AL WADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

NOTES

PARTNERSHIPS - CHANGES
Partnerships can change for a variety of reasons. These include:

A new partner being admitted to the partnership;

Due to retirement of partners;
The partners deciding to change the profit and loss sharing ratio;
The partnership being DISSOLVED. A partnership might end, for example, if
there is a disagreement between partners or if a partner retires or dies.

Such changes in partnerships affect the accounts. For example, a change in the number of
partners will affect the capital structure. Whenever a change occurs, it is accepted practice
to produce a set of accounts for the period up to the date of the change and another for the
period after.
Admission of a new partner
When there is any change to the membership of the partnership, this is technically the end
of the partnership. One partner may leave the business, or if more capital and/ or skill is
required, a new partner may join the partnership. In each case, this is the start of a new
partnership. When a new partner is admitted to the partnership, it is necessary to make
adjustments for Goodwill. This is an intangible fixed asset it has a monetary value, but
no separate physical existence.
Applying the concept of prudence, Goodwill does not usually appear in the books of a
business. Goodwill is the value of a business over and above the value of its recorded
assets. This is affected by such factors as the location of the business premises; the
reputation of the business; the quality of goods or services provided by the
business; the efficiency of the workforce; the number of regular customers; the
contacts with reliable suppliers, and so on.
When an existing business is taken over, the new owner benefits from the Goodwill built up
by the previous owner. The difference between the value of the identifiable net assets and
the purchase price, is the amount paid for this Goodwill.
In a similar way, a new partner joining an existing partnership will benefit from the Goodwill
built up by the existing partners, who must be compensated for this. Even if Goodwill does
not appear on the books, a value must be placed on it. A Goodwill account is opened, and
the necessary adjustments recorded.
If it decided that an account for Goodwill will be kept on the books the entries may be
summarised as
Debit Goodwill account
Credit Capital accounts of the
partners in the old firm

with the Goodwill split in

the old profit-sharing ratio.

In this case the Goodwill account remains open and would appear in any future Balance
Sheet as an Intangible Fixed asset.

PARTNERSHIP CHANGES

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AL WADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

NOTES

If it decided that an account for Goodwill will not be kept on the books, the entries may
be summarised as
Debit Goodwill account
Credit Capital accounts of the
partners in the old firm

with the Goodwill split in

the old profit-sharing ratio.

Debit Capital accounts of the

partners in the new firm
Credit Goodwill account

with the Goodwill split in

the new profit-sharing ratio.

In this case, the Goodwill account is opened and then immediately closed.
Example 1:
Ann and Joe are in partnership. Their financial year ends on 31 July. They share profits and
losses in proportion to the capital invested by each partner. On 1 August 2007 their Capitals
were
Ann $8 000
Joe $12 000
Goodwill did not appear on the books but was valued at $6 000 on 1 August 2007.On that
date they decided to admit Ken to the partnership. He agreed to pay $10 000 into the
business bank account. Profits and losses in the new partnership are to be shared in the
ratio
Ann 2/6
Joe 3/6
Ken 1/6
(a) Assume that Goodwill is to be kept on the books. Show the Goodwill account and
the Capital accounts of Ann, Joe and Ken immediately after the admission of Ken.
(b) Assume hat goodwill is not to be kept on the books. Show the Goodwill account
and the Capital accounts of Ann, Joe and Ken immediately after the admission of
Ken.
Suggested Answer:
Ann, Joe and Ken
(a) Assuming Goodwill is kept on the books

2007
Aug 1

2007
Aug 2

Goodwill Account
$
2007
Aug 1
2 400
3 600
6 000

Capital:
Ann
Joe
Balance

b/d

PARTNERSHIP CHANGES

$
Balance

c/d

6 000
_____
6 000

6 000

Page 2

AL WADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

Ann
$
2007
Aug 1

Balance

c/d

10400
10400

Capital Accounts
Ken
$
2007
15600 10000 Aug 1 Balance
Bank
Goodwill
15600 10000
2007
Aug 2 Balance

Joe
$

NOTES

Ann
$
b/d

Joe
$

Ken
$

8000

12000

2400
10400

3600
15600

10000

10400

15600

10000

10000

b/d

(b) Assuming Goodwill is not kept on the books

2007
Aug 1

Goodwill Account
$
2007
Aug 1
2400
3600

Capital:
Ann
Joe

$
Capital:
Ann
Joe
Ken

6 000
Ann
$
2007
Aug 1

Goodwill
Balance

2000
c/d

8400
10400

Capital Accounts
Ken
$
2007
3000
1000 Aug 1 Balance
Bank
12600
9000
Goodwill
15600 10000
2007
Aug 2 Balance

