Partnership accounting for advanced level.ppt

A copy of partnership accounting slides for A-level learners

1. 1
Accounting For Partnership
Learning Outcomes:
Understand the concept of partnership
Understand the journal entries for the formation
of partnership and distributing profit or loss
Able to prepare financial statements for
partnership

2. 2
Partnership Act 1961
“… is the relationwhich subsists between persons carrying
on business in common with a view of profit.”
Sec 3(1)
Definition

3. 3
Separate legal personality (for the purpose of
financial reporting only)
Unlimited liability
Limited life
Co-ownership of property
Co-ownership of profits
Characteristics

4. 4
Advantages
Ease of formation and dissolution
Better management
Greater capital compared to proprietorship
Disadvantages
Easily dissolved/limited life
Unlimited liability
Difficulty in transferring ownership
Conflict among partners
Lesser capital compared to corporation
Advantages & Disadvantages

5. 5
Minimum members is 2 and should not exceed
20.
Not necessarily in the form of written
agreement. Verbal agreement is accepted.
All matters related to partnership must be
referred to an agreement. If no agreement
exists in relation to certain issues, statutes in
the Partnership Act 1961 would be applied.
Formation

6. 6
This agreement is frameworkwhich governs the
formation, operations, dissolution and liquidation of
the partnership
Contents:
Name, nature & scope of partnership
Authority, rights & duties of each partner
Methods of sharing profits & losses
Rates of interest for capital & drawings
Salaries
Provision for arbitration of disputes & liquidation of
the partnership
Partnership Agreement

7. 7
When nopartnership agreement exists:
Profits and losses are to be shared equally
No interest allowed on capital
No interest to be charged on drawings
No salaries are allowed
Interest 8% p.a. is charged on the advance (loan)
made by a partner to the partnership
Each partner has unlimited liability.
Cont.

8. 8
Partnership vs Proprietorship
Proprietorship
Net Profit
Partnership
Net Profit
Balance Sheet
Balance Sheet
Partner’s Account

9. 9
Two methods available to present the equity in the
balance sheet:
i. Fixed Capital Account
ii. Fluctuating Capital Accounts
The capital account will record the initial introduction of
capital, and will normally only be adjusted if the partner
introduces additional capital.
Reporting Equity in BS

10. 10
The current account will record transactions relating to
partners other than transactions related to capital such as
share of profits/losses, interest on withdrawals, interest
on loan etc.
If the partnership maintains fluctuating capital accounts,
there will be no current account, and appropriations of
profit and drawings will be recorded in the capital
account.
Cont.

11. 11
Fixed Capital Account
Cont.
Capital Account
Ali Abu Ali Abu
Bank 2,000 6,000

12. 12
Fixed Capital Account
Cont.
Current Account
Ali Abu Ali Abu
Int. on
capital
100 300
Int. on
drawings
Drawings
Bal. c/d
2,000 2,000
10050
600 400
2,650 2,500
Profits 2,550 1,700
Salaries
500
2,6502,500
Bal. b/d 600 400

13. 13
Fluctuating Capital Account
Cont.
Capital Account
Ali Abu Ali Abu
Int. on
capital
100 300
Int. on
drawings
Drawings
Bal. c/d
2,000 2,000
10050
2,600 6,400
4,650 8,500
Profits
2,550 1,700
Salaries
500
4,650 8,500
Bal. b/d2,600 6,400
Bank 2,000 6,000

14. 14
See Illustration 1 from Siti et al (2008),PA, p. 8
Cont.

15. 15
Initial Investment
Initial investment made by partners will be
creditedinto their respective Capital Account.
Non cash assets need to be recorded at their
fair value at the date of investment.
Liabilities brought into the partnership have to
be recorded at fair value.
Accounting Treatments

16. 16
Additional Investment
Similar accounting entries as to the initial investment:
Record asset at it’s fair value
Credit the amount to partner’s capital account
Withdrawal of Investment
The withdrawal amount needs to be debited to partner’s
capital account
Accounting Treatments

17. 17
Loan
Any loan provided by a partner is a liability to the
partnership. This partner is entitled to receive a certain
percentage of interest on the loan given. Interest on loan
will be treated as expensesof the firm & will be recorded
in income statement.
Interest on capital
Interest was given for the purpose of encouraging
partners to invest in the business.
Cont.

18. 18
Other issues
All amounts received by each partner for the current
period (e.g. salaries, interest on capital, profit-loss, bonus
etc.) would be credited to respective partner’s Current
Account.
A key point to remember is that as in a sole trader's
accounts, any amounts actually paid to the owners
(whether in cash or in kind) should be treated as
drawings.
Cont.

19. 19
If a partner is entitled to a salary, it is dealt with as part of
the appropriation of profit.
It is not an expense of the business, and should not be
charged to theincome statementin order to calculate
profit.
Only salaries paid to employees of the business are
charged to the income statement.
Cont.

20. 20
Residual Profit
Profitwhich is divided between the partners in the profit
and loss sharing ratio.
It is the amount of profit remaining after taking into
account the fact that the partners will be entitled to a
proportion of the profit under the terms of the partnership
agreement.
These proportions are the 'appropriations of profit'. Profit-
Loss Appropriation Account is prepared to determine the
current profit received by each partner.
Cont.

21. 21
It should be noted that while salaries and interest on
capital will reduce the amount of residual profit to be
shared between the partners, interest on drawings will
increase the residual profit.
Cont.

22. 22
Comprehensive Example
The net profit for the partnership between Azlan and Chong for the year
ended 31 December 2011 was RM28,500. The capital accounts and
current accounts for the partnership on 1 January 2011 were as follow:
Capital accounts:
Azlan RM40,000
Chong RM50,000
Current accounts:
Azlan RM2,160
Chong RM1,500
In the year 2011, Azlan withdrew RM2,000 on 31 Mac 2011.

23. 23
Cont.
The contents of the partnership agreement are as follow:
i. Interest on the initial capital is 5% per year
ii. Azlan would be paid RM12,000 per year for his salary
iii. 8% interest per year would be levied on withdrawals by the partners
iv. Azlan and Chong share a profit/loss in a ratio of 2:3
Prepare:
(a)The allocation of profit-loss using Profit-Loss Separation Account or
Profit-Loss Separation statement for the year ending 31 December
2011.
(b)Capital account and current account for each partner
(c)A balance sheet (equity section) as at 31 December2011