Accounting for Partnership
1. What is a Partnership
A partnership is a form of business organization where two or more individuals agree to
contribute money, property, or services into a business and share in its profits and losses. It is
governed by the partnership agreement, which outlines each partner’s rights and obligations.
2. Characteristics of a Partnership
Partnerships have mutual agency, limited life, unlimited liability unless stated otherwise, co-
ownership of assets, and shared profits and losses.
3. Formation of a Partnership
When forming a partnership, partners contribute cash, non-cash assets, or services.
For cash contribution, the journal entry is:
Debit Cash
Credit Partner’s Capital
For non-cash contributions such as equipment, the entry is:
Debit Asset at agreed value
Credit Partner’s Capital
If the partnership assumes liabilities from a partner:
Debit Asset
Debit Partner’s Capital for the net contribution
Credit Liabilities
4. Profit and Loss Distribution
Profits and losses are shared according to the agreement. If there is no agreement, they are
divided equally.
Common methods of distribution include equal basis, specific ratio such as 2 to 1 to 1, or
providing interest on capital and salaries to partners before dividing the remaining profit.
For example, if partners A and B agreed to a 60 to 40 ratio and the net income is 100,000, the
journal entry would be:
Debit Income Summary 100,000
Credit A Capital 60,000
Credit B Capital 40,000
5. Partner’s Drawings
Partners may withdraw cash or assets from the business. The journal entry is:
Debit Partner’s Drawing
Credit Cash or Asset
At the end of the period, drawings are closed to capital:
Debit Capital
Credit Drawing
6. Admission of a New Partner
A new partner may be admitted by either purchasing interest from an existing partner or
investing new capital into the partnership.
If the new partner purchases interest, no journal entry is made in the books. The transaction is
recorded between the partners.
If the new partner contributes new capital, the partnership records the contribution. A bonus may
be involved if the capital investment does not equal the capital credit given.
7. Withdrawal or Retirement of a Partner
When a partner withdraws or retires, the partnership either settles their capital balance using the
partnership’s assets or transfers the interest to the remaining partners.
The bonus method or the goodwill method may be used to adjust capital balances.
8. Dissolution and Liquidation
Dissolution happens when the partnership ends. Liquidation involves the following steps: selling
the assets, paying off liabilities, and distributing the remaining cash to the partners according to
their capital balances.
Payments follow this order: first to outside creditors, second to loans from partners, and lastly to
capital balances.
For example, if a partner receives 50,000 during liquidation, the entry is:
Debit Partner’s Capital 50,000
Credit Cash 50,000
9. Conclusion
Accounting for partnerships involves recording contributions, profit distribution, changes in
ownership, and liquidation. Understanding the proper journal entries and treatment of
transactions between partners is important for accurate financial reporting.
