TOPIC TWO: PARTNERSHIP ACCOUNTS

A partnership is an agreement between two or more individuals who come together

to start up a business with a view of earning a profit.
Or a partnership is where two or more individuals agree to contribute money,
labour, skills, knowledge to a business organization for mutual benefit which is
profit.
A partnership may be established by a partnership agreement which is literally
referred to as the partnership deed
However, a partnership may also be established by a mere presumption that a
relationship exists between given individuals by virtual of their actions.
Or partnership is made up of partners who share equal responsibility for the
company’s profits, losses, Debts liabilities and management. A partnership consists
of between two and twenty partners.
There are two main types of partners that is to say general and limited partners.
General partners are those who have an obligation of liability to third parties
incurred by the internship.
Limited partners are those whose liability for the debts of the partnership is
limited to their investment in the partnership.
Others include:
Sleeping partners are those who do not actively participate in the day to day
activities of the business but shares in profits and losses of the business.
Sub- partners are those who always take share of the profit through another
member who is a partner.
Nominal partners are those who allow their names to be used in the partnership
yet they are not partners in the business and they are liable to third party.
Minor partners are not personally liable for debts of the business but his/ her
shares in the partnership profits with the consent of all the partners.
THE CONTENTS OF A PARTNERSHIP DEED OR PARTNERSHIP
AGREEMENT.
This usually covers the following:
 Name of the partners.
 The capital contributions of the partners.
 The type of the business.
 The interest on capital if any.
 Drawings rights of the partners.
 Interest on the drawings.
 Procedures for admission of a new partner.
 The profit or loss sharing ratio.
 Salary/ commission to be paid to an active partner.
 Valuation of good will.
 Duration of the partnership business.
 E.T.C
NB: Partnership forms the second phase in the evolution of businesses after sole
proprietorship.
Advantages of partnership business.
 Losses are shared among many partners.
 Partnerships are cheap to set up because more finances can be raised.
 It commands a wide range of capital that is to say easy access to capital.
 It commands a wide range of experience and skills from different partners.
 Easy formation of partnership i.e. few steps are involved.
 Work load can be shared between partners.
Disadvantages
 Decisions may take longer because other partners may need to be consulted.
 Profits are shared by many or all partners.
 In case of disputes/ disagreements amongst the partners the business may
come to a standstill.
 Retirement or death of one partner may affect the running of the partnership.
 There’s a risk of implied authority i.e. every partner is liable for the actions
of another.
 There’s a limitation on the number of partners up to twenty.
Financial statements of partnership.
They are not mandatory for the partnership to prepare financial statements but
sometimes they prepare the financial statements in order to access their financial
performance and financial position.
Income statement. This is similar to those of other forms of businesses except for
the inclusion of the appropriations account.
Net profit XXX
Appropriations account
Add: interest on drawings
A xx
B xx XXX
Less: interest on capital
A xx
B xx (XXX)
Less: salary to be paid to partner A (XXX)
Profit to be shared XXXX
Share of profit:
A 6/10 * Profit
B 4/10 * Profit
Illustration
Charity and Amos commenced business on the 1st Jan 2010 with capital of 100,000
and 150,000 respectively the two partners agreed to share profits in the ratio of 4:6.
Charity and Amos agreed on the following terms.
 To contribute 3% interest on drawings.
 To be given 2.5% interest on their capital.
 Charity and Amos drew 30,000 and 50,000 respectively from the business.
 By 31st Dec 2010, the partnership had made a net profit of 323,000.
Required
Prepare the partnership appropriation account for the period.
BALANCE SHEET/ STATEMENT OF FINANCIAL POSITION

The statement of financial position prepared by partnership business is the same as

any other form of business except for the presentation of equity part of the
statement of financial position
FORMAT:
Assets
N.C.A cost Acc Dep N.BV
CURRENT ASSETS
EQUITY & LIABILITIES
Capital
A xx
B xx
C xx XXX
Current a/c
A xx
B xx
C xx XXX
NON CURRENT LIABILITIES
CURRENT LIABILITIES
NOTE:

 Interest on a loan is a business expense and is treated as a business expense

in the profit and loss account.
 If a partnership gives out a loan in return for interest, the interest received is
treated as a miscellaneous income.
 If a partner extends a loan to the partnership, interest charges on the loan is a
business expense and charged against the profits
METHODS FOR MAINTAINING THE PARTNERS CAPITAL A/CS

There are two methods for maintaining the partner’s capital A/C. i.e.
 The fixed method.
 The fluctuating balance method.
a) Fixed method:
Under this method the capital a/c is opened separate from the current A/C.
i.e. two a/cs are opened up i.e. current a/c and capital a/c.
The capital a/c records only the opening balances of capital plus any
additional fresh capital.

A & B CAPITAL ACCOUNTS

Details A B details A B
Bal B/d xx xx
Bank/Additional k xx
Bal c/d xx xx
xxx xxx xxx xxx

Dr A & B current A/C Cr

Details A B Details A B
Drawings xx xx Bal B/d xx xx
Interest on Drawings xx xx share of profits xx xx
Share of losses xx xx interest on Capital xx xx
xxx xxx salary paid to A xx

Bal c/d xx xx
 xxx xxx xxx xxx

If Bal c/d appears on credit side then the partnership was insolvent in deficiency
N.B
The fixed method of maintaining partnership capital a/c is regarded as the
appropriate method since it allows proper monitoring of transactions of partners in
the partnership

b) Fluctuating balance method

Under this method only the capital a/c is opened up to record and the
opening balance of capital to include the transactions of the partners in the
partnership.

