PARTNERSHIP ACCOUNTS

The Nature of Partnership

OBJECTIVES
1. Explain the meaning of partnership
2. Explain the features of partnership agreement
3. Explain the position of the partnership when there is no partnership deed

A business owned by 2-20 people called partners with an aim of making profit.
The nature/ features of a partnership business
- The business is formed to make profit
- Minimum of partners is two and maximum is 20, with the exception of the
bank where the maximum is 10 partners and there is no maximum for
professions such as accountants, solicitors, stock exchange member,
surveyors, auctioneers, valuers, estate agents, land agents, insurance
brokers etc.
- It has unlimited liability, meaning if the partnership fails to pay its debts, each
partner may be required to pay their share of debt and maybe forced to sell
their private possessions to settle the debt.
- Profit and losses shared
- A partnership agreement is usually drawn up to regulate the operations of the
business
- All partners must consent before decisions are made
- Usually formed by relatives or friends
The Importance of a partnership business
- Reduces risk of failure as losses can be shared by all the partners and
partners bring different expertise to the business
- More capital can be raised which can be used to expand the business
- Responsibilities are shared which leads to efficiency in the business
The Features of a Partnership Agreement
1. State the profit-sharing ratio; indicating the share of each partner in profits or
losses of partnership (not shared in proportion to capital contribution but
according to the agreement)
2. State salary if any to be paid to partners
3. It states the capital contribution to be made by each partner
4. States interest rate to be paid on partners’ capital contributions. Interest on
capital compensate partners who contribute more capital as profit sharing is
not based on capital contributions.
5. States the rate to be paid on drawings to discourage partners from making
excessive drawings from the partnership. Excessive drawings can result in
cashflow problems.
 6. States the terms of admission of a new partner (whether goodwill is to be
considered or not)
7. The procedure to be followed if one partner leaves the company (due to
death, retirement, leaving etc

The position of the partnership when there is no partnership deed

1. Profits/losses to be shared equally
2. There will no interest on drawings
3. There will be no interest on capital, however, partners who invested in
partnership in excess of capital contribution agreed are entitled to interest at
the rate of 5% per annum. For example, Partners of a business agreed to
contribute P50 000 each. Partner X contributed P75 000. When profits are
shared, partner X will get 5% extra on excess capital contributed. Excess
capital contributed is P75 000 – P50 000 = P25 000, 5% of P25 000.
4. Interest on partner’s loan will attract a rate of 5% (charged in the income
statement as an operational business expense- it is not appropriated)
5. Salaries are not allowed

The Importance of a partnership deed

1. It helps to avoid disputes and misunderstandings as partners have

documents that regulate their actions in the business
2. The partnership can operate smoothly and peacefully to be able to achieve
planned objectives as the deed is the guideline for the partnership

Accounting Differences between a sole trader and a partnership

business.
Sole trader Partnership

Capital is contributed by one person Partners contribute capital

There is only one capital account and Many capital accounts, of each partner
it’s a fixed capital account, no current and its current and fixed capital
account. accounts.
No interest on capital and drawings Partners may earn interest on capital
and may pay interest on drawings
No appropriation account is prepared Appropriation account is prepared
Owner takes all the profits and bears all Partners share profits/losses
the losses

ACCOUNTING FOR PARTNERSHIP

Objectives
1. Explain the composition of the final accounts of a partnership
 2. Explain the importance of appropriation account
3. Prepare profit and loss appropriation account
4. Differentiate between fixed and fluctuating capital accounts
5. Explain the importance of current account of partners
6. Prepare the capital and current account of partners in the ledger
7. Prepare the partners final accounts
8. Explain the meaning of goodwill
9. Prepare the accounting entries for goodwill on admission of a new partner
10. State the accounting entries between a sole trader and a partnership

The Composition of final accounts of a partnership

1. Income statement: same as of sole trader, prepared to calculate profit/loss for
the year
2. Profit and Loss Appropriation account: shows how profits/losses are shared
among partners
3. Partners’ capital account
4. Current account
5. Statement of Financial Position

1. Profit and Loss Appropriation account

An account showing how profits and losses are shared among partners.
Steps to be followed:
a. State the profit for the year
b. Add any income increasing profit
c. Deduct anything reducing profit
d. Share the profits accordingly
Elements increasing profit Elements decreasing profit
1. Interest drawings by partners 1. Interest on capital
2. Partner’s salary
3. Bonus to partners

An extract of the Profit & Loss Appropriation Account.

