20 min read Mathew Wahome

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Capital account (fixed)	Capital introduced; changes only when capital is added or withdrawn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.

Partnership Accounts