PARTNERSHIPACCOUNTS

A partnership is an agreement between two

or more people (not more than 20) who enter
into business with a view of earning profits. It
may be established formally by means of a
partnership deed or a partnership may be
presumed to exist from the actions of the
individuals. A partnership deed is an
agreement in which the partners among
others set out the terms of the partnership
The partnership agreement specifies among others;
1)The names of the partners
2)Capital to be contributed by each partner
3)Interest on capital if any
4)Drawings to be made by the partners
5)Interest charged on drawings if any
6)Salaries paid to active partners
7)Nature and kind of business
8)Contractual duties of the partners
9)Valuation of goodwill in case of changes in the partnership
10)Preparation and auditing of accounts
11)Procedure of admission and retirement of partners
12)Duration of the partnership business
NB

Where no partnership deed exists,

the partnership act guides the
partners
 Merits of a partnership
A partnership is regarded to be the second stage in the
evolution of business, the first being sole proprietorship. The
primary merits enjoyed by the partnership over sole trade
include;
1)It is easy to form a partnership business
2)It always has a wider network of contacts
3)The risks are spread across a large number of partners
4)It can command a wide range of experience and skills from
the partners
5)It has access to more capital since up to 20 members may
contribute capital towards the partnership business
Demerits of a partnership
1) Profits are spread among a number of people
2) Dilution of control over the business
3) Risks of implied authority, every partner is liable for the actions of another
provided by the principal agency relationship that exists among them
4) Partners always have limited resources and may not be able to undertake
large scale operations
5) The members have unlimited liability. In the event of winding up of business
and the proceeds from business assets cannot cover the obligations, partners
are called upon to raise cash towards the debts from their own private source
to cover the debts of the partnership
6) There is a limitation on the number of partner such that the number cannot
exceed 20 members
7) Disputes may rise amongst the members on such matter concerning how the
business should be run. These disputes may lead to an immediate dissolution
of the partnership
Attributes of partnership
From the analysis above, it can be summarized that
partnerships have the following attributes;
1)The primary objective of business existence is profit making
2)There must be two or more persons who have mutually
agreed to carry on business
3)There is always a contractual relationship between members.
Only people who have contractual capacity can be partners
4)The members of the partnership have unlimited liability that
is in the event of the partnership winding up, the partners
will be called upon to contribute to the debts incurred if any
from their own resources.
Types of Partners
1) Dormant Partner; is a partner who does not actively participate in the partnership
activities. Though the he or she does not participate in the day to day running of
the business he or she has a right to books of accounts and sharing profits or
losses in the agreed ratios
2) Nominal Partners; is a person whose name is used as if he or she was a member of
the firm but who in reality is not a partner. He is liable to the third parties who give
credit to the firm on the strength of his being a partner
3) Minor Partner; this one can be admitted to the benefits of the existing partnership
with the consent of all the partners. A minor is not personally liable for the debts
of the firm but he or she shares in the partnership profits and benefits
4) Sub partner; is a partner who gets share of profits of the firm through one of the
partners. He or she is not liable against the firm and is not liable to the third
parties for the firm’s debts
5) Partner’s in profit only; is a partner who shares profits only but does not share
losses. Her does not take part in the management of the business but is liable to
third parties who deal with the partnership on that basis
Financial statements of partnerships
• In the contemporary world, partnerships prepare financial
statements such as the statement of comprehensive income,
statement of financial position, statement of cash flow at the
end each financial year. These financial statements are the
same as those of other business entities except the
appropriation account. That is additional information i.e.
partners’ capital accounts and current accounts are also
prepared at the end of each financial year.
Partners’ capital and current accounts are maintained in a columnar form following as shown in the
structure below;
Assuming two partners A & B

PARTNERS’ CAPITAL ACCOUNTS

Details A B Details A B
Balance xxx Xxx Balance xxx xxx
C/d B/d xxx xxx
Additional
Capital

xxx Xxx xxx xxx

PARTNERS’ CURRENT ACCOUNTS

Details A B Details A B
Drawings xxx Xxx Balance B/d Xxx Xxx
Interest on xxx Xxx Interest on Xxx Xxx
drawings capital
Balance c/d xxx xxxx Salaries Xxx Xxx
Profit share xxx xxx

xxx xxx xxx xxx

Basic Double Entry records under partnerships

In preparation of the partner’s capital and current

accounts, the following double entry procedure should
be followed;

