Introduction of

Partnership
Accounts

1
Characteristics of
Partnership
2 – 20 owners
 Governed by the Partnership
Ordinance
 A partnership agreement can be
drawn up to define the rights and
obligations of the partners. If no
agreement, the Partnership
Ordinance applies
 A partnership has no separate legal
identity except for the limited
partners
2
Partnership
Agreement
 Not all partnership have

agreements.
 However, a written partnership
agreement will help prevent
problems and solve dispute
between the partners

3
Terms of
agreement
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 4
 In the absence of partnership
agreement, the Partnership
Ordinance applies which states:
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
5
Features of Partnership
Accounts
 Profit and Loss Appropriation

Account

It is drawn under the trading and
profit and loss account

It shows the distribution of profits
among the partners
 Capital Accounts

These accounts record the
amount of capital by each
partners 6
 Current Accounts
 As the partnership makes profit/loss,
and the partners take the firm’s
resources for private uses, there will be
fluctuation in the partners’ capital
balances. A current account is set up to
maintain constant capital balances of
the partners as stated in the
agreement.

Current account is to record:

Share of profit /loss

Interest on capital

Interest on drawings

Interest on loans

Drawings
7

Accounting
Treatment
Items Accounting Entries

Capital contributed in cash Dr. Cash

Cr. Partners’ Capital Accounts
Share of profits Dr. Profit and Loss
Appropriation Cr.
Partners’ Current Accounts
Share of losses Dr. Partners’ Current
Accounts Cr. Profit and Loss
Appropriation
Interest on capital Dr. Profit and Loss
Appropriation Cr.
Partners’ Current Accounts
Partners’ salaries Dr. Profit and Loss
Appropriation Cr.
Item Accounting
s entries
Interest on partners’ Dr Profit and
loan loss
appropriation
Cr Partners’
Partners’ Dr Partners’
current
drawings current Cr
Partners Drawings
Interest on Dr Partners’
drawings current Cr Profit
and loss
appropriation 9
Profit and Loss
Appropriation

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 T- Form
Peter and John
Profit and Loss Appropriation Account for the year ended 31 December
1997
Partners’ Net Profit b/f X
Salaries
Peter X Interest on
John X Drawings X
Interest on Capital X John
Peter X X
Peter X
X X
John
Share X
of X
Profit
X
Peter X X

John

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 Peter and John
Trading and Profit and Loss Account for the year ended 31 December
Sales 1997 X
Less: Cost of goods
sold Opening stock X
Add: Purchases X
Less: Closing stock X
Gross profit
Less: Expenses
Rent X
Lighting X X
Net Profit XX
Add: Interest on X
Drawings Peter X
John (%*drawings) X X
Less: Partners’
Peter X
SalariesJohn X X
Interest on Capital
Peter X
John (%* capital) X
Share of Profit
Peter (1/2)
John (1/2)
X12
 Capital
Pete account
Joh Peter
r n Bal John X
b/f
X

Debit
balance Current
Peter account
John Peter
Bal b/f X John
Interest on drawings Bal b/f X X
Drawin X X Interest on
Share of
gs
X Bal profit Partners’
capital
X X salariesX X
c/f X Bal X
X X X
c/f X XX

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 Peter and John
Balance Sheet as at 31 Dec
Fixed 1997 Dep Ne
Buildin
assets Cost
X .X t
gs
Furnitur X X X
e X X X
Current
assets X
Stock
Debtor X
s
Less: Current
Bank
liabilities X
Credito X
rs Working X X
Financed by:
capital
Capital – X
Peter X
- John X

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Current Peter John Tot
accountOpening balance X al
add: Share of (X) Debit
profit X X balance
Partners’ X X
salaries XX XX
Less:Interest on
Drawings
X capital X
Interest on drawings X X
X
Long term X
liabilities
15% Loan X
X

