Professional Documents
Culture Documents
2 Partnerships
Partnership - group of two or more people operating a business to make a profit; a business entity
Partnership agreement-includes;
*Name of partners
*Location, partners capital contribution,
*Responsibilities/duties/rights of partners,
*Insurance (death of a partner),
*Salaries to each partner, how profit /loss to be shared.
Partnership Act 1908-states
*Profit/losses shared equally
*Entitled to 5%interest on loans
*No interest payable on capital
Advantages of a partnership simple and inexpensive to set up, more skills and ideas available,
more capital, shared decision making, shared workload/responsibility/risk
Disadvantages of a partnership - unlimited liability (partners liable for debs of business, could loose
personal assets if go bankrupt), some find it difficult to share decision making, partners death,
dissolves partnership
Tax partnership profits not taxed, profit shared between partners then each partner declares
partnership earnings in personal tax return
Profit Sharing - partners do not always contribute equally to partnership, they could;
*Share profits/losses according to capital contribution (different amounts),
*Share profit even if capital contribution is different,
*Interest may be paid to reflect different contributions (on capital),
*Interest on drawings may be charged, silent partner (doesnt work as much), others receive a
salary
Forming a Partnership two or more people buying existing business, sole proprietorship, amalgamating
into partnership, sole proprietor taking on partner
When a business is purchased, Assets and Liabilities are recorded in purchasers book at prices
agreed upon by buyer and seller
General Journal
DR Bank
CR Capital Contribution
DR Assets
CR Liabilities
DR Vendor
When a business is sold, values of Assets in balance sheet, often no the same as values agreed by
buyer and seller
Inventory - discussion of what is being taken over, condition of stock, agreed purchase price
Accounts Receivable- books of buyer, full dollar value of a/c receivable recorded and allowance for
doubtful debts created for debts that might not be received *Total accounts receivable agreed
value*
Fixed Assets agreed purchase price becomes cost price, any accumulated depreciation from
seller is ignored
Goodwill unidentifiable intangible asset, difference between purchase price and fair value of net
assets
Amalgamating into partnership future partners will negotiate value of each business, share capital that
each partner will have in new partnership. Net assets of each business comprise each partners capital
General Journal
DR Assets
CR Liabilities (partner 1)
DR Assets
CR Liabilities (partner 2)
DR Bank
DR Assets
DR Bank
Revenue 400-499
Liabilities 200-299
Expenses 500-599
Equity 300-399
Interest on Drawings General journal entry prepared to charge any interest on drawings to each
partners current account
*Relevant a/c numbers from chart of a/c shown in FOLIO column
Salaries treated as distribution of profit CR to capital account
Interest on Capital or Current a/c CR to current a/c
*If current a/c has a negative balance, it is DR (instead of earning interest, a/c was charged interest)
Profit Distribution - end of financial year; profit for period closed off from Income Summary A/C to
profit distribution a/c
*Salaries, interest on drawings/capital/current a/c closed off to Profit Distribution A/C
*Any changes such as interest on drawings or a DR balance in Current A/C CR to Profit Distribution A/C
*Profit for each partner is calculated and closed off to each partners current A/C
General Journal
DR Income Summary
CR Profit Distribution
DR Profit Distribution
DR Profit Distribution
CR Current A/C
Loans: partners may make loans to partnership (arms length loans), rate is comparable to interest
charged by other institutions
*Interest paid is closed off to Income Summary A/C
Financial Reports for a Partnership - addition to usual income statement/balance sheet, also
includes