entitled to 5 percent per annum interest on capitals, James has N2, 000 capital and
Joy has N6, 000. Joy is to have a salary of N500. They charged interest on drawings, James
being charged N50 and Joy N100. The net profit before any distribution to the partners
amounted to N5, 000 for the ended 31st December, 2005. The drawings for each of them are
N2, 000.

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 SOLUTION
PROFIT AND LOSS AAPROPRIATION ACCOUNT
₦ ₦ ₦ ₦
Parteners’ salary: Net profit b/d 5,000
Joy 500 Interest on drawings :
Interest on capital: JAMES 50
JAMES 100 JOY 100 150
JOY 300 400
Share of profit:
JAMES (3/5 x 4,250) 2,550
JOY (2/5 x 4,250) 1,700 4,250
5,150 5,150

2.4 Capital & Current Account

2.4.1 Fixed Capital Account
The amount put into the business by each partner will not change. The capital will
remain fixed. In order to preserve the capital intact, a current account will be prepared. The
current account will be debited with interest on drawings, drawings and credited with interest
on capital, share of profit and partners salary.
Example: Capital and Current Account of James and Joy given in the earlier question above:

Dr Capital account Cr
Details James Joy details James Joy
Balance b/d 2,000 6,000

Dr Current account Cr
Details James Joy Details James Joy
Drawings 2,000 2,000 Interest on capital 100 300
Interest on drawings 50 100 Share of profit 2,550 1,700
salary 500
Balance c/d 600 400

2,650 2,500 2,650 2,500

2.4.2 Fluctuating Capital Account

This can be referred to as fluctuating capital account. The capital account represents a
mixture of capital and undrawn profit. The interest on capital, partner’s salary and share of
profit are credited to the capital account. The debit side will show drawings and interest on
drawings. Example: using the above example:

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 Dr Capital Account Cr
Details James Joy Details James Joy
Drawings 2,000 2,000 Balance b/d 2,000 6,000
Interest on 50 100 Interest on
drawings capital 100 300
Salary 500
Share of profit 2,550 1,700
2,600 6,400 4,650 8,500
Balance c/d 4,650 8,500

2.4.3 Current Account

In order to keep each partner’s capital fixed year by year in the capital account, the
current account is prepared to take care of profits, interest on capital and salaries to which the
partners may be entitled on the credit side while the drawings and interest on drawings are
debited to it. The balance of the current account at the end of each financial year will then
represent the amount undrawn or withdrawn profits. A credit balance will be undrawn profits
while a debit balance will be drawings in excess of the profits to which the partner was
entitled.

Illustration:
Ogundele and Dapo are in partnership sharing profit and loss in the ratio 3:2.The following is
the trial balance as at 31st December, 2005.
Dr Cr
Capital: Ogundele 100,000
Dapo 50,000
Drawings: Ogundele 6,000
Dapo 5,000
Purchases 120,000
Sales 200,000
Sales returns 4,000
Purchase returns 2,000
st
Stock as at 1 Jan, 2005 10,000
Carriage inwards 1,200
Salaries and wages 15,000
Bad debts 1,000
Office expenses 2,400
Loan –Okafor 14,000
Provision for doubtful debts 300
Discount allowed 1,150
Discount received 1,100
Building at cost 30,000

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 Machinery at cost 109,100
Cash at bank 8,000
Motor van at cost 50,000
Electricity 50
Prov for depr on M/Van 10,000
Debtors 20,000
Creditors 10,000
Bill payable 9,000
Bill receivable 17,500
Carriage outwards 500
Current account: Ogundele 1,500
Dapo 3,000
400,900 400,900
Additional Information:
a. Stock at close N15, 000
b. Salaries and wages accrued N1, 000
c. Electricity prepaid N20
d. Interest on capital at 10%
e. Interest on drawings at 5%
f. Depreciate motor van 10% on cost
g. Partnership salary: Ogundele N2, 000
h. Provision for doubtful debt to be reduced to N200
i. Ogundele withdrew N7, 000 goods for own use
You are required to prepare:
a. Trading, profit and loss account
b. Partners’ capital and current account
c. Balance sheet as at 31st December 2005

