PARTNERSHIP ACCOUNTING
A partnership is where two to twenty persons join to carry on a trade or business (except for
banks that can have a maximum of ten). Each person may contribute money, property, labor or
skill, and expects to share in the profits and losses of the business. Partnerships come in two
varieties: general partnerships and limited partnerships. In a general partnership, the partners
manage the company and assume responsibility for the partnership's debts and other obligations.
A limited partnership has both general and limited partners. The general partners own and
operate the business and assume liability for the partnership, while the limited partners serve as
investors only; they have no control over the company and are not subject to the same liabilities
as the general partners. A partnership is usually based on a partnership agreement.
A partnership agreement is a contract between partners in a partnership which sets out the
terms and conditions of the relationship between the partners, including:
Amount of capital to be contributed by each partners
Ratio in which profits and loss to be shared between partners
Rate of interest, if any to be allowed on partners’ capital
Rate of interest, if any, to be charged on partners’ drawings
Rate of interest, if any, to be allowed on partners’ loans to firm
Salaries to be paid to the partners
A partnership agreement should be prepared by an attorney or accountant.
If no partnership agreement exists then the Partnership Act applies.
1. All partners may contribute capital equally
2. Profits and losses are to be share by partners equally
3. No interest is to be paid on capital
4. No interest is to be charged on partners’ drawings
5. Partners are entitled to interest of 5% per annum on loans to the firm
6. No salaries are allowed to partners
The final accounts of a partnership includes
a. The Income Statement and Appropriation Accounts
The income statement is usually the same as that obtained in a sole trader, however there is
an added section called the Appropriation a/c. The Appropriation Account is added to show
how the net profit is adjusted and distributed amongst the partners. Items entered in the
appropriation account, except for drawings, usually have their double entry in the Current
Account. Among these items are:
a) Additions to Net Profit
1. Interest on drawings Dr Current Acc Cr Appropriation
b) Division of Profits
1. - Interest on capital Dr Appropriation Cr Current Acc
2. - Salary to partners Dr Appropriation Cr Current Acc
3. - Share of profit Dr Appropriation Cr Current Acc (reversed when there is
a loss)
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These items are generally obtained from the footnotes/additions to the trial balance.
Format of the Appropriation a/c.
A &B
Approriation a/c for the year ending 31 December 2014
$ $ $
Net Profit xxxx
Add Interest on Drawings: Partner A xx
Partner B xx +xxxx
Xxxx
Less: Salary: Partner B xx
Bonus: Partner A +xx xxx
Interest on Capital: Partner A xxx
Partner B +xxx +xxx -xxxx
Xxxx
Balance of Profits Shared:
Partner A 3/5 xxxx
Partner B 2/5 +xxx
Xxxx
Note this is the continuation of a Trading Profit and Loss A/c, but may be done one its own.
Example of Trading Profit and Loss A/c with Appropriation A/c
Capital accounts in Partnership: The capital accounts in partnership may be maintained under:
A. Fixed capital method
B. Fluctuating capital method
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A. Fixed Capital Method: Under this method two accounts are kept for each partner viz.Capital
account and Current account. In the capital account the original capital investment only will be
shown every year.
The Current Account
The Current account is used to record:
Share of profit /loss
Interest on capital
Interest on drawings
Interest on loans
Drawings
Partners’ salaries
Bonuses to partners etc( Treated same as Salaries)
This account may show either a debit balance or a credit balance. Debit balance represents
drawings in excess of profits to which a partner was entitled. Credit balance means profits
undrawn.
Example of Fixed Capital and Current A/c
Most of the items in the Current Account are double entries for the items from the
Appropriation Account as shown above. The current account would also include drawings as
a Debit entry.The current account is usually prepared separately and the balance taken to the
Balance sheet. However, some textbooks show the adjustments inside the balance sheet
c. The Balance Sheet.
This is usually the same as before, except for the owners capital, which now consist of
each partner’s initial capital as well as the balance from the Current Account.