1.When additional capital is brought into the business

Dr. Bank/Cash/Asset Account
Cr. Individual partner’s capital account
2. When the partners are entitled to interest on capital
Dr. Interest on capital account/Statement of comprehensive
income
Cr. Individual Partner’s current Account
3. In case of drawings
Dr. Individual partners’ current account
Cr. Bank/Cash Account
4. When partners are charged interest on drawings
Dr. Individual partners current account
Cr. Interest on drawings account/statement of
comprehensive income
5. When partners are entitled to partnership salaries
Dr. Partner’s salaries account/Statement of comprehensive
income
Cr. Individual partners current account
6. Share of profits made during the year
Dr. Statement of comprehensive income
Cr. Individual partners current account
7. Share of losses incurred at the end of the year
Dr. Partner’s current account
Cr. Statement of comprehensive income
Illustration 1
Sheila and Leo are in partnership sharing profits and losses in
the ratio of 6:4. The following is their trial balance for the year
ended 31st 12 2012.

SHEILA AND LEO’S TRIAL BALANCE FOR THE PERIOD

ENDED 31ST DECEMBER 2012
Details Dr ‘000 Cr ‘000
Office equipment cost 13,000

Motor vehicle at cost 18,400

Provision for depreciation

Motor Vehicles 7,360

Office equipment 3,900
Inventory at 1st.01.2009 49,940

Receivables 41,920
Payables 32,550
Cash at Bank 1,230
Cash at hand 280
Sales Revenue 180,740
Purchases 143,260
Salaries 16,834
Office expenses 2,740
Discounts Allowed 1,126
Discounts Allowed 1,126

Current Account

Sheila 2,758

Leo 2,422

Capital Account

Sheila 54,000

Leo 24,000

Drawings

Sheila 11,000

Leo 8,000

TOTAL 307,730 307,730

Additional Information
1)Closing inventory was valued at shs. 54, 680
2)Office expenses owing was shs. 220
3)Provide for depreciation on motor vehicle 20% on cost and
office equipments 10% at cost
4)Interest on capital is charged at 10%
5)Charge interest on drawings Sheila shs. 360 and Leo shs. 420.
Required;
Prepare the financial statements for the
period ended including the capital and
current accounts for the partners
Revision Question
Rose and Winnie are in a partnership sharing
profits and losses equally. The following is their
trial balance as at 31st December 2009
Details Dr Cr

Land and Buildings at cost 150,000

Fixtures at cost 22,000

Accumulated
Depreciation

Land and Buildings 50,000

Fixtures 6,600

Purchases 170,832
Carriage outwards 2,576
Discounts Allowed 230
Salaries and Wages 37,834