Solution
Dr Trading, profit and loss account of Ogundele and Dapo as @ 31st Dec, 2005 Cr
N N
Opening stock 10,000 Sales 200,000
Add purchases 120,000 Less: Returns inwards 4,000
Add carriage inwards 1,200 196,000
121,200
Less return outward 2,000
119,200
Less goods withdrawn 7,000 112,200
122,200
Less closing stock 15,000
Cost of goods sold 107,200
Gross profit c/d 88,800
196,000 196,000

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 Expenses
Salaries and wages 16,000 Gross profit b/d 88,800
Bad debts 1,000 Discount received 1,100
Office expenses 2,400 Provision for bad debts 100
Discount allowed 1,150
Electricity 30
Carriage outwards 500
Depreciation –motor van 5,000
Net profit 63,920
90,000 90,000
Appropriation account
N N
Partner Salary: Ogundele 2,000 Net profit 63,920
Interest on capital: Interest on drawings:
Ogundele 10,000 Ogundele 300
Dapo 5,000 15,000 Dapo 250 550
Share of profit:
Dapo 18,988
Ogundele 28,482 47,470
64,470 64,470

Dr Current account Cr
Details Ogundele Dapo Details Ogundele Dapo
Drawings 6,000 5,000 Balance b/f 1,500 3,000
Interest on 300 250 Share of profit 28,482 18,988
drawings 7,000 Interest on capital 10,000 5,000
Goods withdrawn 28,682 21,738 Salary 2,000
Balance c/d
41,982 26,988 41,982 26,988

Balance sheet as at 31st December, 2005

N N
Capital :Ogundele 100,000 Fixed assets Cost Depr NBV
Dapo 50,000 150,000 Building 30,000
Current account: Machinery 109,100
Ogundele 28,682 Motor van 50,000 (15000) 35,000
Dapo 21,738 50,420 174,100
Current liabilities: Current asset
Loan –Okafor 14,000 Stock 15,000
Bill payable 9,000 Bank 8,000
Creditors 10,000 Debtors 20,000
Wages owing 1,000 34,000 Less provision 200 19,800
234, 420 Bill receivable 17,500
Electricity 20
234,420
2.5 Changes in Partnership
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 Changes can occur in partnership when:
1. There is a change in the profit or loss sharing ratio
2. A new partner is admitted
3. A partner retires or dies
4. Partnership is dissolved
5. There is amalgamation of partnership
The bases of partnership profit sharing through; Use of ratio, Equality or Proportion to
capital contributed

2.5.1 Admission of a New Partner and Goodwill Account

Goodwill can be defined as the excess of the purchases consideration over the total
value of assets less liabilities. It is not a tangible asset and cannot be realized until the
business is to be sold. The reasons for charging goodwill are;
a. The location of the company
b. The name, reputation and connections of the business.
c. The quality of the products and services
d. Managerial skills
e. The quality of the employees
f. Quality of the research and development
g. Possession of monopoly

2.5.2 Treatment of Goodwill on Admission of New Partner

A new partner can be introduced into the business based on agreement of the partners.
On the introduction of a partner, the old partners will give up part of their profit. In order to
compensate them, he will bring in goodwill and this will be dealt with as follows:
1. When goodwill is brought and retained into the books: A goodwill account will be
opened and the amount debited to it. It will be credited to the capital account in their old
profit sharing ratio. The ledger entries are:
DR: Goodwill account
CR: Partner’s capital in old profit sharing ratio
2. When goodwill is written off: The goodwill brought into the books may be written off.
This will be done in their new profit sharing ratio in the partners’ capital account. The ledger
entries are:
DR: Capital account in new profit sharing ratio