A & B capital A/C

Details A B Details A B
Drawings xx xx Bal B/d xx xx
Interest on Drawings xx xx interest on K xx xx
Share of losses xx xx Share of profit xx xx
Salary xx xx
Additional K xx xx
Bal c/d xx xx
xxx xxx xxx xxx

THE BASIC DOUBLE ENTRY UNDER PARTNERSHIP

The following double entry procedure should be followed on recording the
transactions of the partnership (partners capital and current accounts).
 In case additional K is introduced in the partnership.
Dr. Cash / Bank /Assets a/c
Cr. Individual partners’ capital a/c
 In case of the interest on capital.
Dr. P&L appropriation a/c (Less (Y Statement)
Cr. Individual partners current a/c
 In case of Drawings
Dr. Partners current a/cs (with the Drawings)
Cr. Cash / Bank
 In case of interest on Drawings
Dr. Individual partners currents a/c
Cr. Income statement (P&L appropriation a/c)
Add to income statement Cr.
Sub Dr

 In case of a salary paid to an active partner

Dr. P&L appropriations a/c (Y statement)
Cr. Partners current a/cs.
 In case of a share of the profits
Dr. P&L appropriations a/c (Y Statement)
Cr. Partners current a/c (with the profit)
 In case of a share of the loss
Dr. Partner’s current a/c
Cr. P&L appropriation a/c (Y Statement)
EXAMPLE:
Hellen and Jamila are in a partnership sharing profit and loss in the ratio of 6:4 the
following is their trial balance for the year ended 30th June 2016.
HELLEN AND JAMILA TRIAL BALANCE FOR THE YEAR ENDED 30TH
JUNE 2016.

DETAILS DR CR
Office equipment at cost 13,000
 Motor vehicle at cost 18,400
Provision for depreciation
- Motor vehicles 7,360
- Office equipment 3,900
st
Inventory 1 July 2015 49,940
Accounts receivables 41,920
Accounts payables 32,550
Cash at bank 1,230
Cash at hand 280
Sales 180,740
Purchases 143,260
Salaries 16,834
Office expenses 2,740
Discount allowed 1,126
Current account
Hellen 2,758
Jamila 2,422
Capital account
Hellen 54,000
Jamila 24,000
Drawings
Hellen 11,000
Jamila 8,000
TOTAL 307,730 307,730
Additional information:
Closing inventory was valued at shs. 54,680.
Office expenses owing was shs. 220.
Provide for depreciation on motor vehicle 20% on cost and office equipment 10%
on cost.
Interest on capital is charged at 10%.
Charge interest on drawings Hellen shs. 360 and Jamila shs. 420.
Required: prepare final set of accounts (the income statement, balance sheet,
capital and current accounts of the partners).

ACCOUNTING FOR GOOD WILL IN PARTNERSHIP

Good will is an intangible Asset arising from the business’s ability to earn more
profit then other businesses in the same trade.
Good will is defined as the excess of the purchase consideration of the business
sold as a going concern over and above the fair market value of the Net Assets
acquired.
Fair value has been defined in many standards as the value of which an asset may
be exchanged or liability settled between knowledgeable and willing parties at an
arm’s length transaction.

FACTORS THAT LEAD TO THE FORMATION OF GOOD WILL

 Possession of the trade marks
 The location of the business
 Monopoly power of a business
 The costs of Research and Development which have resulted into better
methods of production.
 The new business many continue to trade under the same name.
 Existence of skilled labour force.

CIRCUMSTANCES THAT LEADS TO ASCERTAIMENT OF GOOD

WILL
Good will has to be valued or recorgnised whenever either of the following takes
place:-
 On admission of a new partner
 On retirement of an old partner
 On dissolution of the partnership.
 When there is a change in the profit and loss sharing ratio

TYPES OF GOOD WILL

There are basically 3 types of Good will
  Purchased Good will
 Inherent Good will
 Negative Good will
Purchased Good will: This arises from a defined financial transaction. IFRS 3 -
Business combinations requires this type of Good will to be capitalized as an
intangible asset and recorded on the statement of the financial position.
Inherent Good will: This type of good will results from the normal carrying out of
the business operations. This kind of Goodwill shouldn’t be recorded in the books
as recording it would imply anticipating gains which gains may only be realized
when the business is sold off as a going concern which may never happen.
Negative Good will: This results from a situation where the fair market value of
the Net Assets Acquired exceeds the purchase consideration.

N.B
The value of Goodwill fluctuates from time to time and it varies from one
company to another and therefore its valuation involves on very high degree of
subjectivity.

METHODS USED TO ACCOUNT FOR GOOD WILL

There are 3 methods used in the valuation of Good will i.e.
 The Revaluation method
 The Memorandum Revaluation method
 The Premium method

THE REVALUATION METHOD

Under this method Good will is recorganize and maintained in the books of
partnership as an intangible Asset.
On recognition of Goodwill
Dr. Good will a/c
Cr. The partners’ capital a/c} using the old profit/loss sharing ratios

THE MEMORANDUM REVALUATION METHOD

Under this method we recorganize Good will and write it off immediately.
On recognition of Good will
Dr. Good will a/c.} Using the old P/L
Cr. Partners’ capital a/c
On writing off Good will
Dr. Partners K a/c} using the new P& L
Cr. Good will a/c

THE PREMIUM METHOD

Under this method a new partner comes in with additional cash on top of the
capital contribution the excess cash being the premium for goodwill. This addition
cash is a sign of appreciation for the Good will which has been established by the
old partners. The premium may be treated in three ways;

 The partners share the cash premium without any record being raised in the
books of accounts.
 The cash premium is used to increase the old/ existing partner’s capital and
is retained by the partnership
Dr. bank/cash
Cr. old partners capital accounts
 The cash premium paid by the new partner is withdrawn by the old partners
and no goodwill account is maintained.
On receipt of the payment
Dr. bank/ cash
Cr. Old partner’s capital account
On withdrawal of the premium by the partners
Dr. Old partners capital account
Cr. Bank/cash account.

Example
XY and Z are partners and have always shared profits/ losses in ratio of 4:3:1
respectively.
They are altering there profit /loss ratio to 3:5:2 respectively their statement of
financial position at 31 Dec 1997 was as below.

Net assets 14,000

Capital
 X 6,000
Y 4,800
Z 3,200 14,000

The partners agreed to value good will at 12,000 on the change.

Required prepare
a) The good will a/c
b) Capital a/c
c) Statement of financial position as at 31.Jan 1995.
(i) If the good will a/c was opened and maintained in the books of business.
(ii) Good will a/c was opened & eliminated from the books of a/c.