Joe
$

2 000
3 000
1 000
6 000
Ann
$

b/d

Joe
$

8000

12000

2400
10400

3600
15600

10000

8400

12600

9000

10000

b/d

Apportionment of profit
Partnership changes often occur in the middle of a firms financial year. If a Profit and Loss
Account is not prepared at the time of the change, the profit or loss for the financial year
must be apportioned between the periods before and after the change.
If the profit is assumed to have been earned evenly throughout the year, it should be divided
between the old and new partnerships on a time basis. However, some expenses may not
have been incurred on a time basis and these must be allocated to the period to which they
belong. Such expenses will be specified in a question. Apportionment of profit or loss is
shown in a Profit and Loss Account prepared in columnar form.

PARTNERSHIP CHANGES

Ken
$

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AL WADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

NOTES

Example 2:
A and B are partners sharing profits and losses equally after allowing A a salary of
$20000 per annum. On 1 January 2006 their Capital and Current account balances were as
follows.
A
B
$
$
Capital accounts
50 000
40 000
Current accounts
15 000
10 000
On 1 July 2006, the partners agree to the following revised terms of partnership.
1. A to transfer $10000 from his Capital account to a Loan account on which he would be
entitled to interest at 10% per annum.
2. B to bring his private car into the firm at a valuation of $24000.
3. B to receive a salary of $10000 per annum.
4. Profits and losses to be shared: A

3
2
,B
5
5

Further information for the year ended 31 December 2006 is as follows.

Sales (spread evenly throughout the year)
Cost of sales
Rent
Wages
General expenses

$
400 000
175 000
50 000
70 000
30 000

Of the general expenses, $10000 was incurred in the six months to 30 June 2006. Bs car is
to be depreciated over four years on the straight-line basis and is assumed to have no
value at the end of that time. All sales produce a uniform rate of gross profit.
Required:
(a) Prepare the Trading and Profit and Loss and Appropriation Accounts for the year ended
31 December 2006.
(b) Prepare the partners Current accounts for the year ended 31 December 2006.
Answer:
(a)
A and B
Trading and Profit and Loss and Appropriation Account for
the year ended 31 December 2006
$
400000

Sales

PARTNERSHIP CHANGES

Page 4

AL WADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

Less Cost of sales
Gross profit c/d

Gross profit b/d

Rent
Wages
General expenses
Interest on loan
Depreciation - car
Net profit
Less
Salary:

6 months to
30 June 2006
$
$
112500
25000
35000
10000
(70000)
42500

6 months to
31 December 2006
$
$
112500
25000
35000
20000
500
3000
(83500)
29000

10000
32500

5000
24000

A
B

Share of profit: A 1 2
B

12

(b)
2006
Dec 31 Balance c/d

16250
16250

32500

3 5 14400

2 5 9600

Partners Current Accounts

A
B
$
$
2006
55650
40850 Jan 1 Balance b/d
Dec 31 Salary
Share of profit
55650
40850
2007
Jan 1 Balance b/d

NOTES

(175000)
225000
Year to
31 December 2006
$
$
225000
50000
70000
30000
500
3000
(153500)
71500
10000
5000

15000
56500

30650
24000

25850

56500

A
$
15000
10000
30650
55650

B
$
10000
5000
25850
40850

55650

40850

Revaluation and Partnerships

A change in a partnership, such as a partner leaving, will require a REVALUATION of asset
values. This is because the partner will want to withdraw any profit that has resulted from the
increase in asset values. Revaluations are necessary when the book values of assets in the
balance sheet are not the same as their net realisable value, ie their market value. This
arises for the following reasons.

Assets such as land and buildings are likely to appreciate in value over time. This is
particularly true for property values in times of inflation.
Assets such as vehicles, machinery and computers might fall in value faster than
expected due to excessive wear and tear or obsolescence.

Any increase or decrease in values of Assets is adjusted through a Revaluation Account to

the Partners Capital Accounts. The adjustment must be made in their gain or loss in
values has occurred before the ratios were changed.