Taylor and Clarke Business
Profit and Loss Appropriation Account for the year ended 31 December 2021
P P P
Profit for the year XXX
Add: Interest on drawings
Taylor XX
Clarke XX XXX
 Less: Interest on capital
Taylor XXX
Clarke XXX XXX
Salary: Clarke ( earned by active partners only) XXX XXX
 Commission received by a partner XXX
Balance of Profit to be shared
XXX
Taylor 2/5 of P222 XXX XXX
Clarke 3/5 of P222

NB: Commission received by a partner: Dr in appropriation account

Cr in partner’s account.

The Importance of Profit & Loss Appropriation Account

- Shows how profits and losses are shared among partners
- It shows the interest on drawings
- It shows the salaries earned by partners
- It shows interest on capital

Why Partners charge interest on drawings

1. To discourage partners from making excessive drawings
2. Interest on drawings increases their capital share
3. Interest in drawings increases the profit share
Exercises
1. 32.4 demonstration
2. 32.5 A individual task page 488-9 14 th edition
3. 2014 Lesego & Thuso

32.4 BLAIR, SHORT & STEEL

Profit and Loss Appropriation account for the year ending 31 December 2020
P P P
Profit for the year 111 100
Add: Interest on drawings
Blair 400
Short 300
Steel 200 900
112 000
Less: Interest on capital
Blair 3000
Short 2000
 Steel 1500 6500

Salaries
Short 20 000
Steel 25 000 45 000 51 500
Balance of profit shared 60 500

Blair 70% P60 500 42 350

Short 20% P60 500 12 100
Steel 10% P60 500 6 050 60 500

The Difference between Fixed and fluctuating capital account.

Fixed Capital Account
Shows amount introduced/ invested by each partner at the beginning of the
partnership. If there is any additional capital introduced, it is recorded in this account.
The importance of a fixed capital account
- It helps to know the amount introduced by each partner/ capital contributions
of each partner are readily available
- Advantage of keeping this account is that interest can be calculated on
partner’s fixed capital contributions
- It is only used/kept together with a current account

A fixed capital account extract

Date Details P P Date Details P P
Amo Ben Amo Ben
2021 2021
Dece Balance c/d XX XX Jan 1 Balance b/d XX XX
31 June Cash/bank(introduced XX XX
30 capital)
XX XX XX XX
2022
Jan 1 Balance b/d XX XX

Current Account
Records anything that increases or decreases capital
The importance of a current account
- Used to show each partner’s interest on capital
- Shows salaries earned by partners
 - Shows share of profits and losses
- Shows drawings
- Shows interest charged on drawings

When a partner has a negative (debit balance) it indicates that s/he is eating
into his fixed capital hence can decide to reduce drawings.

(anything that – capital) A current account ( anything that +

capital)
Date Details P P Date Details P P
Aone Ben
2021 2021
Dec 31 Drawings XX XX Jan 1 Balance b/d XX XX
Dec 31 Interest on XX XX Dec 31 Interest on XX XX
drawings capital
Dec 31 Salary XX -
Dec 31 Shareof profit XX XX
Dec 31 Balance c/d XX Dec 31 Balance c/d XX
XX XX XX XX

NB: Can show a credit/debit balance for a partner. Debit balance means the partner
is eating into his fixed capital hence a need to reduce drawings.

Fluctuating Capital Account

Where all transactions are recorded in partners’ capital accounts. The capital
accounts of partners changes with current entries made (eg drawings, interest on
drawings, interest on capital, share of profit, salary to partners). The balances of
which changes from one period to the next.

Fluctuating Capital Account Extract

Date Details P P Date Details P P
Aone Ben Aone Ben
2022 2022 Balance b/d XX XX
December31 Drawings Xx Xx January Bank (more XX XX
December31 Interest on Xx Xx 1 capitalintroduced)
December31 drawings Xx Xx April 5 Interest on capital XX XX
December31 Share of Xx Xx Salary XX
losses Dece Share of Profits XX XX
Bal c/d xx xx 31 Interest on loan
 Dece issued (if not
31 issued as cash)
Dece Xxx Xxx
xxx Xxx 31
Dece Balance b/d xxx xxx
31

2023
January
1

NB: Interest on loan issued by a partner

- It appears in the income statement as an expense, however, if not issued on
cash to the partner concerned, it must be added to increase the partner’s
capital share.
- A fluctuating capital account will never have a negative (debit) balance
because the partner’s fixed capital (capital invested) is included as compared
to the current account.
- Fixed capital account and current account are put in one account- hence
called fluctuating capital account as partner’s balances will keep on changing.

