Week 7:

Partnerships,
Corporations & Other
Organisations

LO 1

Proprietorships
A proprietorship is a company owned
by a single individual.
Simple to form
No limitation on legal liability
Not taxable
Limited life
Limited ability to raise capital (funds)

LO 1

Partnerships
A partnership is an association of 2 or
more persons who own and manage a
business for profit.
No limitation on legal liability
Not taxable
Limited life
Limited ability to raise capital (funds)

Partnership Agreement/Deed

LO 1

A partnership agreement includes

Length of existence of partnership
Nature of business
duties & responsibilities of the partners to
each other & to others outside the firm
amount of capital contributed by each
partner
Profit/loss sharing arrangement
Partners salaries
Interest paid on partners capital &
advances
Interest charged on drawings
What happens when a partner dies, retires,
leaves or becomes bankrupt, or when a

LO 1

Partnerships
A limited partnership is a unique legal
form that provides partners who are
not involved in the operations of the
partnership with limited liability.
There must be at least one general
partner who operates the partnership.
The remaining partners are considered
limited partners.

LO 1

Advantages of Partnerships
Easier & less expensive to form (v.
corporations)
Less formal & more flexible (v.
corporations)
Utilises talents/skills of more than 1
person (v. proprietorship)
Can obtain more capital (v.
proprietorship)
Less risk faced (v. proprietorship)

LO 1

Disadvantages of Partnerships
Each partner liable for debts of
partnership (not limited liability)
Any contract made by a partner is
binding on all other partners
Too many cooks spoil the broth
Partnership has to be reformed
whenever a new partner joins, or
when an old partner
withdraws/retires/dies.

LO 5

Statement of Partnership
Equity

The changes in the partners capital

accounts for a period of time are
reported in a statement of
partnership equity.
There is a capital account for each
partner.
Starts with capital balances at the
beginning of the accounting period
Reflects additional investments, made
by the partners during the year
Also reflects net income for the period,

LO 5

Statement of Partnership
Equity
Additional investments and allocated
net income increase capital accounts
of the partners.
All kind of allowances, like salary
allowances and capital allowances,
are treated as withdrawals.
Withdrawals reduce capital accounts.
The end result is capital balances of
the partners at the end of the
accounting period.

Statement of Partnership
Equity
Partner
A

Partner
B

Capital, Jan. 1, 20X8

40,000

30,000

70,000

Additional investments

10,000

20,000

30,000

Capital plus investments

50,000

50,000

100,00
0

Net income for the year

60,000

40,000

100,00
0

110,000

90,000

200,00
0

Withdrawals

30,000

20,000

50,000

Capital, Dec 31, 20X8

80,000

70,000

150,00
0

Balance

Total

LO 5

LO 1

Corporations/Companies
A corporation is a legal entity, distinct and separate
from the individuals who create and operate it.
As a legal entity, a corporation may acquire, own,
and dispose of property in its own name.
A corporation sells shares of ownership, called
shares or stock.
The shareholders who own the shares own the
corporation.
can buy and sell shares without affecting the
corporations operations or continued existence.

LO 1

Corporations/Companies
Corporations whose shares are traded
in public markets are called public
corporations/public companies/public
limited companies (plcs).
Corporations whose shares are not
traded publicly are usually owned by
a small group of investors and are
called private corporations.
The shareholders of all corporations
have limited liability.

LO 1

Corporations/Companies
The shareholders control a
corporation by electing a board of
directors.
This board meets periodically to
establish corporate policy.
It also selects the chief executive officer
(CEO) and other major officers.

LO 1

Corporations/Companies
A corporation has limited
shareholders liability.
A corporation is subject to taxes.
Thus, the corporate form has the
disadvantage of double taxation.

LO 1

Non-profit organisations
entities that receive significant amounts
of revenue from providers who do not
receive equivalent amounts of services
operate for purposes other than
providing goods or services at a profit
do not possess ownership interests like
those of business entities
E.g. hospitals/clinics,
universities/colleges, clubs/societies,
charities

Accounting for
non-profit organisations

LO 1

The day-to-day accounting consists of

maintaining:
Cash book for recording receipts and
payments
Ledger for classification of transactions
under proper headings.

Accounting for
non-profit organisations

LO 1

Receipts & payments book:

does not show expenses and incomes on accrual
basis (but is done on cash basis)
does not show whether the club or society is able
to meet its day-to-day expenses out of its incomes.
does not show expenses on account of
depreciation of assets.
does not explain the details about many expenses
and incomes.
In order to explain such questions, treasurer of the
club prepares 'Income and expenditure account'
and balance sheet.

Accounting for
non-profit organisations
Income and expenditure account
discloses whether the organisation has
earned or lost.
prepared on "accrual basis" (not on
receipt basis)
all incomes & expenses are included
(whether actually received/paid or
not).

LO 1

Accounting for
non-profit organisations

LO 1

Special accounting items

Legacy: amount received via the 'will' of a
donor.
Annual members subscriptions
Life membership fees: lump sum
Entrance fees
Honorarium: for lectures
Donations: for a specific purpose & general
Endowment fund: donation of a source of
permanent income.