PARTNERSHIP CHANGES

Page 5

AL WADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

NOTES

Example: Hanson and Williams are in Partnership sharing Profits and losses equally. On 1
January 2007 they agree to change the Profit-sharing ratio so that they will share Profits and
losses as 2:1 in future. The Partnership Balance Sheet at 31 December 2006 was as
follows:

Balance sheet of Hanson and Williams (before revaluation of assets)

Balance Sheet as at 31.12.06
$
$
Fixed assets
Premises
85,000
Less depreciation
5,000
80,000
Van
15,000
Less Depreciation
1,000
14,000
94,000
Current assets
18,000
Less Current liabilities
11,000
Net current assets
7,000
Net assets
101,000
Financed by
Capital accounts:
Hanson
20,000
Williams
15,000
35,000
Current accounts:
Hanson
44,000
Williams
22,000
66,000
Capital employed
101,000
The partners agree that the assets shall be revalued at 1 January 2007:
$
Premises
120000
Vann
11000
Required:
(a) Prepare Journal entries to give effect to the revaluation of the assets in the
Partnership books.
(b) Prepare Revaluation Account, Assets Accounts, and Partners Capital Account.
(c) Prepare a redrafted Balance sheet as at 1 Jan 2007 after the assets have been
revalued.
Answer:
(a)
Journal
Premises

PARTNERSHIP CHANGES

$
40000

Page 6

AL WADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

Van
Revaluation account
(Revaluation of assets at 1 Jan 2007)
Revaluation account
Capital accounts: Hanson
Williams

NOTES

3000
37000
37000
18500
18500

(Profit on revaluation of assets credited to the partners

Capital accounts in their profit sharing ratios:
Hanson (), Williams ())
Note that the profit is credited to the partners capital accounts rather than their current
accounts because the profit has not yet been realised. In other words, the profit has not
actually been made until the property is sold. If the profit was credited to the partners
current accounts it might be withdrawn and then place a financial strain on the business.
Since the profit has not been realised, there might not be enough money in the business for
partners to draw on.
(b)
Revaluation Account
$ 2007
1 Jan
3,000 Premises

2007
1 Jan
Van
Capital accounts:
Hanson ()
Williams ()

18,500
18,500
40,000
Premises Account
$
2007
1 Jan
80,000 Balance c/d
40,000
120,000
120,000

2007
1 Jan
Balance b/d
Revaluation
Balance b/d

Van Account
$
2007
1 Jan
14,000 Revaluation
Balance c/d
14,000
11,000

2007
1 Jan
Balance b/d
Balance b/d

2007

Hanson
$

Partners Capital Accounts

Williams
$
2007

PARTNERSHIP CHANGES

$
40,000
______
40,000

$
120,000
______
120,000

$
3,000
11,000
14,000

Hanson Williams
$
$

Page 7

AL WADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

1 Jan
Balances c/d

38,500
______
38,500

1 Jan
33,500 Balances b/d
______ Revaluation
33,500
Balances b/d

(c)

20,000
18,500
38,500
38,500

NOTES

15,000
18,500
33,500
33,500

Hanson and Williams

Balance Sheet
As at 1 Jan 2007
Fixed Assets:
Premises (80 + 40)
Van (14 3)

$
120000
11000

$
131000

Current Assets:
Current Assets
(-) Current Liabilities:
Current Liabilities
Net Current Assets
Net Assets
Financed by:
Capital Accounts:
Hanson
Williams
Current Accounts:
Hanson
Williams
Capital employed

18000
(11000)
7000
138000

38500
33500
72000
44000
22000

66000
138000

Introduction of new, or the retirement of an existing, partner

When a partner leaves a firm, or a new partner joins, it marks the end of one partnership
and the beginning of a new one. As in the case of a simple change in profit- sharing ratios, a
change in partners may occur at any time in a firms financial year, and no entries may be
made in the books to record the change until the end of the year.
Account must be taken of:

Asset revaluation.
Goodwill.
Changes in the profit/loss-sharing ratios.

