How Cindys Caf became

Cindys & Fionas Delightful Diner

An Accounting Tale
From a Sole Trader to a Partnership

By

Cindy Lakhram

TITLE Copyright 2013 by Author Name.

All rights reserved. Printed in the United States of America. No part of this book may be used or reproduced in any manner
whatsoever without written permission except in the case of brief quotations em- bodied in critical articles or reviews.
This book is a work of fiction. Names, characters, businesses, organiza- tions, places, events and incidents either are the product of
the authors imagination or are used fictitiously. Any resemblance to actual persons, living or dead, events, or locales is entirely
coincidental.

For information contact; address www.website.com

Book and Cover design by Designer

ISBN: 123456789
First Edition: Month 2013

10 9 8 7 6 5 4 3 2 1

CONTENTS
INTRODUCTION ........................................................................ 2
CHAPTER ONE .......................................................................... 6
CHAPTER TWO.......................................................................... 9
CHAPTER THREE .................................................................... 11
CHAPTER FOUR ...................................................................... 17
THE FINAL CHAPTER............................................................. 18
Acknowledgments .................................................................... 329

|2

INTRODUCTION

IT all started as a simple as a dream to market my tasty cakes and desert. A place where my customers
can relax and share their experiences of the day. A place where everyone left feeling satisfied and
happy. I was the owner of my business contributing all the capital, took all the risk and collected the
handsome profits. In accounting language this is called a sole trader. Business was good. You know
how they say love what you do and you wont have to work a day in your life. Well I did not feel like I
was working. Everyone at my caf felt like my family and I was happy to serve my family.

Here are some of the features of a sole trader.

My business was located in the heart of the borough of Point Fortin. A town know for its major
contribution to our country Gross Domestic Product. The year 2009 was the year that brough a huge change
to my business. During this time there was an increase in industrial development in the area and my clientele
increase by almost double. I know had trouble remembering my customers names and my book keeping skills
fell drasctically but it seems as though my profits increased. Yet I had no control. This was bittersweet as my
small restaurant was insufficient to accommodate my clientele, who sometimes had to seek parking and
seating accommodation at my neighbor and close friends front porch. Fiona didnt mind at all as she often
waited patiently for leftovers on a daily basis and I was grateful to for her accommodation to my customers
and the delightful evening coversation.
Eventually, some customers started going to the main competitor. Thankfully, my products were one of a
kind so most of my customers were loyal. This was a great concern to me. One night Fiona suggested if we
can pool our resources together and my problem would be alleviated. Are you serious? I asked Fiona. But I
could tell she was by the glimmer in her eyes. Yes think about it Fiona said I have the extra financial resources
that you need and you already have the expertise. This type of business is called a partnership business. That
weekend I spent hours at the library learning as much as I can about Partnership businesses. I knew I could
trust Fiona but was I capable of running a Partnership business? Would I have to work harder? Woud it mean
less profits for me? Can I still have contact with my customers?
And so this was the beginning of a new era for Cindys caf.

Why dont
merge
resources?

we
our

I wonder if she
means a
Partnership

|4

This book is a narrative story that seeks to provide the form four and five 5 student with a more
practical accounting understanding of the following key points of the type of business known as
Partnership. Highlighted in this book are the following :

1. Features of a partnership
2. Partnership agreements
3. Accounting for the formation of a partnership
4. Appropriation of Profit and Loss.
5. The balance sheet.

|6

CHAPTER ONE
WELCOME TO CINDYS AND FIONAS
Feactures of a partnership

One month later Fiona and I pooled our resources and became co-owners of Cindy & Fionas Delightful

Diner. Things change obviously. Besides the name I now shared ownership of the business with Fiona. We
were able to extend the size of the caf thanks to Fiona contribution of extra land and finance. Together Fiona
and I agreed to pool our assets and liabilities and were dedicated to sharing high profits. This quite fits the
description of a partnership, which is a form of organization where two to twenty persons are associated to
operate a business entity with a view to earn profit. Each member of such a group is individually known as
partner and collectively the members are known as a partnership firm.

Three months later and business was good. For us this meant that our customers expressed how happy they
were with the service and the safe and comfortable environment. It was late one rainy Friday afternoon and
Lindsay one of my loyal customers and I were reminiscing on the early days of the restaurant. She said she
had loved the cosy feeling of the small caf. Then she asked, Why did you enter into this partnership? Well,
I said, to me my customers are most important and it was impossible to accommodate everyone in the small
structure. Lindsay laughed loudly, No no I meant couldnt you have made these changes as a single owner?