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 CR: Goodwill account
Example:
Olu and Ariyo are in partnership. They shared profit and loss equally, they decided to admit
Aluko and he brought in cash of N7, 000 as capital. It was agreed that goodwill was worth
N15,000. The new profit sharing ratio is to be Olu 3: Ariyo 2: Aluko 3: The balance sheet
before Aluko was introduced is as follows;
Balance sheet
N
Capital: Olu 20, 000 Net assets 40, 000
Ariyo 20, 000
40, 000 40, 000

a. When goodwill account is to be opened: The goodwill account will be debited and the
capital account will be credited in their old profit sharing ratio.
Dr Capital account Cr
Details Olu Ariyo Aluko Details Olu Ariyo Aluko
Balance c/d 27,500 27,500 7,000 Balance b/f 20,000 20,000
Cash 7,000
Goodwill 7,500 7,500
27,500 27,500 7,000 27,500 27,500 7,000

balance b/d 27,500 27,500 7,000

Goodwill sharing in their old profit sharing ratio

Goodwill = N15, 000
Olu’s share = ½ of N15, 000 = N7, 500
Ariyo’s share = ½ of N15, 000 = N7, 500

Balance sheet
N N
Capital: Olu 27, 500 Net assets 40, 000
Ariyo 27, 500 Cash 7, 000
Aluko 7, 000 Goodwill 15, 000
62, 000 62, 000

B. When goodwill is to be written off: The partners’ capital account will be debited with the
value of goodwill in their new profit sharing ratio.

Dr Capital account Cr
Details Olu Ariyo Aluko details Olu Ariyo Aluko

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Goodwill written Balance b/f 20,000 20,000
off 6,428 4,286 4,286 Cash 7,000
Bal c/d 21,072 23,214 2,714 Goodwill 7,500 7,500

27,500 27,500 7,000 27,500 27,500 7,000

Goodwill written off:
Olu =3/7 of N15, 000 = N 6, 428
Ariyo=2/7 of N15, 000 = N 4, 286
Aluko =2/7 of N15, 000= N 4, 286
Balance sheet
N N
Capital: Olu 21, 072 Net assets 40, 000
Ariyo 23, 214 Cash 7, 000
Aluko 2, 714
47, 000 47, 000

2.6 Revaluation Account

The assets of the business may be revalued to show the current value. The revaluation
of assets is necessary because some asset may have appreciated in value while others may
have depreciated. Accounting entries are;
a. Open a revaluation account:
i. DR: Asset account
CR: Revaluation account with increase in value of assets
ii. DR: Revaluation account
CR: Assets account with reduction in value of assets
iii. DR: Revaluation account
CR: Liabilities account with increase in value of liabilities
iv. DR: Liabilities account
CR: Revaluation account with reduction in value of liabilities
b. In revaluation of assets, the following accounts are prepared:
i. Revaluation account
ii. Capital account of partners
iii. Balance sheet.

Example:
Sola and Ojo are in partnership, sharing profit and losses equally. On the 1 st January, they
decided to admit Joke, who would be entitled to one quarter of future profits, the balance
being shared equally between Sola and Ojo. The financial position of the business before the
admission of Joke was as follows:
N
Freehold premises 75, 000

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 Fixture and fittings 26, 000
Stocks 105, 480
Debtors 45, 000
Cash in hand 12, 640
Creditors 58, 940
Additional information:
a. It is agreed to value and retain goodwill at N30, 000
b. Revalue the other assets as follows:
N
Freehold premises 100, 000
Fixture and fittings 24, 000
Stock 103, 000
c. provision for bad debt of N 3, 000 is to be made
d. capital is contributed by Sola and Ojo equally
e. Joke is to bring N80, 000 into the business as capital
You are required to prepare:
i. Revaluation account
ii. Partners’ capital account
iii. Opening balance sheet of the new partnership of Sola, Ojo and Joke.

Solution
The closing balance sheet of Sola and Ojo to show the capital contributed by each of them
N N
Capital: Sola 102,590 Freehold premises 75, 000
Ojo 102,590 205, 180 Fixture and fittings 26, 000
Creditors 58, 940 Stock 105, 480
Debtors 45, 000
Cash in hand 12, 640
264, 120 264, 120

(i) Dr Revaluation account Cr

Decrease in asset value N Increase in asset value N
Fixture and fittings 2,000 Freehold premises 25,000
Stock 2,480 Goodwill 30,000
Provision for bad debt 3,000
Share of profit:
Sola 23,760
Ojo 23,760 47,520
55,000 55, 000

Dr Premises account Cr
Balance b/f 75,000 Balance c/d 100,000

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Revaluation account 25,000
100,000 100,000
Balance b/d 100,000

