Accounting For Partnership/ Principles of Accounts

Principles of Accounts notes on the topic Partnership.

1. Accounting F or Partnership Grade 11

2. Objectives Definition of partnership State the features of partnership Give reason for establishing a partnership Outline the essential components of a partnership agreement

3. What is Partnership? Partnership is an agreement between 2 or more persons in business with the view of making a profit.

4. State the feature of a partnership Characteristics of a partnership includes: Voluntary Association Mutual Agency Unlimited liability

5. Voluntary association A partnership is a voluntary association between partners. Joining a partnership increases the risk to one’s personal financial position. Some courts have ruled that partnerships are created by the actions of individuals even when there is no express agreement to form one.

6. Mutual agency Legal relationship among partners whereby each partner is an agent of the partnership and is able to bind the partnership to contracts within the scope of the partnership’s business.   This means that each partner is a fully authorized agent of the partnership. As its agent, a partner can commit or bind the partnership to any contract within the scope of the partnership business.

7. Mutual agency cont’d. For example, a partner in a used car business, can bind the partnership through the purchase and sale of used cars. But this partner cannot bind the partnership to a contract for buying men’s clothing or any other garments that are not related to the used car business.

8. Unlimited liability Legal relationship among general partners that makes each of them responsible for partnership debts if the other partners are unable to pay their shares.   This means that each partner can be called on to pay a partnership’s debts. When a partnership cannot pay its debts, creditors usually can apply their claims to partners’ personal assets.

9. Unlimited liability Cont’d. For example, the firm is to pay $25,000 to its suppliers for goods. The partners are able to arrange $20,000 from the business. The balance of $5,000 will be arranged from the personal properties of the partners.

10. Reasons for establishing a partnership More capital can be raised Diverse skills/ variety of skills Share management responsibility Easy to start up Profits from the partnership are taxed as personal income of the partnership

11. Essential components of partnership agreement Capital - will tell how much each partner will contribute to the business. 2. Profit sharing ratio- this tells what ratio of profit each partner is to get.

12. Essential components of partnership agreement 3. Interest on capital- this tells how much interest each partner will gain on the capital that he/ she contributed. 4. Partners salary- tells how much salary each partner is suppose to get based on the agreement.

13. Essential components of partnership agreement 5. Drawings by partners- this is what partners take out of the business for personal use 6. Interest on drawing- this tells the amount of interest each partner will pay on his/ her drawings

14. Where no partnership agreements exists Profit and losses are shared equally There is to be no interest on capital No interest to be charged on drawings Salaries are not allowed

15. Current Account A Current Account is used to record the profits retained in the business by the partner. A CREDIT balance on the current a/c indicates that a partner has undrawn profits. A DEBIT balance tell us that a partner has withdrawn more than his share of profit. The current a/c has a normal credit balance.

16. Additional Reading Ensure that you read the chapter on ‘ Accounting for Partnership’ in your text book.