WHY BUSINESSES PREFER KEEPING FIXED CAPITAL ACCOUNTS PLUS

CURRENT ACCOUNTS OVER TO FLUCTUATING CAPITAL ACCOUNTS.
When partners are taking greater amounts than the share of the profits that they are
entitled to, this will be shown by a debit balance on the current account hence acts
as a warning to the concerned partner to reduce drawings.

Exercises to do
1. Lesego and Thuso
2. Ben & Amu
3. Gladys & Barbara
4. Benson &Boitshoko
5. Mercy &Laone
6. Macho & Neo
 GOODWILL

Objectives
1. Explain the meaning of goodwill
2. Prepare the accounting entries of goodwill on admission of a new partner
3. State the accounting differences between a sole trader and a partnership

Goodwill is an amount representing the added value to a business of such factors

as; customer loyalty, good reputation, market penetration and expertise.
Reasons Why Goodwill is paid
1. The business has many regular customers who will continue to deal with new
owner
2. The business has good contacts with suppliers
3. The business has a good reputation
4. The business has well trained, efficient and reliable employees
5. It has well-known brand names that have not been valued and included as
assets

NB: If the business has a bad reputation, inefficient labour force or any negative
characteristic, the owner would not be paid for goodwill on selling the business.
How Goodwill Is Calculated
There is no single way of calculating goodwill. Different industries/occupation have
own customary way of calculating goodwill.
i. Retail businesses normally value goodwill at the average weekly sales for
the past year multiplied by a given figure. The given figure differs between
types of business and often changes gradually in the same type of
business in the long term.
ii. Professional firms like accountants’ value goodwill as being the gross
annual fees times a given number.
iii. The average net annual profit for a specified past number of years
multiplied by an agreed number. This is often said to be X years purchase
of Net Profits.
iv. The super profits methods: what is left of the net profits after allowances
have been made for.

Goodwill in partnership; normally not entered in the books unless if it has been
purchased. However, partners own a share in goodwill in the same ratio in which
profits are shared. The account will be opened and closed.
WHEN IS GOODWILL CALCULATED?
1. When a new partner is admitted
2. When a partner dies
3. When old partners change profit & loss sharing ratio
4. When the business is sold

1. GOODWILL ON ADMISSION OF A NEW PARTNER

Reasons for admitting a new partner

1. The firm has grown, and someone is needed with different skills
2. To replace partners who left the firm due to death/ retirement

When a new partner is admitted to a partnership, he would be buying not only a

share of the recorded assets of the business but also a share of the unrecorded
goodwill in the business. Remember goodwill in the business comes about due to
the excellence or good reputation of the business. It is essentially the value of the
business as a whole over and above the value of the recorded Net Assets.

The Accounting records: Date of admission used in accounts. End of year date not
used as goodwill account is NOT to be maintained.
1. Immediately before the admission of the new partner, the amount of goodwill
that the old partners have built up must be recognized and shared between
the partners using the old profit & loss ratio.
- Dr goodwill account with the estimated amount of goodwill
- Cr old partner’s capital accounts with the old profit-sharing ratio

2. The new partner will then be admitted and the cash that s/he brings into
partnership is accounted for by;
- Dr Cas/Bank account
- Cr new partner’s capital account

3. Finally, the goodwill must be eliminated from the books and this is done by
- Dr new partners’ capital accounts in new profit-sharing ratio
- Cr the goodwill account with the value of goodwill
 EXAMPLE
Peter and Paul have been in a partnership for several years sharing profits equally.
The balance in Peter’s capital account is P100 000 and for Paul is P80 000. They
decided to admit a new partner, Phill, on 5th April to their partnership. Phill will
contribute P60 000 in cash and the new profit-sharing ratio will be 2:2:1. The
goodwill in the partnership is estimated to be P30 000 and the goodwill account is
not to be maintained.
Required
Write up the partners ‘capital accounts to reflect admission of Phill.

Goodwill Account
Date Details P Date Details P
2023 2023
April 5 Capital: Peter 15 000 April 5 Capital: Peter 12 000
Paul 15 000 Paul 12 000
Phill 6 000

Capital Account
Date Details Peter Paul Phill Date Details Peter Paul Phill
P P P P P P
2023 2023
April 5 Goodwill 12000 12000 6000 April Balance b/d 100000 800000
1
April 5 Balance 103000 83000 54000 April
c/d 5 Goodwill 15 000 15 000
April
5 Bank 60000
115000 95000 60000 115000 95000 60000
April
6 Balance b/d 103000 83000 54000

Cash Account
Date Details P Date Details P
2023
April 5 Phill 60 000

Why is goodwill charged when admitting a new partner?

