Topic 10 - Accounting For Partnerships

Chapter
10
Accounting for
Partnerships
100 Shares
Partnership???
$1 par value
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana
The McGraw-Hill Companies, Inc., 2007
Learning
Learning Objectives
Objectives
Define partnership
Identify characteristics
of partnerships and
similar organizations
Identify advantages and
disadvantages of
partnership
Prepare entries for

partnership formation
Dividing profit or loss
Preparing partnership
financial statements
Definition
Definition of
of partnership
partnership
AA partnership
partnership is
is an
an unincorporated
unincorporated association
association of
of two
two or
or
more
more people
people to
to pursue
pursue aa business
business for
for profit
profit as
as co-owners.
co-owners.
In
In Malaysia,
Malaysia, this
this business
business form
form is
is governed
governed under
under the
the
Partnership
Partnership Act
Act 1961.
1961.
According
According to
to Para
Para II,
II, Section
Section 3(1)
3(1) of
of the
the Partnership
Partnership Act
Act 1961,
1961, aa
partnership
partnership is
is defined
defined as:
as:
the
the relation
relation which
which subsists
subsists between
between persons
persons carrying
carrying on
on
business
business in
in common
common with
with aa view
view of
of profit.
profit.
Characteristics
Characteristics of
of Partnership
Partnership
Voluntary
Voluntary
Association
Association
Partnership
Partnership
Agreement
Agreement
Limited
Limited
Life
Life
Taxation
Taxation
Mutual
Mutual
Agency
Agency
CoCoOwnership
Ownership
of
of Property
Property
Unlimited
Unlimited
Liability
Liability
Organizations
Organizations with
with Partnership
Partnership
Characteristics
Characteristics
Limited
Limited
Partnerships
Partnerships
(LP)
(LP)
General
General partners
partners
assume
assume management
management
duties
duties and
and unlimited
unlimited
liability
liability for
for partnership
partnership
debts.
debts.
Limited
Limited partners
partners have
have
no
no personal
personal liability
liability
beyond
beyond invested
invested
amounts.
amounts.
Limited
Limited
Liability
Liability
Partnerships
Partnerships
(LLP)
(LLP)
Protects
Protects innocent
innocent
partners
partners from
from
malpractice
malpractice or
or
negligence
negligence claims.
claims.
Most
Most states
states hold
hold all
all
partners
partners personally
personally
liable
liable for
for partnership
partnership
debts.
debts.
Choosing
Choosing aa Business
Business Form
Form
Proprietorship Partnership
LLP
LLC S Corp. Corporation
Business entity
yes
yes
yes
yes
yes
yes
Legal entity
no
no
no
yes
yes
yes
Limited liability
no
no
limited* yes
yes
yes
Business taxed
no
no
no
no
no
yes
One owner allowed
yes
no
no
yes
yes
yes
*A partner's personal liability for LLP debts is lim ited. Most LLPs carry insurance to protect
against malpractice.
Many
Many factors
factors should
should be
be considered
considered when
when
choosing
choosing the
the proper
proper business
business form.
form.
Advantages
Advantages of
of Partnerships
Partnerships
Ability
Ability to
to share
share knowledge,
knowledge, expertise,
expertise, and
and experience
experience among
among cocopartners
partners in
in the
the business.
business.
Easy
Easy to
to form
form the
the partnership
partnership firm
firm and
and lower
lower cost
cost of
of formation
formation as
as
compared
compared to
to the
the other
other types
types of
of business
business organizations.
organizations.
Enables
Enables firm
firm to
to get
get additional
additional sources
sources of
of investment
investment capital
capital from
from
each
each partner
partner since
since more
more than
than one
one partner
partner isis within
within the
the partnership
partnership
firm.
firm.
Advantages
Advantages of
of Partnershipscont
Partnershipscont
Possible
Possible tax
tax advantages
advantages where
where aa partnership
partnership has
has the
the same
same tax
tax
status
status as
as aa sole
sole proprietorship
proprietorship and
and is,
is, therefore,
therefore, not
not subject
subject to
to taxes
taxes
on
on its
its income.
income.
Easy
Easy to
to manage
manage and
and decisions
decisions can
can be
be made
made with
with less
less bureaucracy
bureaucracy
since
since the
the owners
owners of
of the
the partnership
partnership firm
firm are
are usually
usually its
its managers.
managers.
Disadvantages
Disadvantages of
of Partnerships
Partnerships
The
The liability
liability is
is unlimited
unlimited where
where all
all partners
partners are
are personally
personally liable
liable
for
for business
business debts
debts and
and liabilities.
liabilities.
ItIt is
is hard
hard to
to find
find suitable
suitable partners
partners where
where there
there is
is aa possibility
possibility of
of
conflict
conflict between
between partners
partners in
in the
the future.
future.
Partnership
Partnership is
is dissolved
dissolved upon
upon the
the death
death of
of aa partner.
partner.
Partnership
Partnership Agreement
Agreement
AA partnership
partnership is
is based
based on
on aa contract
contract between
between individuals.
individuals. ItIt is
is an
an
agreement
agreement among
among the
the members
members of
of aa firm
firm for
for sharing
sharing the
the profits
profits of
of
the
the business
business carried
carried on
on by
by all
all or
or any
any of
of them
them acting
acting for
for all.
all.
Partnership agreements normally include the following details:

