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Maintaining Financial Record FA2

CHAPTER 13
Partnerships

Textbook Reading:
FA2 Maintaining Financial Records , 2020 Edition, BPP, Chapter 13
Practice:
FA2 Maintaining Financial Records Practice & Revision Kit, 2020 Edition, BPP
Question 13.1 to 13.14

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 Chapter 13: Partnership

Learning objectives:
At the end of this chapter, you should be able to:
• Define a partnership.
• Explain the purpose and content of a partnership agreement.
• Explain, calculate and account for appropriations of profit.
• Explain the difference between partners’ capital and current
accounts.
• Prepare the partners’ capital and current accounts.
• Prepare the final accounts for a partnership.
• Explain and account for the admission of a new partner including
the treatment of any goodwill arising.

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 Chapter 13:​​ Partnership

What is a partnership?
➢A partnership can be defined as the relationship which exists
between persons carrying on business in common with view of
profit.
➢A partnership agreement is usually (though not always) drawn
up detailing the provisions of the contract between the partners.
➢The agreement is likely to specify:
▪ Any salaries to be paid to partners
▪ Interest to be paid on any loans made to the partnership by a partner
▪ Interest (if any) to be paid on partners’ capital account balances
▪ Interest (if any) to be charged on partner’s drawings
▪ The proportion in which any residual profit is to be allocated between
partners

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 Chapter 13:​​ Partnership

Advantages and disadvantages of partnership

➢ Partnership Vs. Sole Trader
Advantages Disadvantages
• Spread risk • Profits spread
• Network of contacts • Dilution of control
• Partners brings in business, skills • Disputes between partners
and experiences
• Easier to raise finance
➢ Partnership Vs. Limited Liability Company
Advantages Disadvantages
• No need to comply with statuary • No limited liabilities
requirement such as audit
• No need to comply with accounting
standards
• No information or registration fees

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 Chapter 13:​​ Partnership

Partnership capital:
➢It is usual to maintain both a capital account and a
current account for each partner.
➢A partner’s capital account shows any cash or other
assets brought by him into the business. The balance
normally remains constant from year to year.
➢A current account for each partner is maintained to
record a wide range of items on a continuous basis,
example, drawings.

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 Chapter 13:​​ Partnership

Partnership capital:
Proforma Current Account
A B C A B C
$ $ $ $ $ $
Drawings X X X Balance b/f X X X
Interest on drawings X X X Salary X X X
Interest on capital X X X
Balance c/f X X X Profit share X X X
X X X X X X

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 Chapter 13:​​ Partnership

Appropriation of net profits:

1. After calculating the net profit earned by the business, an
appropriation account must be prepared to determine the
allocation of net profit between the partners.
2. To discourage the excessive drawings, partners often
agree to charge themselves interest on any sums
withdrawn from the business.
3. Such interest is charged to the partner concerned and
credited to the appropriation account, increasing the profit
available for sharing between the partners.

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 Chapter 13:​​ Partnership

Appropriation of net profits:

4. The sum available for appropriation must now be shared
amongst the partners and credited to their current
accounts.
5. Some partners may be entitled to a salary. This is credited
to the partner concerned and taken out of the pool
available for appropriation.
6. Partners may be entitles to interest on their capital
account balances. Each partner is credited with the
appropriation amount and again the pool is reduced.
7. Finally, the residual pool of profits is shared amongst the
partners in their profit sharing ration.

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 Chapter 13:​​ Partnership

Proforma Appropriation Accounts:

$ $
Net profit X
Add interest on drawings
A X
B X
C X
X
X
Less: Salary A X
Interest on capital: A X
B X
C X
(X)
Profit X

Appropriation:
A X
B X
C X
X

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 Chapter 13:​​ Partnership

Illustration 1
Crossly, Steels and Nabs are partners in a music business, sharing profits
in the ratio 5:3:2 respectively.
Their capital and current account balances on 1 January 20X5 were as
follows.
Capital Current
accounts accounts
$ $
Crossly 24,000 2,000
Steels 18,000 (1,000) Dr
Nabs 13,000 1,500
Interest at 10% per annum is given on the fixed capital amounts, and
salaries of $8,000 per annum are credited to Steels and Nabs.