PARTNERSHIP CHANGES

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AL WADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

NOTES

Worked Example 1:
(Retirement of old partner & Admission of new partner)
Ford, Susan and Tom are partners sharing and losses in the ratio of 6:3:1 respectively. On
30th September 2006, Susan retired. On the same day, Ford and Tom decided to admit Flora
as a new partner. The new profit-sharing ratio will be, Ford: Tom: Flora 3:2:1. The balance
sheet of the old partnership, Ford, Susan and tom at 30 September 2006 was as follows:

$
Premises
Machinery
Motor Vehicles
Equipment
Stock
Debtors
(-)Provision for bad debts
Bank

54,000
(5,000)

$
295,000 Capital Accounts:
243,000
Ford
51,000
Susan
27,000
Tom
34,000 Current Accounts:
Ford
49,000
Susan
34,600
Tom
Loan from Susan
Loan from Flora
_______ Creditors
733,600

320,000
280,000
120,000

620,000

14,000
7,000
3,000

24,000
25,000
40,000
24,600
733,600

The following were the terms and conditions for the retirement of Susan and admission of
Flora:
(1)
(2)

Goodwill is valued at $150,000 but goodwill account is not to be opened in the

books.
Assets are to be revalued as follows:
$
$
Premises
320,000
Equipment
24,000
Machinery
235,000
Stock
32,000
Motor vehicles
45,000

(3) Bad debts of $4,000 is to be provided.

(4) Provision for bad debts to be increased to 12% of outstanding debtors.
(5) Loan from Flora is to be considered as part of her capital. Flora is also to bring motor
vehicle worth $12,000 and $95,000 by cheque.
(6) Susan will be paid $75,000 by cheque and equipment worth $7,300.
(7) The balance in her capital account is to be treated as loan from her to be paid after four
years.
Required:
(a) Prepare Revaluation account and Partners Capital accounts.
(b) Prepare Balance sheet of the new partnership at 30 September 2006.

PARTNERSHIP CHANGES

Page 9

AL WADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

Answer:

NOTES

Revaluation Account

2006
30 Sept
Machinery
Motor vehicles
Equipment
Stock
Bad Debts
Increase in provision for b/d
Gain on Revaluation:
(Old Ratios)
Capitals: Ford
Susan
Tom

$
8000
6000
3000
2000
4000
1000

2006
30 Sept
Premises

$
25000

600
300
100
25000

25000

Partners Capital Accounts

2006
30 Sept
Goodwill(w/o)
(new ratio)

Ford
$

Susan
$

75000

Equipment

Tom
$

Flora
$

50000

25000

7300

Bank

75000

Loan from
Susan
Balance c/d

160000
335600
410600

242300

100100
150100

2006
30 Sept
Balance b/d

* Current a/c
Gain on
Revaluation
Goodwill
(Old Ratios)
Partners
Loan
Motor Vehicle
122000 Bank
147000
1 Oct
Balance b/d

Ford
$
320000

Susan
Tom
$
$
18000 120000
7000

600

300

100

90000

30000

30000

25000

40000
12000
95000
410600 242300 150100 147000
335600

100100 122000

* Only include the Current account balance of the partner who is leaving the firm.

Fixed Assets:
Premises

Ford, Tom, Flora

Balance Sheet as at 30 September 2006
$

Machinery
Motor Vehicles (45000 + 12000)
Equipment (24000 7300)

$
320000

235000
57000
16700
628700

Current Assets:

PARTNERSHIP CHANGES

Flora
$

Page 10

AL WADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

Stock
Debtors

54000

(-) Bad Debts

Provision For Bad Debts

(4000)
(6000)

NOTES

32000

Bank (34600 + 95000 75000)

44000
54600
130600

Less Current Liabilities:

Creditors
Net Current Assets

(24600)
106000
734700

Less Long term Liabilities:

Loan from Susan
Net Assets

(160000)
574700

Financed by:
Capital Accounts: Ford
Tom
Flora
Current Accounts:
Ford
Tom
Capital employed

335600
100100
122000

557700

14000
3000

17000
574700

Worked Example 2
(Admission of new partner)
Astle and Jones have shared profits and losses in the ratio of 3:2. On 1 October 2006 they
decided to admit Mark as a partner. No entries to record Marks admittance as a partner
were made in the books before the end of the financial year on 31 December
2006.Information extracted from the books for the year ended 31 December 2006 included
the following.
$
Turnover
800000
Cost of sales
480000
Wages
80000
Rent
16000
General expenses
19200
Depreciation of fixed assets:
1 January to 30 September 2006
12000
1 October to 31 December 2006
8700 (based on asset
revaluation as shown below)
At 31 December 2006 the balances on Astle and Jones Capital and Current accounts were
as follows.
Capital accounts
Current accounts
$
$

PARTNERSHIP CHANGES

Page 11

AL WADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

Astle
Jones

100000
60000

NOTES

4000
6000

On 1 October 2006, the partnership assets were revalued as follows.