1. Name of the firm.
2. Name of all partners and contributions made by each
partner.
3. Nature of the business.
4. Date of commencement of partnership.
5. Duration of partnership, if any.
Partnership
Partnership Agreementcont
Agreementcont
6. Rights and duties of all partners.
7. Sharing of profit and losses.
8. Interest charged on capital.
9. Withdrawal arrangement and interest charged on drawings.
10. Salaries, bonus, commissions, etc to the partners.
11. Interest on loan by the partner(s) of the firm.
12. Dispute procedures.
13. Admission and withdrawal of partners.
14. Rights and duties in the event of partner dies.
15. Dissolution of partnership.
In
In the
the Absence
Absence of
of aa Partnership
Partnership
Agreement
Agreement
Profits
Profits or
or losses
losses sharing
sharing
Every
Every partner
partner should
should share
share the
the profits
profits or
or losses
losses of
of the
the firm
firm
equally
equally regardless
regardless of
of the
the amounts
amounts of
of the
the capital
capital
contributed
contributed by
by them.
them.
Salary
Salary (remuneration)
(remuneration) and
and commission
commission to
to partners
partners
No
No partner
partner is
is entitled
entitled to
to any
any salary
salary or
or commission
commission for
for
acting
acting in
in the
the partnership
partnership business.
business.
Interest
Interest on
on capital
capital
No
No interest
interest on
on capital
capital is
is allowed
allowed to
to all
all partners.
partners.
In
In the
the Absence
Absence of
of aa Partnership
Partnership
Agreementcont
Agreementcont
Interest
Interest on
on drawings
drawings
No
No interest
interest will
will be
be charged
charged on
on any
any drawings
drawings made
made by
by the
the
partners.
partners.
Advance/loan
Advance/loan to
to the
the business
business
A
A partner(s)
partner(s) is
is entitled
entitled to
to an
an interest
interest of
of 8%
8% per
per annum
annum
for
for any
any advance
advance made
made to
to the
the business
business beyond
beyond the
the amount
amount
of
of capital
capital subscribed.
subscribed.
Participation
Participation in
in business
business
Every
Every partner
partner may
may take
take part
part in
in the
the management
management of
of the
the
partnership
partnership business.
business.
In
In the
the Absence
Absence of
of aa Partnership
Partnership
Agreement..cont
Agreement..cont
Admission
Admission of
of new
new partner(s)
partner(s)
No
No admission
admission of
of new
new partners
partners into
into the
the business
business except
except
that
that all
all partners
partners agree
agree to
to it.
it.
Books
Books of
of accounts
accounts
All
All books
books of
of accounts
accounts of
of the
the partnership
partnership shall
shall be
be kept
kept at
at
the
the place
place of
of the
the partnerships
partnerships business.
business. Each
Each partner
partner is
is
entitled
entitled to
to access
access to
to all
all of
of them.
them.
Organizing
Organizing aa Partnership