Sales 247,300
Inventory 1st January 2009 83,958

Cash Balances 1,354

Payables 22,300
Receivables 32,486
Loan interest (Kenneth) 8,000

Office Expenses 4,832

Bad Debts 1,006
Provision for Bad Debts 800
Partners’ Capital Accounts
Rose 70,000
Winnie 59,000
Partners’ Current Accounts
Rose 2612
Winnie 596
Drawings
Rose 12800
Winnie 11,300
539,208 539,208
Additional Information
1.On 31st December 2009, inventory was valued at shs. 112,680
2.Expenses accrued; office expenses shs.192, wages shs 400
3.Partner’s salary of Rose shs 600 is not yet recorded
4.Reduce the provision for bad debts to shs. 640
5.Provide for depreciation of fixture at 10% on reducing
balance basis, where as that of building is shs 2,000
6.Interest on drawings at that date amounted to shs. 360 and
shs. 240 in respect of Rose and Winnie respectively
7.Interest on capital accounts is to be charged at a rate of 10%.
Required
1.Prepare Rose and Winnie’s statement of
financial Position and statement of
comprehensive income for the year ended 31st
December 2009
2. Prepare Partner’s Current Accounts
 ACCOUNTING FOR
GOODWILL IN PARTNERSHIP
ACCOUNTS
Goodwill is an intangible asset arising from the
business entity to earn more profit as compared to
other firms in the same or similar business. It arises
when the value of the business as a going concern is
greater that the value of its separate tangible assets. it
is the excess of purchase consideration of a business
sold as a going concern above the fair market value of
the business assets.
So how does Goodwill arise in
business???
1.The possession of trademarks and patent rights may account for
good will. These may have cost the original owner little or nothing
and they could be shown in the statement of financial position.
They are normally unsellable unless the business is sold as a going
concern.
2.The location of the business premises may be valuable if the
business does not change. Where the business is strategically
positioned this is an advantage
3.The business may have enjoyed some form of monopoly either
nationally or locally for example there may not be sufficient trade
to out compete some engineering firms, which have been managed
or run profitably for a long period
4. The value employees including management skills other than
that of the retiring proprietor may be carried forward. Skilled
management is an asset to the business
5. A new business may continue to trade under the same name as
that of the original firm. The fact that the firm was well known
could mean that new customers and old customers are attracted
for this reason alone.
6. The cost of research and development, which might have
brought about cheaper manufacturing methods or cheaper
products, may be charged to the current buyer. The amount which
the buyer is prepared to pay will depend on his view of the future
profits which will accrue to the business due to the factors
mentioned
CIRCUMSTANCES THAT LEAD TO THE ASCERTAINMENT OF
GOODWILL
When dealing with partnership accounts, goodwill may be recognized
under the following circumstances;
1. At dissolution of the partnership
2. When there is a change in profit sharing ratios
3. When there is a change in the mode of ascertaining profit and loss of
the firm
4. On retirement or death of one partner from an established
partnership
5. On admission of a new partner
Accounting for Goodwill in Partnership
Books of Accounts
There are basically two methods and these
include;
Premium Method; here the new partner
brings cash in addition to his or her capital
contribution, the excess cash being premium
for goodwill. The premium may be treated in 3
ways.
a) the partners share the cash premium
without any record being raised in the books of
accounts
b) the cash premium is used to increase the
old/existing partner’s capital and is retained by
the partnership
Accounting Entry
Dr. Bank/Cash
Cr. Old Partners capital accounts
Revaluation method; according to this method, the new partner
brings in his/her capital contribution and agrees to compensate
for goodwill. The goodwill account is opened and maintained in
the books of the business and therefore has to appear in the
statement of financial position as intangible asset. Under this
method, the goodwill is recognized and must be shared by the old
existing partners and increase their capital accounts.
Accounting Entries
Dr. Goodwill account
Cr. Old PARTNER’S Capital account (using the old profit sharing
ratios)
Memorandum Revaluation method
Under this method, goodwill account is raised but it does not remain in the
books of accounts. That is, good will is recognized and written off
immediately,

Accounting entries
On recognition of goodwill
Dr. Goodwill Account
Cr. Old Partners capital account (using the old profit sharing ratios)

On writing off
Dr. Partner capital account (both the old and new partner at new profit
sharing ratio)
Cr. Goodwill account
Illustration
X, Y and Z are partners and have always shared profits and losses in the ratio
4:3:1 respectively. They are altering their profit and loss sharing ratio to
3:5:2 respectively. Their statement of financial position as at 31st 12 2009
was as below

Net Assets 14,000

Capital: X 6,000
Y 4,800
Z 3,200
14,000
The partners agreed to value goodwill at shs. 12,000 on the change.
Required:
1.prepare the goodwill account
2.Capital account
3.Statement of financial position 31st 12 2009
If
i. The good will account was opened and maintained
in the books of the business (Revaluation Method)
ii.The goodwill account was opened and eliminated
from the books of the partners (Memorandum
Revaluation Method)
Revision Question
X and Y are in partnership sharing profits and losses equally. They
decided to admit Z. by agreement goodwill was valued at shs. 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 goodwill.

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;
Assets 15,000
Non Current Assets
Cash at Bank 2,000
Total Assets 17,000
Equity
Capital 8,000
X 4,000
Y
Current Liabilities 5,000
Total Equity and Liabilities 17,000
Required
Open up the ledger accounts to reflect the
admission of Z and treatment of goodwill using:
a.Revaluation Method
b.Memorandum Revaluation method
c.Show the goodwill account and statement of
financial position using a) and b)