$
Freehold premises
100000 increase
Other fixed assets
28000 decrease
Current assets
6000 decrease
The partners agreed the value of Goodwill at 1 October 2006 at $80000 and decided that no
Goodwill account should be opened in the books.
On 1 October 2006, Mark paid $40000 into the firms bank account as capital. On the same
day, Astle lent the partnership $40000. He is entitled to interest at a rate of 10% per annum
on the loan.
The balances on the partners Drawings accounts at 31 December 2006 were as follows.
$
Astle
46000
Jones
34000
Mark
6000
The new partnership agreement provided for the following as from 1 October 2006.
(i) Interest was allowed on the balances on Capital accounts at 31 December each year at
a rate of 5% per annum.
(ii) Jones was entitled to a salary of $24000 per annum.
(iii) The balances of profits and losses were to be shared:
Astle 2/5; Jones 2/5; Mark 1/5
Required:
(a) Prepare the Capital accounts of Astle, Jones and Mark at 31 December 2006.
(b) Prepare the Partnership Trading, Profit and Loss and Appropriation Account for the
year ended 31 December 2006.
(c) Prepare the Partners Current accounts at 31 December 2006.
(a)

Partners Capital accounts

2006
Oct 1 Goodwill
w/o (New ratio)

Astle
$
32000

Jones
$

Mark
$

32000

2006
Jan 1

155600
187600

86400
118400

24000
40000
2007
Jan 1

(b)

Jones
$
60000

Bank
Profit on
revaluation
Goodwill
(old ratios)
Balance b/d

40000

39600

26400

48000
187600

32000
118400

40000

155600

86400

24000

Astle, Jones and Mark

PARTNERSHIP CHANGES

Mark
$
-

16000
Oct 1

Dec 31 Balance
c/d

Balance b/d

Astle
$
100000

Page 12

AL WADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

NOTES

Trading and Profit and Loss and Appropriation Accounts for the year ended 31
December 2006

Turnover
Less Cost of sales
Gross profit c/d
9 months to
30 June 2006
$
$
240000
60000
12000
14400
12000
(98400)
141600

Gross profit b/d

Wages
Rent
General expenses
Interest on loan
Depreciation
Net profit
Interest on capitals: Astle
Jones
Mark

1946
1080
300
3326
6000

Salary: Jones

3
5
2
Jones
5

Profit shares: Astle

Mark

84960
56640
______

(c)
2006
Dec 31

Drawings
Balance

c/d

3 months to
31 December 2006
$
$
80000
20000
4000
4800
1000
8700
(38500)
41500

Astle
$
46000
58776

104776

2

5
2

5
1
141600
5

$
800000
(480000)
320000
Year to
31 December 2006
$
$
320000
80000
16000
19200
1000
20700
(136900)
183100

(9326)
32174

(9326)
173774

12870

97830

12870

69510

6434

6434
32174

Partners Current accounts

Jones Mark
$
$
2006
34000 6000 Jan 1
Balance b/d
48590
734 Dec 31 Loan interest
Interest on
capital
Salary
Profit
82590 6734
2007
Jan 1
Balance b/d

173774

Astle
$
4000
1000

Jones
$
6000
-

Mark
$
-

1946
97830
104776

1080
6000
69510
82590

300
6434
6734

58776

48590

734

Worked Example 3:
(Partner retires)

PARTNERSHIP CHANGES

Page 13

AL WADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

NOTES

Mathew, Steve and Warne have traded in partnership for some years. Mathew decided to
retire on 30 September 2006 but no accounts were prepared for the partnership until the
end of the financial year on 31 December 2006. The following balances have been extracted
from the trial balance at 31 December 2006:
$
Sales
Purchases
Stock at 1 January 2006
Wages
Rent
Heating and lighting
Sundry expenses