Maybe it was possible to achieve as a sole trader but there were several reasons why I chose to enter into this
agreement. Here are four main reasons:

Combined CapitalAs a sole trader I did not have the required amount of capital that was needed to expand my my caf. Fiona
provided the additional capital that was needed. Though I had the money to purchase a larger building I did
not want to change my location.

Combined Skills- While I am an excellent chef I was falling behind in my Managegrial and Bookeepig Skills.
In a matter of weeks Fiona was able to develop a computerized inventory and accounting system.

Social Reason entering into this partnership arrangement also meant that I did not have to be at the diner all
day, all night . Some days Fiona would manage things all by herself and with the extra capital, we were able to
hire extra employees.

As I explained these reasons to Lindsay I also remembered to remind her of another key element of the any
partnership type business. That is the partnership agreement. Now Fiona and I were very close friends for
many years. We share common interests, she was also there for me through heartbreaks from old boyfriends at
high school, even shared happy moments at partying together and riding our bicycle to the beach on
afternoons. If anyone understood what this business meant to me it was her. I trusted her, this made her a good

|8
candidate to enter into a partnership with. However the stress and strains of business life things can go crazy
sometimes and in the business world there is the need for legal documentation. This brings us to another
important aspect known as the Partnership Agreement.

CHAPTER TWO
THE PARTNERSHIP AGREEMENT

FIONA AND I CHERISHED OUR FRIENDSHIP and so in order to avoid misunderstandings about how
profits/losses are shared, the responsibilities of each partner, and other ownership, management, and operating
decisions we decided to have a formal legal partnership agreement which spelt out the rights and obligations of
each partner.
This agreement contained information regarding the terms and conditions of our partnership agreement. For
example the amount of capital both Fiona and myself contributed to the business. The amount of interest we
would receive on our capital, loans, drawing i.e withdrawals from the business for personal use, loans to and from
partners. The ratio or proportion of how profit or losses are to be shared amongst oversleves as business partners
and the amount of salaries we should be paid.
Lindsay asked, Was this agreement necessary? To me it was just a measure to avoid conflict but in the
event that there wasnt any we would have to abide by the Partnership Act of Trinidad and Tobago.

Terms in the Partnership Agreement may include:

Amount of capital to be contributed by each partners

Ratio in which profits and loss to be shared between partners

Rate of interest, if any to be allowed on partners capital

Rate of interest, if any, to be charged on partners drawings

Rate of interest, if any, to be allowed on partners loans to firm

Salaries to be paid to the partners

In the absence of partnership agreement, the Partnership Ordinance applies which states:

| 10

All partners may contribute capital equally

Profits and losses are to be share by partners equally

No interest is to be paid on capital

No interest is to be charged on partners drawings

Partners are entitled to interest of 5% per annum on loans to the firm

No salaries are allowed to partners

Lindsay seemed quite interested in kowing about the partnership agreement so I found a sample of an
agreement and showed it to her. By this time the rain subsided and we greeting each other good night. And I
turned off the lights in the restaurant and called it a day. Oh! How have my business operations changed?

Here is a sample of an agreement.

Our partnership agreement stated:

Cindy and Fiona hereby agree to start a partnership to be called Cindy and Fionas

Delightful Diner agree on the following terms.

1. Each partner will subscribe capital in the form of assets and

liabilities.

2. Profits and losses will be shared in the ratio Cindy: 3 and Fiona 2.
3. Interest on Capital at the rate of 10 % per year will be credited.
4. Each partner will receive a monthly salary .
5. Any partner who makes withdrawals of cash, stock or other asset of the partnership will pay interest on
drawings .
6. The partnership will maintain separate Capital and Current Accounts as well as Drawings Account for
each Partnership.
7. Procedures for the entry and exit for partners will be decided on at the end of the first year of the
operations.

| 12

CHAPTER THREE-PARTNERSHIP ACCOUNTS

Everyday is a new experience in the world of business I thought to myself as I sat at my office desk entering
invoices into the perpetual computerized accounting system. My thoughts was interrupted by a strange gentlemen
who said he was my new Accountant. He was here to help me understand the accounting procedure for my
partnership business. That day I learnt alot!
Partnership accounts were similar to my as sole trader accounts I practiced. In that the partnership business
does follow the accounting cycle. This means that it was similar in the steps in which I used to enter transactions.