Solution
(i)
a) Dr. Good will a/c Cr.
Capital
A 6,000
B 4,500 Bal c/d 12,000
C 1,500

12,000 12,000
b) Capital A/C
Details X Y Z Details X Y Z
Bal B/d 6,000 4,800 3,200
Good will 6,000 4,500 1,500
Bal c/d 12,000 9,300 4,700
12,000 9,300 4,700 12,0009,300 4,700

c) XYZ STATEMENT OF FINANCIAL POSITION AS 31 JAN 1998

NET ASSETS 14,000
ADD GOOD WILL 12,000
 TOTAL ASSETS 26,000

EQUITY & LIABILITIES

CAPITAL X 12,000
Y 9,300
Z 4,700
26,000
ii
Dr. Good will a/c Cr.
Capital Capital
X 6,000 X 3,600
Y 4,500 Y 6,000
Z 1,500 Z 2,400
______ ______
12,000 12,000

Capital A/C
Details X Y Z Details X Y Z
Good will 3,600 6,000 2,400 Bal B/d 6,000 4,800 3,200
Good will 6,000 4,500 1,500
Bal c/d 8400 3300 2300
12,000 9,300 4,700 12,0009,300 4,700

XYZ STATEMENT OF FINANCIAL POSITION AS 31 JAN 1998

NET ASSETS 14,000
TOTAL ASSETS 14,000
EQUITY
CAPITAL X 8400
Y 3300
Z 2300
14,000
Example 2
X&Y are in partnership sharing profits losses equally. They decided to admit Z by
agreement Good will was valued at 6.000 to be introduced in the books of the
partnership, Z is required to provide capital equal to that of Y after he has been
credited with his share of Good will. The new profit sharing ratio will be 4:3:3 for
X Y& Z respectively. The statement of financial position before the admission of Z
was as follows.
NON CURRENT ASSETS 15,000
Bank 2,000
17,000
CAPITAL
X 8,000
Y 4,000
Current liabilities 5,000
17,000
Required: open up the ledger a/cs to reflect the admission of X and the treatment of
Good will using.
a) The revaluation method
b) The memorandum revaluation method
c) Show the Good will a/c and statement of financial method under the 2
methods using a and b

Solution 2
a) Revaluation method
 Dr. Good will a/c Cr.
Capital a/c
X 3,000
Y 3,000 Bal c/d 6,000
6,000 6,000

Dr. Bank a/c Cr.

Bal B/d 2.000
Capital Z 7,000
Bal c/d 9000
9,000 9.000

CAPITAL A/C
Details X Y Z Details X Y Z
Good will Bal B/d 8,000 4,000 __
Good will 3,000 3,000 __
Bal c/d 11,000 7000 7000 Bank 7,000
11,000 7000 7000 11,000 7,000 7,000

XYZ STATEMENT OF FINANCIAL POSITION AS AT

Noncurrent Assets 15,000
Intangible asset (GOOD WILL) 6,000
Current asset (bank) 9,000
Total assets 30,000

Capital
X 11,000
Y 7,000
Z 7,000
Current liabilities 5,000
 30,000
b) Memorandum Revaluation method
Dr. Good will a/c Cr.
Capital Capital
X 3,000 X 2,400
Y 3,000 Y 1,800
Z 1,800
______ ______
6,000 6,000

X Y&Z CAPITAL A/C

Details X Y Z Details X Y Z
Good will 2,400 1,800 1,800 Bal B/d 8,000 400 __
Good will 3,000 3,000 __
Bal c/d 8,600 5,200 5,200 Bank 7,000
11,000 7000 7000 11,000 7,000 7,000
XY& Z STATEMENT OF FINANCIAL POSITION
NC.A 15,000
Bank 9,000
24,000
CAPITAL
X 8,600
Y 5,200
Z 5,200
CURRENT LIABILITIES 5,000
24,000

REVALUATION OF ASSETS AND LIABILITIES

A revaluation of Assets and liabilities is necessary when a new partner is
admitted or when an old partner retires or dies. It is not only good will that is
revalued but also Assets & liabilities have to be revalued in order to discover this
meaningful values in order to arrive at the correct capital a/c balances.
All assets and liabilities have to be taken into consideration during this exercise.
The Assets & liabilities affected are adjusted so that proper records of the business
are kept.
A revaluation a/c is normally complied to determine the profit/ loss on
revaluation. If the Cr. Side of this A/C exceeds the Dr. Side the difference is
known as the profit on revaluation. And this should be credited to the partners’
capital/ current a/c using the old profit/ loss sharing ratios.
However, If the Dr. side of this a/c exceeds the must be shared amongst the
partners and debited to their capital a/cs OR current a/cs using the old P/L sharing
ratios.

ACCOUNTING ENTRIES
 In case of an increase in the value of Assets
Dr. Individual Asset a/c} with the increase
Cr. Revaluation a/c

 In case of a decrease in the value of an Asset

Dr. Revaluation a/c} with the decrease
Cr. Individual Asset a/c

 In case of an increase in the value of a liability

Dr. Revaluation a/c} with the increase
Cr. Individual liability a/c
 In case of a decrease in the value of a liability
 Dr. Individual liability a/c} with the decrease
Cr. Revaluation a/c
 In case of the share of the profit on revaluation
Dr. Revaluation a/c
Cr. Individual capital/ current a/c
 In case of the share of the loss on revaluation
Dr. Individual capital/ current a/c.
Cr. Revaluation account.