Partnership
When
When partners
partners invest
invest in
in aa partnership,
partnership, their
their capital
capital accounts
accounts are
are
credited
credited for
for the
the invested
invested amounts.
amounts.
Each
Each partners
partners investment
investment is
is recorded
recorded at
at an
an agreed-on
agreed-on value,
value, normally
normally
the
the market
market values
values of
of the
the contributed
contributed assets
assets and
and liabilities
liabilities at
at the
the date
date of
of
contribution.
contribution.
Journal
Journal entry
entry is:
is:
Cash/
Cash/ Bank/
Bank/ Assets
Assets Accounts
Accounts
Partners
Partners Capital
Capital Accounts
Accounts
XX
XX
XX
XX
Organizing
Organizing aa Partnership
Partnership
Kayla
Kayla Zayn
Zayn and
and Hector
Hector Perez
Perez organize
organize aa partnership
partnership called
called BOARDS
BOARDS
that
that offers
offers year-round
year-round facilities
facilities for
for skateboarding
skateboarding and
and snowboarding.
snowboarding.
Zayns
Zayns initial
initial investment
investment in
in BOARDS
BOARDS is
is $30,000,
$30,000, made
made up
up of
of cash
cash
($7,000),
($7,000), boarding
boarding facilities
facilities ($33,000),
($33,000), aa note
note payable
payable reflecting
reflecting aa
bank
bank loan
loan for
for the
the new
new business
business ($10,000).
($10,000). Perezs
Perezs initial
initial investment
investment is
is
cash
cash of
of $10,000.
$10,000.
Zayns investment
Cash
Boarding facilities
Note payable
K. Zayn, Capital
Perezs investment
Cash
H. Perez, Capital
7,000
33,000
10,000
30,000
10,000
10,000
Partners
Partners Capital
Capital Account
Account
The capital accounts of partners can be maintained
based on two methods, namely:
Fixed Capital Method, and
Fluctuating Capital Method
(1)
(1) Fixed
Fixed Capital
Capital Method
Method
Under this method, the amount of capital of the partners
remains fixed unless there is some additional capital
brought in or there is any capital withdrawn by the partners
during the period. This method requires two types of
accounts to be opened. These accounts are:
Capital Account, and
Current Account
Any accounts that reflect the changes in the partners
capital accounts such as additional capital (increase
capital) and drawings of capital (decrease capital) will be
shown in the partners capital account as below:
(1)
(1) Fixed
Fixed Capital
Capital Method
Method (Cont)
(Cont)
Partners Capital Account
Date
Description
Drawings
capital
Ref
of
Amount
$
Ending balance
Date
Description
XX
Beginning balance
XX
Additional capital
Ref
Amount
$
XX
XX
$ XXX
$ XXX
* balancing figure
Note: Separate capital account is kept for each partner in the business.
(1)
(1) Fixed
Fixed Capital
Capital Method
Method (Cont)
(Cont)
Partners Current Account
Date
Description
Beginning balance
Ref
Amount
$
Date
Description
Ref
Amount
XX
Beginning balance
Drawings
XX
Interest on capital
XX
Interest on drawings
XX
Salary to partners
XX
Share of loss P & L