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Example
1

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Tom and David are in partnership, sharing profits and losses
equally. The Following is their trial balance as at 31 December
1997. Dr
Fixed Cr
assets
Provision for 400000 4000
depreciation
Stock as at 1 Jan 1000 0
Sales
1997 0 29000
Purchases 15000 0
Expenses 0
Capital – 30000 19700
Tom 0
-Davi 19700
d Current – 2000 0
Tom 5000 8000
-David 5000
Drawings – 7000
Tom 0
- 8000 20000
Davi 75200
0 75200
d 0 0
Debtor 17
 Additional information:
1. Stock in hand as at 31 December has
been valued at cost at $30000
2. Depreciation is to be provided at
10% per annum on the straight line
bases
3. Pat interest on capital at 1% and
charge interest on drawings at 5%
4. Partners’ salaries are $10000 to
Tom and
$5000 to David 18
Example 1 Tom and David
Trading and Profit and Loss Account for the year ended 31 December
1997
Opening Stock 10,000 Sales
Purchases 150,000 290,000
160,000

Less: Closing Stock 30,000

Cost of Goods Sold 130,000
Gross Profit 160,000
290,000 290,000

Expenses 30,000 Gross Profit 160,000

Depreciation 40,000
Interest on Loan
(20,000 X 2,000
10%)
Net Profit 88,000
160,000 160,000

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 Tom and David
Trading and Profit and Loss Account for the year ended 31
DecemberNet
1997
Profit
Partners’ 88,000
Salaries
To 10,000 Interest on Drawings
Tom 250
m
David 5,000 15,000
David 250 500
Interest on Capital
Tom 1,970
David 1,970 3,940
Share of Profit
Tom (1/2) 34,780
David (1/2) 34,780 69,560
88,500 88,500

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 Tom and David
Current
Tom Account 1997 Tom David
1997
Jan 1 Bal. Davi Jan 1 Bal. b/f 8,000
b/f d Dec 31 Profit and Loss Appropriation
Dec31 P&L
-Int. on
Appropriation 2,000 - Int. on Capital
Drawings 250 250 -1,970
Profits 34,780 34,780
31 Drawings 5,000 5,000 -1,970
Salaries 10,000 5,000
31 Bal. c/f 51,500 34,500 31 Profit and Loss
- Int. on Loan 2,000

56,750 41,750 56,750 41,750

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 Tom and David
Balance Sheet as at 31 December 1997

Fixed Assets 400,000 Less: Capital

Provision for Dep. Accounts Tom 197,000
David 197,000 394,000
80,000 320,000
Current
Current Accounts Tom 51,500
Assets 30,000 David 34,500 86,000
Stock 70,000 Long-term Liabilities
Debtors 80,000 Loan from Tom 20,000
Bank 180,000 500,000 500,000

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Net profit 88,00
0
Interest on
Drawings 500
88,50
0
Partners’ Tom 10,00
salary 0
Davi
5,000
Interest on d
capital 1,970 18,94
Tom
1,970 0
Davi 69,56
0
Share of d Tom 34,78
profit 0
Davi 34,78 69,56
d 0 0
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Minimum Share of
Profits
 Sometime, one of the partners is

guaranteed a minimum profit. If

the amount of profits shared
according to the normal profit-
sharing ratio is smaller than the
minimum share, that partner will
get his/her minimum share first,
while the balance of the profits is
to be shared between the other
partners 24
Example
2

25
 Paul, Betty and Rose are in
partnership sharing profits in the
ratio of 5:3:2. Rose is guaranteed a
minimum share of profits of
$10000.
Profits
31 Decfor the years ended
$20000
1996 0
31 Dec $42000
1997the share of profits to each
Calculate
Required
partner for 1996 and 1997 are:
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 Paul, Betty and Rose
Profit and Loss Appropriation Account for the year ended 31 December
1997
Share of Profit: Net Profit
Paul (5/10) 100,000 200,000
Betty (3/10) 60,000
Rose (2/10) 40,000 200,000
200,000 200,000

Paul, Betty and Rose

Profit and Loss Appropriation Account for the year ended 31 December
1997
Share of Profit: Net Profit
Paul (5/10 X 20,000 42,000
32,000)
Betty (3/10 X 32,000) 12,000
Rose (guaranteed) 10,000
42,000 42,000
42,000

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