Example
A and B are partners sharing P/L in the ratio of 1:3 respectively. On 31 st Dec 1997
there statement of financial position was as follows:-
NCA
Premises 100,000
Furniture 80,000
M.V 40,000
Furniture & fittings 25,000
245,000
Current Assets
Inventory 60,000
A/Cs receivables 45,000
Bank 80,000
Cash 35,000 220,000
TOTAL ASSETS 465,000
Capital & liabilities
Capital A 200,000
B 180,000
 380,000
Current liabilities
A/cs payable 15,000
Bills payable 10,000 25,000
N: C liabilities
Stanbic loan 60,000
465,000

On 31st Dec the partners agreed to admit C and he was to contribute 120,000 as
capital to the business bank a/c and Z is entitled to ¼ of the profit and losses.
The revaluation exercise was carried out as follows:-
Premises were revalued to 120,000
Furniture to 90,000
Fixture and fittings to 20,000 and Goodwill to 130,000 Goodwill is to be
maintained in books as an intangible Asset.
Required prepared the necessary ledger a/cs including
(i) Revaluation a/c (ii) capital a/c
(iii) Assets a/c properly adjusted (iv) Bank a/c (v) statement of financial
position after the admission of Z
Solution
Dr. Revaluation a/c Cr.
Fixtures fittings 5000 Premises 20,000
Capital a/c furniture 10,000
A 6250
B 18,750
_______ _______
30,000 30,000
Dr. Premises a/c Cr. Dr. Furniture a/c Cr.
Bal B/d 100,000 Bal B/d 80,000
Revaluation 20,000 Revaluation 10,000
_____ Bal c/d 120,000 ______ Bal c/d 90,000
120,000 120,000 90,000 90,000

Dr. Fixture &fittings alc Cr. Dr. Good will a/c Cr.
Bal B/d 25,000 Capital
Revaluation 5,000 A 45,000
B 135,000 Bal/cd 180,000
Bal c/d 20,000 ______ ______
25,000 25,000 180,000 180,000

Dr. Bank a/c Cr.

Bal B/d 80,000
Capital 120,000 Bal c/d 200,000
_____ _____
200,000 200,000

Dr. A, B & C CAPITAL A/C Cr.

Details A B C Details A B C
Bal B/d 200,000 180,000 ___
Good will 45,000 135,000 ___
Bank 120,000
Profit on revaluation 6250 18750 ____
Bal c/d 251,250 333,750 120,000 ______________________

251,250 333,750 120,000 215,250 333,750 120,000

X,Y& Z B/SHEET AS AT 31 DEC 1997.
N.C.A
Premises 120,000
Furniture 90,000
M.V 120,000
Furniture & fittings 20,000
INTAGIBLET 270,000
Good will 180,000
CURRENT ASSETS
Inventory 60,000
A/Cs receivable 45,000
Bank 200,000
Cash 35,000 340,000
TOTAL ASSETS 790,000
CAPITAL & LIABILITIES
Capital A 251.250
B 333,750
C 120,000
705,000
LIABILITIES
Bills payable 10,000
A/cs payables 15,000
N.C LIABILITIES
STANBIC LOAN 60,000 85,000
TOTAL EQUITY & LIABILITIES 790,000
Question
Charles, David and Ernest are in partnership sharing profits and losses in the ratio
of 2:1:1. They agreed on retirement or admission of a new partner Goodwill will be
valued at 2 times the average of the proceeding year’s profits which were
43,000,000, 55,000,000 and 52,000,000.
At 31st Dec 2000 the statement of financial position of Charles, David and Ernest
was as follows:-
Assets
Freehold premises 40,000,000
Delivery vans 20,000,000
Inventory 25,000,000
Accounts receivables 15,000,000
Bank 10,000,000
TOTAL ASSETS 110,000,000
Capital and liabilities
Capital a/c
Charles 25,000,000
David 20,000,000
Ernest 20,000,000 65,000,000
Current A/C
Charles 10,000,000
David 10,000,000
Ernest 10,000,000 30,000,000
Liabilities
A/C payable 15,000,000
110,000,000
At 31st Dec 2000 Charles Decides to retire and Francis is admitted to a partnership
Charles goes with one the delivery vans valued at 8,000,000 and decides to leave
20,000,000 as loan to the partnership.
The Assets were revalued as follows.
Freehold premises 50,000,000
Delivery Van 17,000,000
Inventory 8,000,000
Francis is required to bring his capital contribution of 70,000,000 and the new ratio
will be 2:2:1
You are expected to Use the Memorandum revaluation method for recording
Goodwill.
a) Prepare the necessary ledger a/cs to reflect the transaction of the partnership.
b) Prepare the statement of financial position of the partners after the retirement
of Charles and admission of Francis.
Solution
Dr. Freehold Premises a/c Cr. Dr. Delivery Van Cr.
Bal B/d 40,000 Bal B/d 20,000 Revaluation 3,000
Revaluation 10,000 Charles 8,000
_____ Bal c/d 50,000 ______ Bal c/d 90,000
50,000 50,000 20,000 20,000

Dr. Inventory a/c Cr. Dr. Charles Retirement a/c Cr.

Bal b/d 25,000 Delivery van 8000 Partners Capital
75,000
Revaluation 17,000 Loan 20,000 current a/c
5,000
Bank 52,000
_____ Bal c/d 8,000 80,000 80,000
25,000 25,000
Dr. Revaluation Cr.
Delivery Van 3,000 Free hold premises 10,000
inventory 12,000 current A/c
Charles 5,000
David 2,500
Ernest 2,500
______ ______
20,000 20,000

PARTNERS CURRENT A/C

Details Charles David Ernest Details Charles David Ernest
Loss on
revaluation 5,000 2.500 2,500 Bal B/d 10,000 10,000 10,000
Retirement 5,000
Bal c/d 7500 7500
10,000 10,000 10,000 10,000 10,000 10,000

Dr. Good will Cr Goodwill

Capital A/C 2:1:1 Capital A/C 2:2:1 2x (43,000 +55,000 +52,000)
Charles 50,000 David 40,000 3
David 25,000 Ernest 40,000 2x50 = 100,000
Earnest 25,000 Francis 20,000

Dr. Bank a/c Cr.