Appropriation
XX
Commission/bonus
XX
Share of profit P &

L Appropriation
XX
Ending balance *
XX
Ending balance *
XX
$ XXX
$ XXX
* balancing figure
Note: In Partners' Current Account, beginning balance and ending balance can be either debit or credit
side.
XX
Example:
Example:
On 1 July 2006, Aidiel and Fitrie commenced a
partnership where they contributed RM60,000 and
RM45,000 each. P/L sharing ratio is 2:1.
Additional information:
i) Salary for Aidiel and Fitrie RM10,000 per annum and
RM 8,000 per annum respectively and the interest for
the capital was 8% per year.
ii) Aidiel and Fitrie also made a withdrawal of RM 3,000
and RM6,000 respectively.
iii) The profit of the firm after providing Aidiel and
Fitries salary as well as interest of capital was
RM16,500.
(1)
(1) Fixed
Fixed Capital
Capital Method
Method (Cont)
(Cont)
Partners Capital Account (Aidiel)
Date
Description
30/6/07
Ending balance
Ref
Amount
Date
60,000
1/7/06
Description
Cash
60,000
Ref
Amount
60,000
60,000
* balancing figure
Note: Separate capital account is kept for each partner in the business.
(1)
(1) Fixed
Fixed Capital
Capital Method
Method (Cont)
(Cont)
Partners Current Account (Aidiel)
Date
Description
Ref
Amount
Date
Description
Ref
Amount
Beginning balance
Drawings
Ending balance *
3,000
Interest on capital
4800
Salary to partners
10,000
Share of profit P &

L Appropriation
(2/3 x 16,500)
11,000
22,800
25,800
25,800
* balancing figure
Note: In Partners' Current Account, beginning balance and ending balance can be either debit or credit
side.
(2)
(2) Fluctuating
Fluctuating Capital
Capital Method
Method
This method is not similar to the fixed capital method.
Only one capital account for each partner will be opened.
Any items that reflect the partners account such as
interest on capital, drawings, interest on drawings,
salary/remuneration, commission, and share of profits or
losses of partners for the period will be recorded in the
partners capital account.
(2)
(2) Fluctuating
Fluctuating Capital
Capital Method
Method (Cont)
(Cont)
Partners Capital Account
Date
Description
Drawings
Ref
Amount
$
Date
Description
Ref
Amount
XX
Beginning balance
XX
Additional capital
XX
Share of loss P & L

Appropriation
XX
Interest on capital
XX
Salary to partners
XX
Commission/bonus
XX
Share of profit P & L

Appropriation
XX
Ending balance *
XX
$ XXX
XX
$ XXX
* balancing figure
Note: A Partners' Capital Account usually shows a credit balance. However, under certain situations, it
can show a debit balance, such as over withdrawal or insolvency of the partner.
Example:
On 1 July 2006, Aidiel and Fitrie commenced a partnership

where they contributed RM60,000 and RM45,000 each. P/L
sharing ratio is 2:1.
Additional information:
i)
Salary for Aidiel and Fitrie RM10,000 per annum and RM 8,000
per annum respectively and the interest for the capital was 8%
per year.
ii)
Aidiel and Fitrie also made a withdrawal of RM 3,000 and
RM6,000 respectively.
iii) The profit of the firm after providing Aidiel and Fitries salary
as well as interest of capital was RM16,500.
(2)
(2) Fluctuating
Fluctuating Capital
Capital Method
Method (Cont)
(Cont)
Partners Capital Account (Aidiel)
Date
Description
Ref
Amount
Drawings
30/6/
07
Ending balance *
3,000
82,800
85,800
Date
1/7/
06
Description
Cash
Ref
Amount
60,000
Interest on capital
4,800
Salary to partners
10,000
Share of profit P &