$
1440000

800000
40000
200000
52000
42000
24000

Further information
1. Stock at 31 December 2006 cost $48000.
2. At 31 December 2006 rent of $4000 had been prepaid and $2400 had accrued for
heating and lighting.
3. Fixed assets at 1 January 2006 at cost were as follows.
$
Plant and machinery
160000
Office equipment
20000
Additional machinery was purchased on 1 October 2006 for $24000.
4. Depreciation of fixed assets is to be provided at 10% per annum on cost.
5. Goodwill was valued at $90000, but no Goodwill was to be recorded in the books.
6. The Partners Capital and Current account balances at 1 January 2006 were as
follows:
Capital accounts
Current accounts
$
$
Mathew
100000
16000 (CR)
Steve
80000
18000 (CR)
Warne
40000
6000 (DR)
7. The Partners drawings were as follows.
Mathew (up to 30 September 2006)
Up to 31 December 2006:
Steve
Warne

$
60000
100000
64000

8. Mathew left $120000 of his capital in the business as a loan with interest at 10% per
annum. The interest was payable on 30 June and 31 December each year.
9. The partnership agreement up to 30 September 2006 allowed for the following:
Interest on capitals: 8% per annum (based on balances on Capital accounts at
1 January 2006)
Salary: Warne $12000 per annum.
Profit and losses to be shared: Mathew () , Steve ( 1 3 ) , Warne ( 1 6 ).
The agreement was amended on 1 October 2006 as follows.
Interest on capitals: 10% per annum (based on balances on Capital accounts at
1 October 2006).

PARTNERSHIP CHANGES

Page 14

AL WADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

NOTES

Salary: Warne $20000 per annum.

Profits and losses to be shared: Steve ( 3 5 ), Warne ( 2 5 ) .
10. The assets were not revalued at 30 September 2006.
11. It is assumed that gross profit has been earned evenly throughout the year.
Required:
(a) Prepare the Partners Capital accounts.
(b) Prepare the Partnerships Trading, Profit and Loss and Appropriation Accounts for the
year ended 31 December 2006.
(c) Prepare the Partners Current accounts for the year ended 31 December 2006.
Answer:
(a)
2006
Sept 30 Goodwill
Loan a/c
Bank
Dec31Balancec/d

Mathew
$
120000
93500
213500

Partners Capital accounts

Steve
Warne
$
$
2006
54000
36000 Jan 1
Sept 30
56000
110000

Balance b/d
Goodwill
*Current a/c

19000
55000
2007
Jan 1

Mathew
$
100000
45000
68500

Steve
$
80000
30000

Warne
$
40000
15000

213500

110000

55000

56000

19000

Balance b/d

The balance on the outgoing partners Current account is transferred to Capital account.
(b)

Mathew, Steve and Warne

Trading and Profit and Loss and Appropriation Accounts for the year ended 31
December 2006
$
$
Sales
1440000
Less Cost of sales:
Stock at 1.1.06
40000
Purchases
800000
840000
Less Stock at 31.12.06
(48000)
(792000)
Gross Profit
648000

Gross Profit
Wages
Rent (52 4)
Heating and lighting (42 + 2.4)
Sundry expenses
Depreciation: Plant and machinery
Office equipment
Interest on loan

9 months to 30.9.06
$
$
486000
150000
36000
33300
18000
12000
1500
(250800)

PARTNERSHIP CHANGES

3 months to 31.12.06
$
$
50000
12000
11100
6000
4600
500
3000

Total
$

$
648000

200000
48000
44400
24000
16600
2000
3000
(87200)

(338000)

Page 15

AL WADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

Net profit
Interest on capital:

Salary:
Salary of profits:

235200
Mathew
Steve
Warne
Warne

6000
4800
2400
13200
9000

Mathew
Steve
Warne

106500
71000
35500

(22200)
213000
213000

NOTES

74800
1400*
475*
1875
5000
40755
27170

310000
6000
6200
2875
15075
14000

(6875)
67925

106500
111755
62670

67925

(29075)
280925
280925

On capital balances of $56000 and $19000 respectively.

Partners Current accounts
Steve Warne
$
$
2006
6000 Jan 1 Balance b/d
60000
Int. on Capital
68500
Profit
100000 64000 Dec31 Int. on Capital
35955
9545
Salary
Profit
128500 135955 79545
2007
Jan 1 Balance b/d

Mathew
$

2006
Jan 1
Sept 30

Balancesb/d
Drawings
* Capital a/c
Drawings
Balance c/d

Dec 31

Mathew
$
16000
6000
106500
128500

Steve
$
18000

Warne
$

6200
111755
135955

2875
14000
62670
79545

35955

9545

The balance on the outgoing partners Current account is transferred to Capital account.
PARTNERSHIP CHANGES LAYOUTS
PARTNERSHIP ADMISSION
Example: Lets suppose A and B are existing partners and C has joined the firm.