Bal B/d 10,000 Charles
Capital retirement 52,000
Francis 70,000
Bal c/d 28,000
_____ _____
 80,000 80,000

PARTNERS CAPITAL A/C

Details Charles David Ernest Francis Details Charles David Ernest Francis
Goodwill 40,000 40,000 20,000 Bal/B/d 25,000 20,000 20,000
Bank _ _ _ 70,000
Charles
Retcrement a/c 75.000 Goodwill 50,000 25,000 25,000 __
Bal c/d 5.000 5,000 50,000
25,000 45,000 45,000 90,000 75,000 45,000 45,000
70,000

PARTNERS (DAVID, ERNEST & FRANCIS)

Statement of financial position as at 31 Dec 2000 in 000 ugx.
Assets:
Freehold premises 50,000
Delivery van 9,000
Inventory 8,000
Accounts receivable 15, 000
Bank 28,000
TOTAL ASSETS 110,000
CAPITAL & LIABILITIES:
Capital A/C
David 5,000
Ernest 5,000
Francis 50,000 60,000
Current a/cs
David 7,500
Ernest 7,500 15,000
LIABILITIES
A/c payable 15,000
Loan from Charles 20,000
110,000

DISSOLUTION OF PARTNERSHIP
A partnership may be dissolved after a certain period of time the following are the
circumstances under which a partnership business may come to an end.
 Mutual Agreement: when one or more of the partners reaches retirement or
on the expiry of the contract.
 When the partnership business is no longer making profits
 Force of circumstance i.e. death of a partner
 Is where a partnership business has expanded to appoint where it is worth
while running as a company.
 When the parties cannot agree between themselves on how to operate the
business.
N: B
On dissolution the partnership may be sold as a going concern, it may be converted
into a Ltd company or its assets may be sold off individually and then the business
is wound up.
The proceeds from dissolution are used to settle the obligations from the
partnership including the amount due to the partners.

PROCEDURE & ACCOUNTING ENTRIES ON DISSOLUTION

On dissolution a special a/c known as the realizations a/c is opened through which
all the assets of the partnership are closed (Debited) except cash /Bank.
Dr. Realization’s a\c
Cr. Individual Assets a/c.
 The provisions a/c e.g. provision for Bad debts should also be closed off to
the realizations a/c.
Dr. Provision’s a/c.
Cr. realizations a/c.
 External liabilities should be paid from the business bank a/c.
Dr. Individual liability a/c.
Cr. Cash/ Bank.
 In case of a decrease on the value of an Asset e.g. D/Allowed on trade
receivables.
Dr. Realizations a/c} with the D/A
Cr. Individual assets a/c
 In case of a decrease in the value of a liability e.g. Discount Received from
trade creditors
Dr. Individual liability a/c} with the D/R
Cr. Realizations a/c
 For Assets taken over by the partners
Dr. Individual partners capital a/c} with the agreed take over
price.
Cr. Realizations a/c
 For liabilities taken over
Dr. Liability A/C
Cr. Individual partners capital a/c
 When assets are sold for cash
Dr. Cash / Bank} with the sale proceeds
Cr. Realizations a/c
 For the realization / dissolution expenses paid
Dr. Realization’s a/c
 Cr. Cash/ Bank
 Balance off the realizations a/c to determine either a profit / loss on
realization
 In case the Cr. Side of realization exceeds the Dr. Side then there’s a
profit on realization.
 In case the Dr. Side is more the Cr. Side then there’s a loss on
realization.
In case of a profit
Dr. Realizations a/c
Cr. Individuals capital/ currents a/c
In case of a loss
Dr. Individual capital/ current a/c
Cr. realizations a/c
 Transfer the partners current a/c balances to their capital a/cs
 In case of credit balance on a current a/c
Dr. Partner’s currents a/c
Cr. Partners capital a/c
 In case of Dr. balance on a current a/c
Dr. Partner’s capital a/c
Cr. Partners current a/c
 Balance off the partners’ capital a/cs any partners with a Dr. balance pays
into the firms bank a/c a sufficient sum to clear his/her balance.
Dr. Bank
Cr. Partners Capital A/C
Finally there should be sufficient cash/ bank balances to pay the partners with Cr.
Balance on their capital a/c.
Dr. Partner’s capital A/C
 Cr. Cash/ Bank A/C
N: B
After all the above transactions the bank/ cash A/C must automatically balance.
Example one
Allen and Ben are partners sharing profits and losses in the ratio of 2:1 on 31 st Dec 2015 they
decided to dissolve the partnership. The balance sheet as at that date was as below.
Balance sheet as at 31 Dec 2015
N.C.A
Land and buildings 150,000
Furniture 100,000
M.V 100,000
350,000
C.ASSETS
Inventory 150,000
A/C receivable 200,000
Bank 50,000 400,000
750,000
CAPITAL & LIABILITIES
CAPITAL A/C 500,000
Allen 200,000
Ben 700,000
Current a/c
Allen 100,000
Ben (300,000)
A/Cs payable 250,000
750,000
On that date the following transactions took place. Building and furniture realized shs 170,000 &
80,000 respectively. Motor Vehicle were taken over by Allen at 85,000, Inventory was taken
over by Allen at shs 130,000. Accounts receivables were factored to Sukran at shs. 180,000.
The external liabilities were paid off less 5% discount, Realization expense amounted at
40,000/=.
Required
Prepare the following ledger account to close off the book of the partnership
a) Realisation A/C
b) Capital A/C
c) Bank a/c
Solution
Dr. Realization A/c Cr.
Bank
Land & buildings 150,000 buildings 170,000
Furniture 100,000 furniture 80,000
M.Vehicle 100,000 Capital
Inventory 150,000 M.V taken by A 85,000
Accounts receivable 200,000 inventory taken by Allen
130,000
Realization exp (bank) 40,000 A/C’s receivables 180,000
Direceived 12.500
Current A/C
Allen 55,000
_______ Ben 27,000
740,000 740,000

Solution
Dr. Land & Building a/c Cr. Dr. Furniture Cr.
Bal B/d 150,000 Bal B/d 100,000

_____ Realisation 150,000 ______ Realisation100, 000

150,000 150,000 100,000 100,000

Dr. M.Vehicles a/c Cr. Dr. Inventory a/c Cr.

Bal B/d 100,000 Bal B/d 150,000
 _____ Realisation 100,000 ______ Realisation150,000
100,000 100,000 150,000 150,000

Dr. Accounts receivables A/c Cr. Dr. A/Cs Payables Cr.