It compensates partners for losing because of changing ratios of profits and losses. (
The new partner has to pay part of the goodwill to compensate old partners)
Initial cash introduced : Peter P100 000
Paul P80 0000

After admitting a new partner: Peter’s capital is P103 000

Paul P83 000
Increased by P3000 each
Paul’s capital was P60 000 and its decreased by P6000

Journal Entries
Date Details Dr Cr
P P
2023
April 5 Goodwill 30 000
Capital: Peter 15 000
Paul 15 000
Being goodwill shared by old partners
April 5 Cash 60 000
Capital: Phill 60 000
Being capital introduced by Phill on admission
April 5 Capital: Peter 12000
Paul 12000
Phill 6000
Goodwill 30 000
Being goodwill written off after admission of
Phill

Exercises to do
1. Mokone and Chawa 92005)
2. Kagiso and Tapiwa
3. Maame and Lucy( goodwill amount not stated but the new partner’s share of
goodwill stated)
4. Lebo and Marang (2018)
5. Khumo and Thuto(2020)

B. GOODWILL ON PURCHASE OF A BUSINESS/WHEN A BUSINESS IS SOLD.

Objectives
1. Explain the factors that may affect the purchase price of a business
 2. Calculate the goodwill and adjust for the revaluation of assets for a business
purchased
3. Explain the need to revalue some of the assets of a business purchased
4. Differentiate between the purchase of a business by a sole trader and the
amalgamation of two sole traders ‘s businesses
5. Record the purchase of a business in the buyer’s books of account
6. Prepare the statement of financial position which has bought another
business or two businesses which have amalgamated.

Factors that may affect the purchase price

1. Goodwill (all factors affecting goodwill inclusive)
2. The value of assets taken over
3. The value of liabilities taken over
4. Profitability of a business
5. The actual purchase price payable to the vendor/the seller (net assets value)
The Need to revalue some assets of a business when its purchased
1. Some non-current assets were bought long ago, their values need to be
revalued to reflect current market values. For instance, inflation has increased
prices, depreciation lowers prices
2. Some non-current assets are absolute (out of fashion), their prices
3. Inventory may have slow lines; goods low in demand which may end up
expiring on shelf, hence a need to reduce prices
4. Some inventory maybe stoles while the books/records reflect a certain
amount which is not existing, hence a need to reduce the value
5. Some inventory must be revalued to reflect the current market prices e.g cell
phones
6. Some trade receivables maybe close to being bad debts hence a need to
revalue and make provisions for bad debts.
When is Revaluation Done?
1. When partnership is sold
2. When a new partner is admitted
3. When a partner leaves the firm
4. When partners change profit & loss sharing ratio

Valuation must be done so that the value of assets and liabilities become realistic
hence when calculating goodwill and preparing final statements use new
values.

Profit or Loss on Revaluation

 - The gain/loss made on revaluation is shared between old partners in their old
profit-sharing ratio
- If the revaluation shows no difference in assets values, no further action is
needed.

If it’s a profit/Gain pg 513 14th edition

New total valuation of assets P90 000
Old total valuation of assets (P60 000)
Gain on revaluation P30 000

If it’s a loss
New total valuation of assets P40 000
Less: Old total valuation of assets (P50 000)
Loss on revaluation (P10 000)

Accounting Entries for Revaluation

Once assets have been valued, you need to record the changes, gains and losses in
the ledger accounts of partnership. That is, open revaluation account and update the
concerned assets accounts.

Revaluation Account: an account used to record gains and losses when assets are
revalued. ( Frank wood, 14th edition chapter 34)
Step 1

Assets Showing a gain on revaluation

Dr asset account with revaluation: increase amount
Cr revaluation account with concerned asset e.g., premises
Assets showing a loss on revaluation
Dr revaluation account
Cr asset account with revaluation: reduction

Step 2
 - Add the two sides of the revaluation account
- If credit side is more than the debit side, there is profit on revaluation, share it
among the old partners using the old profit ratio.
Dr Revaluation account with “profit on revaluation”, showing how it was shared
between old partners
Cr Old partner’s capital accounts (as profit increases their capital share)
- If the Dr side is more than the Cr side, it means there is loss on revaluation,
share it among old partners using old profit-sharing ratio
Dr old partners’ capital accounts (current accounts- to reduce their capital share)
Cr loss to revaluation account, showing how it was shared among old partners.