L Appropriation
(2/3 x 16,500)
11,000
85,800
* balancing figure
Note: A Partners' Capital Account usually shows a credit balance. However, under certain situations, it
can show a debit balance, such as over withdrawal or insolvency of the partner.
Dividing
Dividing Profit
Profit or
or Loss
Loss
Before the preparation of the Profit and Loss Appropriation,
an income statement should be prepared first whereby at the
end, the profit or loss for the period is calculated and then
transferred to the Profit and Loss Appropriation.
Dividing
Dividing Profit
Profit or
or Loss
Loss (Cont)
(Cont)
In preparing the Profit and Loss Appropriation, the
following adjustments need to be considered:
1. Interest on Capital
Partners can agree to allocate interest allowance (or interest on
capital) based on the amounts invested by each partner. Expense
to partnership firm but gain for partners.
2. Drawings
Similar to other business types of organizations, the partners in the
partnership firm can make a withdrawal of cash or goods from the
business. -NO EFFECT ON PROFIT AND LOSS APPROPRIATIONLarson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana
Dividing
Dividing Profit
Profit or
or Loss
Loss (Cont)
(Cont)
3. Interest on Drawings
Gain to the partnership firm.
4. Partner's Salary/Remuneration
Gain to partners but an expense to the partnership firm.
5. Partner's Commission
Any commission paid to the partners is a gain to partners but an
expense to the partnership firm.
Dividing
Dividing Profit
Profit or
or Loss
Loss (Cont)
(Cont)
6. Transfer to Reserve
Reduction of profit to the partnership firm.

7.
7. Share
Share of
of Profits
Profits or
or Losses
Losses
Partners
Partners can
any method
can agree
agree to
to any
method of
of dividing
dividing profits
profits or
or losses.
losses.
In
In the
the absence
absence of
of an
an agreement,
agreement, the
the law
law says
says that
that the
the partners
partners
share
share profits
profits or
or losses
losses of
of aa partnership
partnership equally.
equally.
Example
Example of
of Profit
Profit and
and Loss
Loss
Appropriation
Appropriation
Farid and Fariq are in partnership named Waja Ent. since 1st January
2006, sharing profit for the ratio 2:1. For the year ended 31 December
2006, Waja Ent. managed to obtained a profit of RM16,855. The
partners entitled to interest on capital and drawings at 10% and 5%
per annum respectively based on their agreement. Farid also entitled
to receives a salary of RM 200 per month.
Additional info:
i) Farid and Fariq contributed capital of RM78,000 and RM48,000
respectively.
ii) Farid withdrawn RM4,800 while Fariq RM 3,600.
iii) Farid also received a commission of RM 1,000 from the partnership.
Prepare profit and loss appropriation for Waja Enterprise.
RM
Profit as per I/S
16,855
Farid (5% x 4,800)
Fariq (5% x 3,600)
Interest on capital
Farid (10% x 78,000)
Fariq (10% x 48,000)
Salary
Farid (200x12)
Fariq
Commission
Farid
Fariq
Share of profit:
Farid (2/3 x RM 1,275)
Fariq (1/3 x RM 1,275)
240
180
(7,800)
(4,800)
(2,400)
(1,000)
- .
1,275
RM850
RM425
1,275
Death
Death of
of aa Partner
Partner
A partners death dissolves a partnership. A deceased
partners estate is entitled to receive his or her equity. The
partnership contract should contain provisions for
settlement in this case.
These
Theseprovisions
provisionsusually
usuallyrequire:
require:
(1)
(1)Closing
Closingthe
thebooks
booksto
todetermine
determineprofit
profit or
orloss
losssince
sincethe
theend
endof
of
the
theprevious
previousperiod,
period,and
and
(2)
(2)Determining
Determiningand
andrecording
recordingcurrent
currentmarket
market values
valuesfor
forboth
both
assets
assetsand
andliabilities.
liabilities.
End of Chapter 10

Topic 10 - Accounting For Partnerships

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Chapter

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

Prepare entries for

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Partnership agreements normally include the following details:

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

Share of loss P & L

Share of profit P &

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

Share of profit P &

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Share of loss P & L

Share of profit P & L

The McGraw-Hill Companies, Inc., 2007

On 1 July 2006, Aidiel and Fitrie commenced a partnership

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Share of profit P &

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

Gain to partners but an expense to the partnership firm.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

Reduction of profit to the partnership firm.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007

The McGraw-Hill Companies, Inc., 2007

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

The McGraw-Hill Companies, Inc., 2007