Bal B/d 200,000 Realisation 12,500 Bal B/d
250,000
_____ Realisation 200,000 Bank 237,500 ______
200,000 200,000 250,000 250,000

Dr. BANK a/c Cr.

Bal B/d 50,000 A/cs payable 237,500

Realization
Buildings 170,000 realisation exp 40,000
Furniture 80,000 capital Allen 330,000
A/C’s receivable 180,000
Capital B 127,500
______
607,500 607,500

PARTNERS CAPITAL A/C

Details A B Details A B
M.V taken 85,000 Bal B/d 500,000 200,000
Inventory taken 130,000
Current 327,500 current 45,000
Bank 330,000 bank 127,500
545,000 327,500 545,000 327,500

CURRENT A/C
Details A B Details A B
Bal B/d 300,000 Bal B/d 100,000
Loss on realisation 55,000 27,500
Capital 45,000 Capital 327,500
100,000 327,500 100,000 327,500
Example Two

X Y and Z have been partners sharing profits/ losses in a ratio of 3:2:1 respectively on 31st Dec
2016 they decided to dissolve the partnership. Their statement of financial position was as
follows:-
N.C.A
Land & Buildings 300,000
Equipment 250,000
M.Vehicles 200,000
750,000
C.A
Inventory 300,000
A/cs recievables 120,000
Bank 80,000 500,000
TOTAL ASSETS 1,250,000
CAPITAL & LIABILITIES
Capital a/c
X 500,000
Y 400,000
Z 100,000
1,000,000
Current a/cs
X 50,000
Y (25.000)
Z (25.000) _
A/C payable 250,000
1,250,000
Additional information
The following information was also available land and building were sold for shs.350, 000.
Equipment realized shs.230, 000, X took over one Motor Vehicle shs.150, 000 while the others
realized shs.80, 000.
Inventory was taken over by Z at shs.280, 000.
A/c receivables were factored to Kutty at shs.110, 000.
A/cs payables were paid off less 2 1/2% discount.
All partners were solvent
Required
Prepare a) Realization a/c b) Partners capital a/c c) Bank a/c

Dr. Realisation a/c Cr.

Land & Buildings 300,000 D/received 6250
Equipment 250,000 bank
M.Vehicle 200,000 Land & Buildings 350.000
Inventory 300,000 equipment 230,000
A/C Receivables 120,000 M.vehicles 80,000
Capital
M.V taken by X 150,000
Inventory taken by Z 280,000
Current a/c Bank
X 18.125 A/C receivables 110,000
Y 12.083
Z 6.042 _______
1,206,250 1,206,250

Dr. Land & Building a/c Cr. Dr. Equipment a/c Cr.
Bal B/d 300,000 Bal B/d 250,000

_____ Realisation 300,000 ______ Realisation250,000

300,000 300,000 250,000 250,000

Dr. M.Vehicles a/c Cr. Dr. Inventory a/c Cr.

Bal B/d 200,000 Bal B/d 300,000

_____ Realisation 200,000 ______ Realisation300,000

200,000 200,000 300,000 300,000

Dr. Accounts receivables A/c Cr. Dr. A/Cs Payables Cr.

Bal B/d 120,000 Realisation 6,250 Bal B/d 250,000
D/R
_____ Realisation 120,000 Bank 237,500 ______
 120,000 120,000 250,000 250,000

Dr. BANK a/c Cr.

Bal B/d 80,000 A/c’s payable 243,750

Land & Building 350,000

Equipment 230,000
M.vehicles 80,000
Capital X 418,125
ACCOUNTS Receivables 180,000 Y 387,083
Capital Z 198,958
______
1.048,958 1.048,958

Dr. PARTNER CAPITAL A/C Cr.

Details X Y Z Details X Y Z
M.V taken by x 150,000 Bal B/d 500,000 400,000 100,000
Inventory taken by Z 280,000

Current a/c 12,917 18,958 Current a/c 68,125

Bank 418,125 387,083 Bank 198,958

568,125 400,000 298,958 568,125 400,000 298,958

Dr. PARTNER CURRENT A/C Cr.

Details X Y Z Details X Y Z
Bal/B/d 25,000 25000 Bal B/d 50,000
Inventory taken by Z Profit on realization 18,125 12,083 6,042
Capital 68,125 Capital al 12,917 18,958
68,125 25,000 25,958 68,125 25,000 25,000

Exercise
Allan, Ben and Charles have been in partnership for the last past years sharing P/losses in a ratio
of 2:2:1 respectively. On 31st Dec 2017 they decided to dissolve the partnership and their
statement of financial position was as follows.
ALLAN, BEN CHARLES STATEMENT OF FINANCIAL POSITION AS AT 31 DEC
2017
N.C.A
Land & Buildings 4,250,000
M. Vehicles 7,500,000
11,750,000
C.A
Inventory 4,250,000
A/cs receivables 2,250,000 6,500,000
TOTAL ASSETS 18,250,000

CAPITAL &LIABILITIES
Capital A/c Allen 5,000,000
Ben 2,500,000
Charles 500,000
8,000,000
LIABILITIES
A/c payable 7,500,000
Bank 2,750,000 10,250,000
TOTAL CAPITAL &LIABILITIES 18,250,000

Additional information.
 Land and buildings were taken by Allan at valuation of 2,500,000.
Two motor vehicles were taken by Allan and Ben at 3,000,000 and 2,500,000 respectively.
Inventory was sold at 3,500,000 and amt paid for by cheque.
A/cs receivables were factored to XYZ Ltd at 1,750,000.
All the partners were solvent.
Required;
Prepare the following ledger a/cs.
a) Realisation a/c.
b) Partners capital a/c.
c) Bank a/c.