SUMMARY
- Profits on revaluation of assets are credited to old partners’ accounts in the
old profit & loss sharing ratio as it increases their capital share
- Losses on revaluation of assets are debited to old partners’ capital accounts
in the old profit & loss sharing ratios as they decrease their profit share
- Assets accounts also show revalued amounts, profits will be debited as
(revaluation: increase, and losses credited as revaluation: reduction)
RATIONALE OF SHARING GAINS/LOSSES ON REVALUATION AMOMG
PARTNERS
The new partner should not enjoy the gains or suffer the losses that occurred before
his/her admission.

Demonstration Exercise 34.1 pg 516, 14th edition Frankwood.

Revaluation Account
Date Details P Date Details P
2019 2019
January 1 Motor vehicle 13000 January 1 Buildings 75 000
January 1 Inventory 1900
January 1 Office fittings 1700
January 1 Profit on revaluation
Cox P29 200
Fox P17 520
Lock P11 680 58 400
75 000 75 000
Workings : Revalued assets
a. Buildings
New value P250 000
Less; Old value P175 000
Gain on evaluation 75 000

b. Motor vehicles
New value P30 000
Less; old value P43 000
Loss on valuation P13 000

c. Inventory
New value P14 000
Less; old value P15 900
Loss on revaluation P1 900

d. Office fittings
New value P3 000
Less; old value P4 700
Loss on revaluation P1 700

The credit side is of the revaluation account is more than the debit side; hence profit
on revaluation.

Sharing of profit made

P75 000- (13 000+1 900+1 700)
P75 000- P16 600= P58 400
Cox 5/10 * P58 400= P29 200
 Fox 3/10 * P58 400 = P17 520
Lock 2/10* P58 400 = P11 680

Buildings Account
Date Details P Date Details P
2019 2019
January 1 Balance b/d 175 000 January 1 Balance c/d 150 000
January 1 Revaluation: increase 75 000
150 000 150 000
January 2 Balance b/d 150 000

Motor vehicle Account

Date Details P Date Details P
2019 2019
January 1 Balance b/d 43 000 January 1 Revaluation: reduction 13 000
January 1 Balance c/d 30 000
43 000
January 2 Balance b/d 30 000 43 000
 Inventory Account
Date Details P Date Details P
2019 2019
January 1 Balance b/d 15 900 January 1 Revaluation: reduction 1 900
January 1 Balance c/d 14 000
15 900 15 900
January 2 Balance b/d 14 000

Office Fittings Account

Date Details P Date Details P
2019 2019
January 1 Balance b/d 4 700 January 1 Revaluation: reduction 1 700
January 1 Balance c/d 3 000
Balance b/d 4 700 4 700
January 2 3 000

PARTNERS’ CAPITAL ACCOUNT

Date Details Cox Fox Lock Date Details Cox Fox Lock
P P P P P P
2019 2019
Jan 1 Balance c/d 169200 9752 56080 Jan Balance b/d 14000 80000 44400
0 1 Profit on 0 17520 16680
Jan revaluation 29200
169200 56080 1 97520 56080
9752 16920
0 Balance b/d 0 97520 56080

Jan 16920
2 0
 COX, FOX, & LOCK
BALANCE SHEET AS AT 1 JANUARY 2019
P P P
NON-CURRENTS ASSETS
Buildings at valuation 250 000
Motor vehicle at valuation 30 000
Office fittings at valuation 3 000
283 000
CURRENT ASSETS
Inventory at valuation 14 000
Accounts receivable 22 200
Bank 3 600 39 800
322 800

Capitals:
Cox 169 200
Fox 97 520
Lock 56 080
322 800

JOURNAL ENTRIES

Date Details Dr Cr
2019 P P
January 1 Buildings 75 000
Revaluation 75 000
Being increase in value of buildings to change profit &
loss sharing ratio of partners

January 1 Revaluation 1300

Motor vehicles 1300
Being decrease in value of motor vehicle to change profit
& loss sharing ratio of partners

January 1 Revaluation 1900

Inventory 1900
Being decrease in value of inventory to change profit &
loss sharing ratio of partners

January 1 Revaluation 1700

 Office fittings 1700
Being decrease in value of office fittings to change profit
& loss sharing ratio of partners

Individual Exercises ( do the solutions) then do more exercises without

revaluation account, A. tsala.
1. 34.2A
2. 34.4A
3. A. Tsala
4. Thebe and Kitso
5. Khupe and Pongo
6. Botho

AMALGAMATION