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 Chapter 13:​​ Partnership

Illustration 1 Continued
Expansion of the business was hindered by lack of working capital,
so Crossly made a personal loan of $20,000 on 1 July 20X5. The
loan was to be repaid in full on 30 June 20X8 and loan interest at
the rate of 15% per annum was to be credited to Crossly's account
every half year.
The partnership profit (before charging loan interest) for the year
ended 31 December 20X5 was $63,000 and the partners had made
drawings of: Crossly $16,000; Steels $16,500 ; Nabs $19,000 ,
during the year. Interest on drawings is charged at 10% of the year
end balance.
Required
Prepare the appropriation account, the partners’ capital and current
accounts in respect of the year ended 31 December 20X5.

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 Chapter 13:​​ Partnership

Admission of a new partner:

➢A new partner introduce fund to:

▪ Share in the ownership of assets
▪ Share in the future profits (the partner purchases
goodwill)
➢Goodwill is the value of the partner not represented
by tangible assets (such as reputation).
➢On admission of a partner, goodwill can be
maintained or removed.

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 Chapter 13:​​ Partnership

Admission of a new partner:

➢Recording admission:
1. Calculate goodwill and credit to existing partners in old
profit sharing ratio in the capital accounts
2. Records cash introduced by the new partner in the
partner’s capital accounts.
3. If goodwill is not maintained further entries are made to
credit goodwill account and debit the capital account
with the value of goodwill reallocated in the new profit
sharing ratio.

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 Chapter 13:​​ Partnership

Illustration 2
Ant and Dec share profits in the ratio - Ant 1: Dec: 1 - in a repairs
and maintenance business. They agree to Noel becoming a partner
on 1 January 20X9.
At that date Ant and Dec value the business’s goodwill at $5,000
and their capital accounts are Ant - $12,000; Dec - $9,000 .
Noel agrees to introduce $3,000 in cash. The partners agree to
share profits in the ratio - Ant 2: Dec 2: Noel 1.
Required
Provide the appropriate accounting entries for this transaction.

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Practice Questions

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 Chapter 13:​​ Partnership

Question 1
Wayne and Kay are in partnership. In the year to 31 May 20X1, Wayne's drawings
were $12,000 and the following entries have been made in the partnership
appropriation account for Wayne:
$
Salary 7,500
Interest on drawings 2,800
Share of profit 13,500

At 1 June 20X0, the balance on Wayne's current account was $31,200 (credit).

What is the balance on Wayne's current account at 31 May 20X1?

A. $37,400
B. $43,000
C. $49,400
D. $22,400

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Question 2
Bill and Ted were in partnership and shared profits and losses equally.

On 1 October 20X0 they admitted a new partner, Fred. Bill and Ted had
established the goodwill in the partnership at that date was valued at
$120,000 and Fred introduced enough cash to ensure his opening capital
balance on admission was $10,000.

The three partners now share profits and losses equally and goodwill was
not maintained in the partnership accounts.

How much cash did Fred contribute?

A. $120,000
B. $60,00
C. $50,000
D. $40,000

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Question 3
When preparing partnership accounts, which of the following are treated
as an expense of the business?

1) A partner's salary
2) Loan interest paid to a partner
3) A partner's entertaining expenses
4) Interest paid on a partner's capital

1
2
3
4

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 Chapter 13:​​ Partnership

Question 4
Alice and Ann share their partnership profits in the ratio 2:1 after payment
of Ann's salary of $10,000. They both owe $500 interest on drawings.
Profit for the year is $75,000.
What will Alice's profit share be?
A. $50,000
B. $43,500
C. $44,000
D. $43,333

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Question 5
Bruce and Sheila are in partnership sharing profits and losses in the ratio
5:6. A net profit of $34,100 was reported in the statement of profit or loss
for the year to 30 September 20X0.

Bruce is entitled to a salary of $12,100 per annum.

What is Sheila’s share of the profit for the year to 30 September 20X0?

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