Solution
Dr. Realisation a/c Cr.
Land & Buildings 4,250 Bank
Motor vehicle 7,500 Land & Building 2,500
Inventory 3,500
Inventory 4,250
Trade receivables 2,250 Capital
Mr. Allan 3,000
Ben 2,500
A/cs receivable 1,250
Capital A/c.
Allan 2000
Ben 2000
_____ Charles 1000
18,250 18,250

Dr. Land & Buildings a/c Cr. Dr. Motor vehicles a/c
Cr.
Bal B/d 4,250 Bal B/d 7,500 Realisation
_____ Realisation 4,250
7,500
4,250 4,250 7,500 7,500

Dr. Inventory a/c Cr. Dr. Trade receivables Cr.

Bal B/d 4,250 Bal B/d 2,250 Realisation
_____ Realisation 4,250
2,250
4,250 4,250 2,250 2,250

Dr. Bank a/c Cr.

Lands & building 2,500 Bal B/d 2750
Inventory 3.500 A/Cs payable 7,500
A/Cs receivable 1,750
Allan 2,500
Ben 2000
Capital
Charles 500
_____ ______
10,250 10,250

PARTNERS CAPITAL A/C

Details Allan Ben Ernest Charles Details Allan Ben Charles
M.V. taken 3000 2500 Bal B/d 5000 2500 500
Loss on Realisation 2000 2000 1000

L & Building 2.500 Bank 2500 2000 500

7.500 4500 1000 7500 4500 1000

A CASE FOR THE INSOLVENT PARTNERS

Sometimes a partner may be insolvent i.e. being unable to bring in the amount
required to cover his/ her deficiency (the Debit capital A/C bal). The solvent
partners will have to share his/her deficiency at an agreed ratio.

If the partnership agreement is silent as to how the deficiency will be shared the
Garner Vs Murray rule will apply.

The rule states that in case of an insolvent partner his/ her deficiency should
be shared by the solvent partners in the ratio of their last capital a/c.

Example

Betty, Connie and Dan were partners in BCD partnership for over thirty (30) yrs.
dealing in general merchandise with several branches nationwide. They were
sharing profits and losses in the ration of 3:2:1 respectively. The operations had
been successful over years except for the year ended march 31. 2016 during which
one partner became insolvent while others were exhausted by age and could not
cope up with the aggressive competition that had the market. They decided to
terminate the operations of BCD. Their statement of financial position as at March
31, 2018, was as follows; -

BCD STATEMENT OF FINANCIAL POSITION AS AT 31.3 2018

ASSETS SHS (000) SHS (000)

N.C.A
Land & Building 14,000
Motor Vehicles 10,000
24,000
C.A
Inventory 9,000
A/C receivables 5,000 14,000
Total assets 38,000
Capital & liabilities
Capital a/c Betty 2,500
Connie 6,000
Dan 8,000
16,500
Current a/c Betty (1,000)
Connie 1000
Dan 2000
18,500
Liabilities
N.C.L
Bank loan 1,000
C. Liabilities
A/C payable 14,000
Bank 4.500 18,500
TOTAL CAPITAL & LIABILITIES 38,000
During termination the Following took place.
 Assets were realized as follows Land & building 10,000 and Motor Vehicle 5,000.
 Inventory was taken over by Connie at an agreed sum of 8,000. A/Cs receivable factored
to bid shs 3,000 and A/Cs payable settled by less 20% discount.
 Termination (dissolution) expense amounted to shs. 3,000
 Betty was so insolvent that she could only afford to settle 40% of her indebtedness.
Required
a) Realization a/c
b) Partners capital a/c
c) Bank a/c
d) Any other relevant a/cs.

Dr. Realisation a/c Cr.

Bank
Land & Buildings 14,000 land & Building 10,000
M.Vehicle 10,000 M.V 5,000
Inventory 9,000
A/C Receivables 5.000
Expenses 3,000 Capital a/c
Inventory taken by com 8.000
A/cs Receivable 3,000
D/Receivable 2,800
Betty 6100
Connie 4,067
Dan 2033
41,000 41,000

Dr. Land & Building a/c Cr. Dr. M.V a/c Cr.
Bal B/d 14,000 Bal B/d `10,000

_____ Realisation 14,000 ______ Realisation 10,000

14,000 14,000 10,000 10,000

Dr. Inventory a/c Cr. Dr. A/C Receivable a/c Cr.

Bal B/d 9,000 Bal B/d 5,000

_____ Realisation 9,000 ______ Realisation

5,000
9,000 9,000 5,000 5,000

PARTNERS CAPITAL A/C

Details Betty Connie Dan Details Betty Connie Dan
Inventory taken 8000 2500 Bal B/d 2500 6000 8000
DIR
Loss on Realisation 6100 4067 2033 Current a/c 1000 2000

Current a/c 1000 Bank 1840

B’s deficiency 1.183 1577 L’s share deffice 1.183

D’s 1,577

Bank 6,390 Bank 6,250

7100 13,250 10,000 7100 13,250 10,000

Dr. Bank a/c Cr.
Realisation Bal B/d 4500
Land & Building 10,000 Realization expenses 3,000
A/Cs payable 11,200
Capital Capital
Bes 1,840 D 6390
Com 6,250

_____ ______
26,090 26,090

Exercise
ABC&D are partners sharing P&L in the ratio of 2:1:1:1 on 31 Dec 1999. They decided to
dissolve their partnership. Their statement of financial position was as follows.
N.C.A
Plant & machinery 400,000
Equipment 500,000
M.Vehicles 300,000
1,200,000
C. Assets:
Inventory 180,000
A/C receivables 160,000
Bank 60,000 400,000
Total Assets 1,600,000
CAPITAL AND LIABILITIES
Capital A 600,000
B 400,000
C 200,000
D 100,000
1,300,000
A/C payable 200,000
Current A/C A 200,000
B 300,000
C (240,000)
D (160,000)
TOTAL CAPITAL & LIABILITIES 1,000,000
Assets were realized as follows:
Plant & machinery 340,000
Equipment 520,000
Inventory 160,000
 A took a M.Vehicle valued 280,000
 A/C receivables realized 140,000
 A/C payables were paid off less 5% discount
 Realisation expenses were 60,000.
 Both C & D are insolvent C could only bring half of his deficiency.