Here are key features to note:

INTEREST ON PARTNERS CAPTIAL:
The partners may also agree to reward the partners at a fixed rate, in relation to the amount of capital Fiona and I
brought to the business. This is called interest on capital.

SHARE IF RESIDUAL PROFIT / LOSS:

After fulfilling these terms if their agreement, Fiona and I will enjoy a share or appropriation of any remaining or
residual profit of the partnership. We will also bear a share of loss. The proportion of profit or loss was agreed by
the both of us.

DRAWING AND INTEREST ON DRAWINGS:

This highly productive caf was the result of hardwork and dedication on both partners. So we both agreed that
each of us will be able to withdraw money or stock from the business in order to receive our benefit of the
business. Either partner may take money out of the bank that may be needed to pay our creditors. However if

13

there is the need for early withdrawals then we agreed that a fixed percentage rate for early withdrawal of his
benefits. This may help or discourage us from doing so, this is called interest on drawings.

PARTNERS LOAN TO THE PARTNERSHIP:

There may be occasions where either partner will need to lend money or other assets to the partnership business.
This is any asset lent to the business outside of the asset we agreed to contribute. As with any other loan the
business must pay interest. We agreed that the interest on loans would be 5%. This represents an expense to the
business in the Profit and Loss Account and not as an appropriation of profit.

So if we think about it these benefits, withdrawals and charges will have an effect on the amount we contributed
to the business which our capital is owned to us the partner by the partnership business and should be recorded
accordingly.

ACCOUNTING PROCEDURES
It is quite clear that as partners both member maintains a relationship with the business and all the transactions
between the partner and the business must be recorded. There are two ways in which this can be done:

THE FLUCTUATING CAPITAL ACCOUNT:

Each partner will have two accounts in the general ledger:

A Capital Account

A Drawings Account

All changes in the amount owed to the partners is recorded in the Capital Account, hence the balance will
fluctuate or change after every appropriation.

| 14

THE FIXED CAPITAL ACCOUNT:

We were advised to use this method. All changes in the amount owed to the partner will be recorded in the current
account i.e. interest on loans on loans from partners. The CAPITAL account will remain unchanged hence the
term fixed capital account
Each partner will have three accounts in the general ledger:

A Capital Account

A Drawings Account

A Current Account

15

STEPS IN PARTNERSHIP ACCOUNTING:

1. OPEN JOURNAL ENTRIES LISTING ALL ASSETS & LIABILITES BROUGHT
BY THE PARTNERS
2. POSTING TO THE LEDGERS- CAPITAL & DRAWINGS ACCOUNT.
3. PREPARATION OF FINAL ACCOUNTS

The Partnership final accounts included the :

Trading and Profit & Loss Account
The Approriation Account
The Current Account of Partner
The Balance Sheet

| 16

17

CHAPTER FOUR
THE TRADING AND PROFIT AND LOSS ACCOUNT FOR PARTNERSHIP
THE TRADING AND PROFIT AND LOSS FOR THE PARNERSHIP IS SIMILAR TO THE SOLE
TRADERS EXCEPT FOR THE SECTION UNDER THE PROFIT AND LOSS KNOWN AS THE
APPROPRIATION ACCOUNT. Hearing the term Appropriation Account made me quite nervous. So I decided
to aks Mr. Smart the Accountant who I felt was more of a food critic than an accountant as he sampled every type
of pastry I had to offer on that day.

I realized that completing final entries for my business as a partnership is not so difficult.

| 18

THE PARTNERSHIP FINAL ACCOUNTS

The Profit and Loss Appropriation Account is drawn under the trading and profit and loss account. It shows the
distribution of profits between Fiona and myself. The Capital Accounts on the other hand these accounts record the
amount of capital by each partners.

Whereas the Current Account can be simply explained as when the partnership makes profit/loss, and the
partners take the firms resources for private uses and sometimes there maybe a fluctuation in the partners
capital balances. A current account is set up to maintain constant capital balances of the partners as stated in the
agreement.

