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Accounting II
Partnership Accounts:
Introduction
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Bachelor of Accounting (Hons) UKAF1083 Financial
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Accounting II
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Bachelor of Accounting (Hons) UKAF1083 Financial
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Accounting II
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Accounting II
What is a partnership?
Partnership
is “the relation that subsists
between persons carrying on a
business in common with a
view of profit”
(The Partnership Act 1961)
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Accounting II
What is a partnership?
• A Partnership is a relationship between parties, NOT
an organisation in its own right with a separate legal
personality
• Each partner is an agent of the partnership & sign
contract on the partnership’s behalf
• People who pool their business resources together to
operate a business are called partners
• Example of well-known partnerships – professional
accounting firms such as PWC, Deloitte Kassim
Chan, legal firms, medical firms, etc
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Accounting II
Benefits of a partnership
• Wider Capital base (compared to a sole proprietor)
• Resource/experience sharing (skills)
• Better decision making
• Business risk sharing
• Business growth strategy
• Higher business confidence
• Family level business
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Accounting II
Nature/characteristics: partnership
• Formed to make profits
• Governed by Partnership Act, 1961, or partnership
agreement
• Minimum 2, maximum 20 (but no limit for professionals)
• Unlimited liability. Each partner’s liability to the partnership
debts is unlimited. This partner is called a general partner.
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Accounting II
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Accounting II
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Accounting II
Shared of profit:
Capital ratio
Allen ( 2/3 ) 24,000 32,000 40,000 96,000
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Accounting II
Interest on capital
• Example: Profits shared:
• Allen $96,000
• Beet $48,000
• Diff $48,000 (Allen > Beet by $48,000)
• Not fair if both contribute to business equally
• HOW?
• Work contributions reward by salaries
• Capital contributions reward by interest
• Interest on capital is deducted prior to calculation of profits
• Rate of interest may be based on return had the capital
been invested elsewhere or at the market interest rate
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Accounting II
Year 1 2 3 total
Interest on capital: 5%
Remainder shared:
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Accounting II
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Accounting II
Interest on drawings
• Interest is charged on drawings for partner’s personal
use.
• Drawings is tantamount to borrowing from the business.
• Imposing interest on drawings is to discourage drawings.
• Drawings will affect the company’s cash flow and working
capital.
• The more cash the business has, the greater the
economies of bargains for cash discounts.
• Allen & Beet to charge interest on drawings at 5% pa (YE
31st December):
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Accounting II
520
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Accounting II
280
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Accounting II
Partner’s salaries
Partners’ contributions to business should
be based on the level of responsibilities,
NOT on profit sharing ratio – pay salaries
Unpaid salaries to be deducted from profit
before sharing the balance of profits
The same for partners’ performance-
related payments, such as commissions
or bonuses
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Accounting II
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Accounting II
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Accounting II
50,000 21
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Accounting II
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Accounting II
Capital accounts
Capital account (fixed) - Tan
1/1/09 Bank 20,000
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Accounting II
Current accounts
Current account – Tan
Dec 09 Dec 09
Cash: Drawings 15,000 Int on capital (PL) 1,000
Int on drawings (PL) 500 Share of profit (PL) 19,500
Bal c/d 5,000
20,500 20,500
Jan 10
Bal b/d 5,000
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Accounting II
Current accounts
Current account – Chandra
Dec 09 Dec 09
Cash: Drawings 26,000 Salary (PL) 15,000
Int on drawings (PL) 1,000 Int on capital (PL) 3,000
Bal c/d 4,000 Share of profit (PL) 13,000
31,000 31,000
Jan 10
Bal b/d 4,000
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Accounting II
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Accounting II
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Accounting II
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Accounting II
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Accounting II
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Accounting II
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Accounting II
Quiz
Which one of the following is not a benefit of partnership
business:
A. Pool of resources
B. Growth strategy
C. Risk sharing
D. Limited liability
E. Better decision making
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Accounting II
Quiz
Why is there a need for partnership agreement?
A. To follow standard business practice
B. It is required under the Partnership Act, 1961
C. To avoid misunderstanding and confusion
D. To protect the partners against unlimited
liability
E. As a form of business growth strategy
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Accounting II
Quiz
1. State the benefits of the use of current account instead
of a fluctuating capital account in partnership
accounting.