Required: prepare:-
a) realization a/c
b) partners K a/c
c) Bank a/c apply the Garner Vs Murray rule

Solution
Dr. Realisation a/c Cr.
Bank
Plant & Machinery 400,000 plant & machinery 340,000
Equipment 500,000 equipment 520,000
M.Vehicle 300,000
Inventory 180,00 inventory 160,000
A/C Receivables 16,000 A/C Receivables 140,000
Bank resolvtion exp 60,000 Capital a/c
M.Vehicle taken by A 280.000

D/Receivable 10,000
Capital a/c
A 60,000
 B 30,000
C 30,000
D 30,000
1,600,000 1,600,000

Dr. Plant & machinery a/c Cr. Dr. Equipment a/c Cr.
Bal B/d 400,000 Bal B/d 500,000

_____ Realisation 400,000 ______ Realisation500,000

400,000 400,000 10,000 500,000

Dr. M.Vehiclesa/c Cr. Dr. Inventory a/c Cr.

Bal B/d 300,000 Bal B/d 180,000

_____ Realisation 300,000 ______ Realisation 180,000

300,000 300,000 180,000 180,000

Dr. receivables a/c Cr. Dr. Cr.

Bal B/d 160,000

_____ Realisation 160,000

160,000 160,000
PARTNERS CAPITAL A/C
Details A B C D Details A B C
D

M.V taken 280,000 Bal B/d 600,000 400,000 200,000

100,00
Current a/c 240,000 160,000 Current a/c 200,000 300,000
Loss on Realisation 60,000 30,000 30,000 30,0000 Bank 35,000

C’s deficiency 21,000 14,000 A’s share of C’s deff 21,000

D’s deficiency 54,000 36,000 B’s share of C’s deff 14,000

 A’s share of D’s salef
54,000 B’s share of D’s deff
36,000

Bank 385,000 620,000

800,000 700,000 270,000 190,000 800,000 700,000 270,000

190,000

Dr. Bank a/c Cr.

Bal B/d 60,000 Realisation exp 60,000
Realisation A/C payable 190,000
Plant & machinery 340,000
Equipment 520,000 Capital A 385,000
Inventory 160,000 B 620,000

A/C’s receivable 140,000

Capital C 35,000
________ _______
1.255.000 1,255,000

CONVERSION OF A PARTNERSHIP INTO A LIMITED COMPANY

As another way of dissolution a partnership maybe sold as a going concern to
either a new company or an existing company. The amount paid for the purchase
of partnership assets and liabilities is called the purchase consideration or purchase
price. The purchase price may be in many forms such as; share capital, debentures,
cash/ bank, share premium or a combination of the above. These are called
discharging items.
On disposing of the partnership, the transaction must be reflected in both the books
of the partnership and the company (Buyer).
IN THE BOOKS OF THE PARTNERSHIP the following accounting entries
will be made;
Assets taken over
Dr. Realization a/c.
Cr. Assets a/c with the book value of the assets.
Liabilities taken over e.g. loan and accounts payables.
Dr. Liability a/c.
Cr. Realization a/c with the value of the liability.
Reduction in the value of the liability for discounts received from suppliers
Dr. Liability a/c
Cr. Realization a/c
When the purchase consideration is received
Dr. New Company’s a/c
Cr. Realization a/c
Discharging of the purchase to reflect the various forms in which it is received
Dr. Discharging items e.g. share capital, debentures, cash share
premium, bank/ cash.
Cr. New Company’s a/c
NB; The discharging items except cash/ bank must be written off to the partner’s
capital accounts using the profit and loss sharing ratios that is;
Dr. Capital a/c
Cr. Discharging items account
IN THE BOOKS OF THE NEW COMPANY BUYING.
After the acquisition of the partnership assets and liabilities the books of the
company will change to reflect the elements of the purchase consideration.
Assets acquired
Dr. Individual assets a/c
Cr. Business purchase a/c
Liabilities acquired
Dr. Business purchase a/c
Cr. Individual Liability a/c
When the purchase consideration passes the business purchase account is
debited and the respective discharging items are credited.
Dr. Business purchase a/c
Cr. Discharging item component account
When the purchase price exceeds the NBV of Assets the excess is regarded as the
goodwill likewise if the NBV of the assets exceeds the purchase price the excess is
referred to as the capital reserve.
In case of goodwill
Dr. Goodwill a/c
Cr. Business purchase a/c
In case of capital reserves.
Dr. Business purchase a/c
Cr. Capital reserves a/c
Note; The capital reserves and goodwill are the balancing figures in the business
purchases account on either side.

Example one
Allan, Bena and Chan were partners in ZAM ENTERPRIZE sharing profits and
losses in the ratio 2:2:1 respectively. The partnership balance sheet as at 31 st
December 2015 was as follows;
Non-current assets shs. Capital and liabilities shs
Plant and machinery 120,000 Capital accounts
 Free hold land and building 180,000 Allan 220,000
Motor vehicles 30,000 Bena 180,000
Chan 100,000
Current assets Liabilities
Inventory 110,000 Loan Allan 70,000
Receivables 140,000 Payable 100,000
Bank 90,000

TOTAL 670,000 Total capital and liabilities 670,000

On January 2016 the partners incorporated ZAM TRADERS LTD. And agreed to
dispose off the partnership business to the newly incorporated company under the
following terms;
The company to acquire the goodwill, fixed assets and inventory at a price of shs.
580,000. The purchase consideration to be discharged by a payment of shs.
100,000 in cash and the issue of 120,000 preference shares of shs. 1,000 each at
par, and the balance by issue of ordinary shares o shs. 1,000 each at shs. 1,250 each
to the partners.
The partnership business to settle amounts owing to suppliers and also to collect
amounts owed by accounts receivables. The purchase consideration payments and
allotments of shares to the partners was completed on 2 January 2016. The
accounts payable were paid off on 1 January 2016 with a cash discount of shs.
1,900. Also accounts receivable paid amounts owing by January 2, 2016 except for
bad debts amounting to shs.8, 000. Discounts allowed to customers amounted shs.
4,000.
Required
a) Ledger accounts to be close the partnership books.
b) Ledger accounts in the new company books immediately on completion of
the above transactions.