Partnership accounting

Introduction
You need to know about:
Advantages and disadvantages of
partnership accounting
The partnership agreement
Capital accounts
Current accounts
Share of profits
Goodwill.
Advantages
Increased capital
Increased knowledge and specialist skills
Shared risk
Flexible working and cover for holidays
and illness.
Disadvantages
Less profit because profit is shared
Possible disagreement over money
Possible disagreement over the direction
of the business.
The partnership
agreement
The Partnership Act states that if there is
no written, legal agreement for the
partnership then the following must apply:
Equal profit shares
No salaries
No interest on capital.
Capital accounts
Each partner must have a capital account
to show the amount of capital owed to the
partner by the business.
Debit Bank account
Credit Capital account
Fixed capital accounts
The amount of capital will remain fixed and
will only change if the agreement changes
and goodwill is introduced.

All transactions for each partner will be

recorded in the partner’s current account.
Fluctuating capital
accounts
This is used when the partnership does not
operate a system of current accounts.

Opening capital plus profit share minus

drawings = closing capital.
Example
Mike and Dave start a business on 1 January
2007 with the following capital:
Dave £30,000 Mike £10,000
They will share profits equally. Dave will take a
salary of £20,000. Each partner will receive 10%
interest on their capital.
At 31 December 2007 the business had made a
net profit of £55,000.
Drawings:
Dave £35,000 Mike £18,000
The net profit for the year must be shared
between Dave and Mike according to the
partnership agreement.
The profit and loss appropriation account will
be used to share out the profit to the current
account of each partner.
Debit Profit and loss appropriation account
Credit Partner’s current account
The amount of drawings made by a partner must
be debited to the partner’s current account.
 Profit and loss appropriation account

Interest: Mike 1,000 Bal b/d 55,000

Interest: Dave 3,000
Salary: Dave 20,000
Profit: Dave 15,500
Profit: Mike 15,500
55,000 55,000
 Current accounts

Dave Mike Dave Mike

Drawings 35,000 18,000 Interest 3,000 1,000
Salaries 20,000
Profit 15,500 15,500
Bal c/d 3,500 Bal c/d 1,500
38,500 18,000 38,500 18,000
Bal b/d 1,500 Bal b/d 3,500
Drawings
A partner will take drawings from the
partnership. The partnership agreement may
state that the partners will be charged interest
on the amount of drawings they make.
The reason for charging interest on drawings is
to stop a partner from drawing large amounts
of cash from the business.
It may help to prevent a cash flow problem.
Interest on drawings
Accounting entries for interest on
drawings:
Debit Partners’ current
accounts
Credit Appropriation account
Exam tip: make the interest on drawings
your first entry in the appropriation
account and current accounts.
Goodwill
You must have a knowledge and
understanding of the following:
The definition of goodwill
Accounting for goodwill in the ledger
Making adjustments in the capital
accounts.
Goodwill is known as an intangible fixed asset.
Goodwill results through the good reputation
that a business has built up over a period of time.
Goodwill = market value – book value
Market value £380,000
Book value £300,000
Goodwill £80,000
A new partner may be required to pay goodwill to
the existing partners.
In the UK, good accounting practice requires that
goodwill should not remain as a fixed asset in the
books of the partnership.
When a new partner joins the partnership,
goodwill will be written out of the ledger by
making an adjustment in the capital accounts of
the partners.
Accounting entries for
goodwill
In the original profit share agreement:
Debit Goodwill account
Credit Existing partners’ capital accounts
In the new profit share agreement:
Debit Capital accounts of all the partners
Credit Goodwill account