Topic 7: Partnership Accounts

1. Meaning of a Partnership

A partnership is a business owned by two or more people (in Kenya, generally 2 to 20) who agree to carry on business together with a view to profit and share profits and losses.

The Partnership Deed

A written agreement that usually states:

• Names of partners and nature of business
• Capital contributed by each
• Profit and loss sharing ratio
• Interest on capital and drawings
• Partners' salaries
• Duties, admission and retirement of partners
• How disputes will be settled

If there is no agreement, the Partnership Act applies: profits and losses are shared equally, with no interest on capital, no salaries and no interest on drawings.

2. Accounts Prepared for a Partnership

1. Trading account, profit and loss account: same as for a sole trader, giving net profit.
2. Appropriation account: shows how net profit is shared.
3. Partners' capital accounts.
4. Partners' current accounts.
5. Balance sheet.

3. Capital and Current Accounts

A credit balance on a current account means the firm owes the partner; a debit balance means the partner has over-drawn.

4. The Appropriation Account

Format

Appropriation Account for year ended ...
Net profit                                  xxx
Add: Interest on drawings (A, B)            xxx
                                            ---
Less: Interest on capital (A, B)            xxx
      Partners' salaries                    xxx
Residual profit shared:
      A (ratio)                             xxx
      B (ratio)                             xxx

Worked Example

A and B: capital A KSh 500,000, B KSh 300,000. Net profit KSh 400,000. Interest on capital 10%; B's salary KSh 60,000; residual profit shared A 3 : B 2.

5. Advantages and Disadvantages of Partnerships

6. Changes in a Partnership (Introduction)

• Admission of a new partner: new capital and profit ratio; goodwill may be adjusted.
• Retirement or death: capital and share of profits paid out.
• Dissolution: business ends; assets sold, liabilities paid, balance shared.