Current account is to record:

Share of profit /loss

Interest on capital

Interest on drawings

Interest on loans

Drawings

Partners salaries

19

HERE

IS

SIMPLE

TABLE

TO

HELP

YOU

REMEMBER

| 20
HERE IS A SAMPLE OF THE PROFIT & LOSS APPROPRIATION

21

| 22

THE CAPITAL AND

CURRENT ACCOUNT

23

CINDY

DECLARES

THAT

SHE

OWNS

ASSETS:

TOOLS AND EQUIPMENT

$
56000

DEBTORS

12600

STOCK

25100

CASH

7100

CREDITORS

7800

BANK LOAN

6000

THE

| 24
FOLLOWING

25

FIONA DECLARES THAT SHE OWNS THE FOLLOWING ASSETS:

AFTER

PROPERTY

$
63400

TOOLS AND EQUIPMENT

10500

STOCK

3100

BANK

1100

DRAWING

UP

JOURNAL ENTRIES.

THE

AGREEMENT

WE

THEN

DREW

UP

THE

| 26
THE OPENING JOURNAL ENTRY FOR

Cindys & Fionas Delightful Diner

27

Cindys & Fionas Delightful Diner

TRIAL BALANCE AS AT 31 DEC, 2015

DETAILS

DEBIT
$

CREDIT
$

CAPITAL: CINDY

87000

CAPITAL: FIONA

79000

PROPERTY

64300

TOOLS & EQUIPMENT

66500

OPENING AND STOCK

28200

SALES
PURCHASES

310000
239000

RETURN OUTWARDS

6200

DISCOUNT RECEIVED

3800

WAGES

32000

DEBTORS

25600

CREDITORS

20700

DRAWINGS:CINDY

17000

DRAWINGS: FIONA

15000

BANK LOAN

6000

BANK
BALANCES

24300
512700

512700

| 28
CINDY AND FIONAS DELIGHTFUL DINER
PROFIT AND LOSS APPROPPRIATION ACCOUNT
FOR THE YEAR ENDED 31 DEC, 2015.
Interest On Capital:
Cindy(10% Of 87000)
Fiona (10% Of 79000)

Salary :
Cindy
Fiona

Share of Residual
Profit
Cindy (3/5)
Fiona (2/5)

Net profit b/d

87000 Interest on Drawings:
79000 Cindy (5% x 17000)
Fiona (5% x 15000)

47100
850
750

48700
12000
12000

4860
3240

48700

48700

29

If the firm had made a loss instead of a profit, the net loss would have been brought down on the debit side.

CINDY AND FIONAS DELIGHTFUL DINER

CURRENT ACCOUNTS

CINDY
Interest
on
drawings
Balance c/d

FIONA
850
17000
7710

25560

CINDY
750 Interest
15000 Capital
7390 Salary
Share
profit
25560
Balance b/d

on

FIONA
8700
12000
4860

of

25560

25560

7710

7710

The Balance Represents The Amounts That

Fio na Could Withdraw Fro m The Bsuiness

7900
12000
3240

Both

Cindy

And

| 30
Cindy And Fionas Delightful Diner
Balance Sheet As At 31st Dec, 2015 (Capital Section only)
CINDY

FIONA

TOTAL

CAPITAL ACCOUNTS

87000

79000

166000

CURRENT ACCOUNTS:

7710

7390

15100

Interest on Capital

8700

7900

16600

Salaries

12000

12000

24000

Share of profits

4860

3240

8100

255560

23140

48700

(17000)

(15000)

(32000)

(850)

(750)

(1600)

7710

7390

15100

Opening Balances

Less: Drawings

The Assets And The Liabilt ies Section Of The Balanceis Quite
Similar To The Sole Trader

31

The Final Chapter

As I mingle with other business owners I realise that partnerships are a popular means of organizing small
businesses. I suppose its because of several advantages of more capital and specilisation amoung others.
But you must first decide on the type of partnership that suits your company whether a general, limited and
limited liability partnership. This should be followed by a legally sanctioned partnership agreement. I
would recommend a partnership type business for a small business. Tomorrow is another day @ the diner
and i look for to it! This business would not have been successful without my partner without the combined
resources my business would not be a successful as it is today.

| 32

Acknowledgments

I would like to thank my mother for all her support, encouragement thorugh this editing process.My esteemed
lecturer Ms. Lisa Perez for all her expert advice in the field of Accounting.