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
- Trading account, profit and loss account: same as for a sole trader, giving net profit.
- Appropriation account: shows how net profit is shared.
- Partners' capital accounts.
- Partners' current accounts.
- Balance sheet.
3. Capital and Current Accounts
| Account | Records |
|---|---|
| Capital account (fixed) | Capital introduced; changes only when capital is added or withdrawn |
| Current account | Share of profit, salary, interest on capital (credit); drawings, interest on drawings (debit) |
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.
| Item | A (KSh) | B (KSh) | Total |
|---|---|---|---|
| Interest on capital (10%) | 50,000 | 30,000 | 80,000 |
| Salary | - | 60,000 | 60,000 |
| Residual profit (260,000, ratio 3:2) | 156,000 | 104,000 | 260,000 |
| Total share of profit | 206,000 | 194,000 | 400,000 |
5. Advantages and Disadvantages of Partnerships
| Advantages | Disadvantages |
|---|---|
| More capital and skills | Unlimited liability (for ordinary partners) |
| Shared decision making and risk | Disagreements between partners |
| Easy to form | Profits are shared |
| Privacy of affairs | Limited life; ends on death or withdrawal |
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.
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Quick Quiz
- Memorandum of Association
- Partnership deed
- Articles of Association
- Prospectus
Answer: Option 2- In proportion to their capital
- Equally
- In proportion to their drawings
- As decided by the oldest partner
Answer: Option 2- Trading account
- Profit and loss account
- Appropriation account
- Balance sheet
Answer: Option 3