PARTNERSHIP

Notes By Talha Mahmood Bhatti.

Partnerships
There are two other types of businesses, apart from
sole proprietors, that you are required to know. These
are partnerships and limited liability companies.

A partnership is a type of business

entity that is owned by a minimum of
two persons and a maximum of 20.

All partnership firm's must adhere to

the laws laid out in the partnership
Act of 1980. When a partnership is
set up, the partners usually form an
agreement called a 'Partnership
Agreement' or 'Deed of Partnership'.

This agreement usually

contains the following
details.
The total capital contributed by each partner.
The rate of interest to be paid on each partner's
capital.
The rate of interest to be charged on Drawings.
Salary (s) to be paid to a partner(s)
The ratio in which profits and losses should be
shared.
The procedures to be followed if a partner dies,
or if a
new partner wishes to enter.

The Trading and Profit and Loss

account of a partnership is the same
as that of a Sole Trader, as long as it
is a Trading concern.

However, the profit and loss

extends to another section
called the appropriation
account. The Net Profit is
brought down in this account
and is shared up among the
partners. Using the horizontal
format, here is an example of
the appropriation account.
Each item is later discussed.

Appropriation A/c for Dick and Jane Ltd

for the year ended Dec 20th 2005
Net Profit B/D

xxx

Add Interest on Drawings

Less: Interest on Capital
Salary: Dick
Jane
(xxx)

$
xxx

xxx
xxx

(xxx)
(xxx)

xxx

Share of Profits:
Dick
Jane
xxx

50%
50%

xxx
xxx

INTEREST ON
DRAWINGS
This is an amount that is charged to each partner in an effort
to discourage them from withdrawing profits from the firm.
The lesser the amount withdrawn, the greater the amount
that will be available for distribution.

INTEREST ON CAPITAL
This represents revenue to
each partner, as sometimes
they contribute different
amounts of capital. The idea is
that, if the partners had
invested or saved that money
otherwise, they would have
earned interest on it.

SALARY
A partner may be awarded an
additional amount as 'salary',
if he has additional
responsibilities.
The interest on Drawings is
added to the Net Profit, in
order to 'swell' the firm's
revenue. Interest on Capital
and Salary are paid before
profits are shared up.

SHARE OF PROFITS
After paying the interest on
capital and salary, the
balance of profits is shared up
according to the 'profit
sharing ratio' decided by the
partners. This ratio may vary,
for example, they may decide
to share profits according to
the proportion in which
capital was contributed.

Current Accounts

The Current Accounts of partners is like a mirror

image of the appropriation account. On the credit
side are items which represent what the partners are
entitled to, that is, salaries, share of profits and
interest on capital.

The Debit side has items which

represent a cost to the partners, such
as "drawings" and "interest on
drawings". The current account is
balanced off at the end of the month.

Here is an example of the format.

Merged Current A/c

It is also
possible to
merge the
partners
current a/c
into one. As
is shown in
the example
below:

Details

Dick
$

Jane
$

Details

Dick
$

Jane
$

Drawings

Xxx

Xxx

Bal b/f
Salary

Xxx
Xxx

Xxx
___

Interest on
drawings

Xxx

Xxx

Interest on
capital

Xxx
____
xxx

Xxx
____
xxx

Balance c/d

Xxx
xxx

Xxx
xxx

Problem 1
Joan and John are in
partnerships sharing profits
and/or losses equally. The
following balance were
extracted from there books at
31 December 2003:
Joan

John

Capitals
20,000
30,000
Current A/cs
10,000
5,000
Drawings
8,000
6,000
Net Profit
$ 40,000

The partnership agreement provides

that:
Interest on capital is to be paid at
10% per annum
Joan is to receive a salary of $8,000
Interest on drawings is 15%

Required:

Construct Joan and Johns

appropriation a/c.
Draw up the merged/joint
current account for the
partners showing the balances
at the end.