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Accounting For Partnerships

accounting notes

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21 views

Accounting For Partnerships

accounting notes

Uploaded by

laban.omondi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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ACCOUNTING FOR PARTNERSHIPS

ACCOUNTING FOR LAWYERS


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INTRODUCTION

• A partnership is a business organization in which


two or more persons come together with a view
of making profits.
• The ownership of the business is shared among
the partners.
• The partners must agree on composition of
ownership, their respective rights and obligations,
their contribution of capital and the ratio in which
they will share profits/ losses.

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Appropriation of profits

• Profits made by the business must be shared


among the partners.
• Partnership accounts therefore, must contain a
statement that shows how the profit or loss for
the year is shared among the partners.
• This statement is known as the profit and loss
appropriation account. The profit sharing ratio
depends on:
– The amount of capital introduced by each partner
– The amount of time each partner devotes to the
business
– The special skills and experience of each partner.

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Interest on Capital

• Partnerships may have unequal capital


contribution
• The partners that have contributed higher
amounts of capital should get a higher
share of the profits
• This compensation is usually made by
paying an interest on the capital.

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Salaries

• Some partners may contribute more time


and skills to the business than others and
therefore, need to be compensated for this
by a salary
• A salary paid to partner is not charged
against the profit and loss account but
against the partnership profits and loss
appropriation account.

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Drawings

• Drawings may be in form of cash or


assets. Either way the drawing is charged
to the respective partner
• Partnerships may restrict or discourage
drawings by charging an interest on them
• The interest charged is credited to the
partners profit and loss appropriation
account.

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Personal Accounts

• These accounts capture the transactions that


each partner has with the business. They are two
main accounts:
a) Capital account: Capture transactions that are
of a long term nature. e.g. capital contributed
and revaluation gains and losses. Interest on
capital is calculated on the basis of the balance
in the partner’s capital account.
b) Current account: Capture transactions that are
of a short- term nature. e.g. distribution of
profits, interest on capital and salaries

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Partners loans

• Partners may advance loans to the


business
• In such a case the loan is treated in
the same way as any other loan to
the business and is therefore, kept
separate from the partner’s capital
and current accounts.

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Financial Statements of a
partnership

• Accounting for partnerships is similar to that of


other forms of business organization. The same
accounts are used, with the exception of profit
appropriation accounts and the personal accounts
aforementioned.
• The profit of the partnership is distributed
through a profit and loss appropriation account.
This is an account drawn after the profit and loss
account and shows the distribution of profits in
the profit sharing pattern adopted by the
partnership.

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Ole Sangale Road, Madaraka Estate. PO Box 59857-00200, Nairobi, Kenya
Tel: (+254) (0)703 034000/200/300 Fax : +254 (0)20 607498
Email: [email protected] Website: www.strathmore.edu
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