* Balance b/d
Interest on Drawings
Drawings - Cash
- Stocks
- Fixed Assets
* Share of Losses
Balance c/d
Balance b/d

A
$
xx
xx
xx
xx
xx
xx
xx
xxx
xx

CURRENT ACCOUNTS
B
C
$
$
xx
xx
* Balance b/d
xx
xx
Interest on Capitals
xx
xx
Interest on Partners Loans
xx
xx
Salaries
xx
xx
Commissions
xx
xx
* Share of Profits
xx
xx
Balance c/d
xxx
xxx
xx
xx
Balance b/d

A
$
xx
xx
xx
xx
xx
xx
xx
xxx
xx

B
$
xx
xx
xx
xx
xx
xx
xx
xxx
xx

Distribution would be of either Profits or Losses.

PARTNERSHIP CHANGES

Page 16

C
$
xx
xx
xx
xx
xx
xx
xx
xxx
xx

AL WADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

NOTES

Current Account Balances may be either Debit or Credit.

A
$
Goodwill written off (New
Ratios)
* Loss on Revaluation (old
Ratios)
Revaluation written off (New
Ratios)

Balance c/d

xx
xx
xx

xx
xxx

CAPITAL ACCOUNTS
B
C
$
$
Balance b/d
xx
xx
Bank ( C Investment)
xx
Various Assets
xx
xx
* Gain on Revaluation (old
Ratios)
Goodwill (old Ratios)
xx
xx
xxx
xxx
Balance b/d

A
$
xx

B
$
xx

C
$
-

xx

xx

xx
xx

xx
xx

xxx
xx

xxx
xx

xxx
xx

B
$
xx
xx
xx
xx
xx
xx
xx
xxx
xx

C
$
xx
xx
xx
xx
xx
xx
xx
xxx
xx

Distribution would be of either Revaluation Gain or Loss.

Revaluation Gain or Loss would always be recorded in the Capital Accounts.

Goodwill and Revaluation Gain would be distributed according to the old ratios
between old partners and written off according to the new ratios between all existing
partners.

PARTNERSHIP RETIREMENT
Example: Lets suppose A, B and C are existing partners and A has decided to retire from
the Partnership.

Balance b/d
Interest on Drawings
Drawings - Cash
- Stocks
- Fixed Assets
* Share of Losses
* Transfer to Capital a/c
Balance c/d
Balance b/d

A
$
xx
xx
xx
xx
xx
xx
xx
xxx
-

PARTNERSHIP CHANGES

CURRENT ACCOUNTS
B
C
$
$
xx
xx
Balance b/d
xx
xx
Interest on Capitals
xx
xx
Interest on Partners Loans
xx
xx
Salaries
xx
xx
Commissions
xx
xx
* Share of Profits
* Transfer to Capital a/c
xx
xx
Balance c/d
xxx
xxx
xx
xx
Balance b/d

A
$
xx
xx
xx
xx
xx
xx
xx
xxx
-

Page 17

AL WADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12

NOTES

Distribution would be of either Profits or Losses.

At the retirement date, A Current Account Balance would be transferred to the Capital
Account.
A
$
Goodwill written off (New
Ratios)
* Loss on Revaluation (old
Ratios)
Revaluation written off (New
Ratios)
* Current Account balance
* Loan from A (new)
* Cash/ Bank
Balance c/d

xx
xx
xx
xx
xxx

CAPITAL ACCOUNTS
B
C
$
$
Balance b/d
xx
xx
* Gain on Revaluation (old
xx
xx
Ratios)
Goodwill (old Ratios)
xx
xx
* Current Account balance
* Loan from A (old)
* Cash/ Bank
xx
xx
xxx
xxx
Balance b/d

A
$
xx

B
$
xx

C
$
xx

xx
xx

xx
xx

xx
xx

xx
xx
xx

xxx
-

xxx
xx

xxx
xx

Retiring partners loan would be transferred to his Capital account.

Retiring partner can also keep his investment in the form of Loan to the partnership.

Note that there would never be a balance remaining in the retiring partners Capital
Account. He can either withdraw or invest cash into the firm.

PARTNERSHIP CHANGES

Page 18