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Accounting II
Quiz
Ali and Lim have been in partnership for one year and they
have agreed on the following terms and conditions:
• Profit sharing ratio: 1:2 respectively
• 10% p.a. interest on capital (Ali contributed RM50,000
and Lim RM100,000)
• Lim’s salary: RM12,000
• Interest on drawings: Ali RM1,000, Lim RM1,200.
• Net profit for the year 2007: RM149,900
Required:
Prepare the Profit and Loss Appropriation Account to show
how profit is shared among the two partners.
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Accounting II
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Accounting II
Goodwill
“Goodwill is an asset representing the future
economic benefits arising from other assets
acquired in a business combination that are not
individually identified and separately recognized
(MFRS3).
• It is the difference (+ or -) between the cost of
acquisition and the fair value of the net
identifiable assets of the business acquired”
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Accounting II
Nature of goodwill
• Goodwill can only exist if the business was
purchased and the amount paid was greater
than the value of the net assets
• Goodwill represents the value of the business at
the time it was purchased
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Attributes of goodwill
• The reputation of a business and/or its products and thus
the likelihood that past customers will buy from the
business in future.
• Existing contracts for the supply of goods in the future.
• The location of the business premises and other forms of
captive customers.
• Patents, trademarks, brand names and previous
expenditure on advertising, training, R&D, etc. (may be
separate assets).
• Known sources of supply of goods and services including
the availability of trade credit.
• Existing staff including particular management skills.
• Other set-up factors.
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Types of goodwill
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The recognition of goodwill
in the financial statements
Acquired purchased goodwill should be capitalised and
classified as a non-current asset on the statement of
financial performance. (IASB, IFRS 3, 2008)
Non-acquired goodwill should not be recognised as an
asset since its valuation is not sufficiently objective/reliable.
Goodwill should be reviewed for impairment and written
down to impairment value if relevant. (IASB, IFRS 3, 2008)
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Accounting II
Goodwill computation
Assume that a business has the following assets and
liabilities:
Building 225,000
Machinery 75,000
Debtors 60,000
Stocks 40,000
Creditors (72,000)
Net asset value (NAV) 328,000
A buyer wishes to buy over the business for RM400,000 :
Goodwill = $400,000-$328,000=$72,000
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Calculation of Goodwill
• Subjective Judgement
• Average Sales/Fees/Profits Method
• Super Profit Method
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Subjective Judgement
• Estimate the value of goodwill with reference to
some intangible factors and according to their
professional judgement
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Goodwill
Capital – E 10,000 Balance c/d 30,000
F 10,000
G 10,000
30,000 30,000
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Accounting II
E F G E F G
Bal c/d 40,000 28,000 32,000 Bal b/d 30,000 18,000 22,000
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E F G E F G
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Capital accounts
E F G E F G
Example
Capital
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Accounting II
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Goodwill
Capital – H 15,000 Bal c/d 45,000
Capital – I 15,000
Capital – J 15,000
45,000 45,000
Bal b/d 45,000
Capital accounts
H I J H I J
The first step is to create the asset of goodwill. This is a debit entry
for the value of the goodwill in the goodwill account. The double
entry is completed with credit entries in the old partners’ capital
accounts. The value of each entry is calculated by sharing the value
of the goodwill between the partners in the old profit and loss
sharing ratio. If goodwill is to be retained in the partnership
(sometimes referred to as ‘carried in the books’) no further entries
are required.
‧The new partner may be required to pay extra cash, or have his capital balance
reduced, for his share of goodwill.
Bachelor of Accounting (Hons) UKAF1083 Financial
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Accounting II
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Capital
A B A B
Example :
Quiz
Where there is no partnership agreement then
profits and losses …
A. Must be shared in same proportion as capitals
B. Must be shared equally
C. Must be shared equally after adjusting for
interest on capital
D. Must be shared based on old profit sharing
ratio
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Accounting II
Quiz
Which of the following is not true of goodwill?
A. it is the premium paid on the cost of the
business
B. it arises from the disposal of a business
C. it represents the intrinsic value of the business
D. it is measured by the net asset value of the
business
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Accounting II
Quiz
Profit sharing ratio is likely to change under the following
conditions EXCEPT
A. When the partnership is dissolved
B. When a new partner is admitted
C. When capital contribution portion changes
D. When a partner is doing much more for the business
than in the past
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