Dr Fixture and fittings account Cr

N N
Balance b/f 26,000 Revaluation account 2,000
Balance c/d 24,000
26,000 26,000
Balance b/d 24,000

Dr Stock account Cr
N N
Balance b/f 105,480 Revaluation account 2,480
Balance c/d 103,000
105,480 105, 480
Balance b/d 103,000

Dr Partner’s Capital Account Cr

Details Sola Ojo Joke Details Sola Ojo Joke
N N N N N N
Balance c/d 126,350 126,350 80,00 Balance b/f 102,590 102,590 -
0 Cash - - 80,000
Share of profit 23,760 23,760 -
126,350 126,350 126,350 126,350 80,000
80,00
0
Share of profit:
Sola (1/2 of N47, 520) = N23, 760
Ojo (1/2 of N47, 520) = N23, 760

Balance sheet as at 1st January, 2005

N N
Capital: Fixed assets:
Sola 126,350 Goodwill 30,000
Ojo 126,350 Freehold premises 100,000
Joke 80,000 332,700 Fixture and fittings 24,000
154,000
Creditors 58,940 Current assets:
Stock 103,000
Debtors 45,000
Less: prov. (3,000) 42,000
Cash balance 92,640 237,640
391,640 391, 640

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2.7 Dissolution of Partnership
Dissolution of Partnership is a situation where the partnership business is brought to
an end or winds up by the happening of certain event which makes it unlawful to operate.
Dissolution of partnership can also mean the cessation of partnership business, disposal of
assets, settlement of debts and division of cash balance among members. The reasons for
Dissolution of partnership is outlined in the following aphorism “BAD WINE”
 B - Bankruptcy of a partner
 A - Admission of a new partner
 D - Death of a partner

 W - Withdrawal or retirement of partner

 I - Insanity of a partner or Illegality of the object of a Business
 N - Non-performance of Partner
 E - Expiration of the time given
ACCOUNTING ENTRIES:
1. Opening a Realization Account:
Dr. Realization account
Cr. Assets Account
2. Assets Taken Over By a Partners:
Dr. Partners’ capital account
Cr. Realization Account
3. When the Assets are Sold:
Dr. Cash/Bank Account
Cr. Realization account
4. Dissolution Expenses:
Dr. Realization account
Cr. Cash / Bank account
5. All Liabilities settle:
Dr. Liabilities account
Cr. Cash/ Bank account
6. Pay off the creditors:
Dr. Creditors account
Cr. Cash/ Bank account
7. Discount received from the creditors:
Dr. Creditors account
Cr. Cash/ Bank account
8. Payment of partners loan due:
Dr. Loan account.
Cr. Cash/ bank account
9. Profit on Realization:
Dr. Realization account
Cr. Partners’ capital account

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 10. Loss on Realization:
Dr. Partners’ capital account
Cr. Realization account
11. Payment made by partners with debit balance:
Dr. Cash/ Bank account
Cr. Capital of the deficient partner
12. Amount due to each partner:
Dr. Partners’ capital account
Cr. Cash/ Bank account
NOTE: In the preparation of dissolution account, the cash or bank account must be equal to
the among to be paid to the partner.

SECTION 44 OF THE PARTNERSHIP ACT on how proceeds from dissolution of

partnership are applied
Section 44 of Partnership Act had spelt out the rule for dissolution of asset .The asset of the
firm including the sum contributed by the partners to make up losses or deficiencies of capital
shall be applied in the following manner:
 Payment of dissolution expenses
 Payment of debt and liabilities to outsiders
 Settled of loan due to partners
 Payment of amount due to partners as capital
 The profit shall be shared among partners in their profit sharing ratio

DR. REALIZATION ACCOUNT CR

₦ ₦
Book Value of Assets Amount Realized from sales
Land and building XXX Land and Building XXX
Equipment XXX Equipment XXX
Debtors XXX Debtors XXX
Stock XXX Stock XXX
Plants and machineries XXX Plant and machineries XXX
Cost of dissolution XXX Motor vehicle XXX
Share of profit: Discount received XXX
A 1/3 XXX
B 1/3 XXX
C 1/3 XXX XXX
XXX XXX

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 DR CASH BOOK CR
₦ ₦
Balance b/f XXX Dissolution expenses/cost XXX
Realization account XXX Creditors XXX
Plant and machineries XXX Settlement of loan XXX
Debtors XXX Capital:
Motor vehicles XXX A XXX
Equipment XXX B XXX
Stock XXX C XXX XXX
XXX XXX

DR CAPITAL ACCOUNT CR
A B C A B C
₦ ₦ ₦ ₦ ₦ ₦
Cash book XXXX XXXX XXXX Balance b/f XXXX XXXX XXXX
Shares of XXXX XXXX XXXX
profit

XXXX XXXX XXXX XXXX XXXX XXXX

DR PLANT AND MACHINERIES CR

PARTICULAR FOLIO ANOUNT PARTICULARS FOLIO AMOUNT
₦ ₦
Balance b/f XXX Realization XXX

DR MOTOR VEHICLES ACCOUNT CR

PARTICULAR FOLIO ANOUNT PARTICULARS FOLIO AMOUNT
₦ ₦
Balance b/f XXX Realization XXX

DR. EQUIPMENT ACCOUNT CR

PARTICULAR FOLIO ANOUNT PARTICULARS FOLIO AMOUNT
₦ ₦
Balance b/f XXX Realization XXX

DR. STOCK ACCOUNT CR

PARTICULAR FOLIO ANOUNT PARTICULARS FOLIO AMOUNT
₦ ₦
balance b/f XXX Realization XXX

DR. CREDITOR ACCOUNT CR

PARTICULAR FOLIO ANOUNT PARTICULARS FOLIO AMOUNT
₦ ₦
Bank XXX Balance b/f XXX

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 ILLUSTRATION 1
ADA and BOSE are in partnership, sharing profit and losses 3:2 respectively.

The Balance sheet as at 31st December 2016

₦ ₦
CAPITAL: ASSETS
ADA 10,500 Motor vehicles 4,000
BOSE 8,500 Plant and Machinery 5,500
Creditors 2,000 Building 6,500
Cash 3,000
Debtors 2,000
21,000 21,000

The following assets were realized.

₦
Motor vehicles 4,800
Plant and machinery 7,500
Building 8,000
Debtors 1,500
Dissolution expenses 1,000
The creditors were settled with 1,200
Prepare the necessary account

REALIZATION ACCOUNT
₦ ₦
BOOK VALUE OF ASSET AMOUNT REALIZED FROM SALES
Motor vehicles 4,000 Motor vehicles 4,800
Plant and machinery 5,500 Plants and machinery 7,500
Building 6,500 Buildings 8,000
Debtors 2,000 Debtors 1,500
Dissolution expenses 1,000 Discount on creditors 800
Share of profit:
A (3,600 X 3/5) 2,160
B (3,600 X 2/5) 1,440 3,600
22,600 22,600

DR CAPITAL ACCOUNT CR
A B A B
₦ ₦ ₦ ₦
Cash 12,66 9,940 Balance b/f 10,50 8,500
0 Share of profit 0 1,440
2,160
12,66 9,940 12,66 9,940
0 0

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 DR CASH BOOK CR
₦ ₦
Balance b/f 3,000 Creditors 1,200
Motor vehicle 4,800 Cost of dissolution 1,000
Plant and machinery 7,500 CAPITAL:
Building 8,000 ADA 12,660
Debtors 1,500 BOSE 9,940
24,800 24,800

DR MOTOR VEHICLE ACCOUNT CR

PARTICULAR FOLIO ANOUNT PARTICULARS FOLIO AMOUNT
₦ ₦
Balance b/f 4,000 Realization 4,000

DR PLANT AND MACHINERY ACCOUNT CR

PARTICULAR FOLIO ANOUNT PARTICULARS FOLIO AMOUNT
₦ ₦
Balance b/f 5,500 Realization 5,500

DR BUILDING ACCOUNT CR
PARTICULAR FOLIO ANOUNT PARTICULARS FOLIO AMOUNT
₦ ₦
Balance b/f 6,500 Realization 6,500

DR DEBTORS ACCOUNT CR
PARTICULAR FOLIO ANOUNT PARTICULARS FOLIO AMOUNT
₦ ₦
Balance b/f 2,000 Realization 2,000

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