Accounting for
non-profit organisations
Special accounting items
Proceeds of concerts, lectures and
dramas or cultural shows
Govt. grants

LO 1

Accounting for Partnerships

Capital accounts
Capital contributed by partners assets, or cash
Capital accounts will be credited by the value of
the assets/cash contributed
E.g. W & L are partners
W contributes RM50,000 cash
L contributes equipment valued at RM30,000
Accounting entries are:
Dr Cash RM50,000
Cr Capital, W
RM50,000
Dr Equipment RM30,000
Cr Capital, L
RM30,000

Accounting for Partnerships

Fixed & Current Capital accounts
Fixed capital accounts original
amounts contributed are unchanged
Current capital accounts will record
Sharing of profits/losses
Interest on partners advances &
capital
Interest on drawings
Partners salaries

Accounting for Partnerships

Sharing of profits & losses
Can be shared on any agreed basis
Usually based on fixed capital
contributions
The Profit & Loss Appropriation Account
An extension of the income statement
Shows how the net profit/loss is shared by
partners
Example to come later.

Accounting for Partnerships

Drawings
Withdrawals by partners from the business.
Interest on drawings may be charged by
the partnership, on the partners making
the withdrawals.
Interest on capital
Payment to the partners on their capital
contribution
The partner who contributes more capital
will get a larger interest.

Accounting for Partnerships

Partners salaries
Usually paid to partners who contribute
time in the management of the
partnership
Sleeping partners are those who do not
actively manage the partnership

Accounting for Partnerships

Working Example 1:
Amos, Benny & Claus are partners, sharing
profits & losses in the following proportions:
3:2:1.
By the partnership agreement, partners are to
be credited with interest on capital & charged
with interest on drawings.
Net profit for the year is RM168,000.
Partners salaries are as follows:
Amos RM48,000
Benny RM50,000
Claus RM45,000

Accounting for Partnerships

Working Example 1:
Interest on capital is as follows:
Amos RM6,000
Benny RM4,000
Claus RM2,000

Interest on drawings is as follows:

Amos RM380
Benny RM420
Claus RM270

Capital accounts of the partners as at

31.12.2010 are as follows:
Amos RM200,000
Benny RM150,000
Claus RM100,000

Accounting for Partnerships

Working Example 1:
Partners drawings are as follows:
Amos RM10,000
Benny RM20,000
Claus RM30,000

Accounting for Partnerships

Profit and loss appropriation
account
Net profit
Add: interest on drawings
Less: Partners salaries
Less: Interest on capital
Share of partnership:
Amos (3/6 x 14,070)
Benny (2/6 x 14,070)
Claus (1/6 x 14,070)

RM
168,000
1,070
(143,000)
(12,000)
14,070
7,035
4,690
2,345

Accounting for Partnerships

Partners capital account
Drawings
Interest on
drawings
Bal c/f

10,000

20,000

30,000 Bal b/f

200,00
0

150,00
0

100,00
0

380

420

270 Interes
t on
capital

6,000

4,000

2,000

202,65
5

138,27
0

74,075 Share
of
profits

7,035

4,690

2,345

213,03
5

158,69
0

104,34
5

213,03
5

158,69
0

104,34
5

Accounting for Partnerships

Working Example 2:
Xandria, Yasmin & Zaitun had the
following trial balance extracted from
the books of their partnership on
31.1.2011. The balances are stated
BEFORE considering interest on capital
and interest on drawings.
X, Y & Z share profits & losses in the
ratio 2:2:1 respectively.

Accounting for Partnerships

X, Y & Z: Trial balance as at
31.1.2011

RM

RM

Capital accounts:
X

200,00
0

200,00
0

130,00
0

Current accounts:
X

65,000

52,000

38,000

Salaries:
X

72,000

Accounting for Partnerships

X, Y & Z: Trial balance as at
31.1.2011

RM

Property

430,00
0

Equipment

160,00
0

Motor vehicles

110,00
0

Inventory as at 31.1.2011

26,000

Loan
Accounts receivable

RM

120,00
0
15,000

Accounts payable

23,000

Net profit for the year

124,00

Accounting for Partnerships

Working Example 2:
No entries were made in the books of
the partnership for the following
matters:
Interest on capital will be equal to 5% of
the balances in the capital accounts.
Interest on drawings were determined as
RM1,200 for Xandria, RM1,200 for Yasmin
and RM800 for Zaitun.

Accounting for Partnerships

Profit and loss appropriation account
Net profit
Add: interest on drawings
(1,200 + 1,200 + 800)
Less: Partners salaries
(72,000 + 65,000 + 54,000)

RM
124,000
3,000
(191,000)

Less: Interest on capital

(10,000 + 10,000 + 6,500)

(26,500)

Loss

(90,500)

Share of loss of partnership:

Xandria (2/5 x -90,500)

(36,200)

Yasmin (2/5 x -90,500)

(36,200)

Zaitun (1/5 x -90,500)

(18,100)

Accounting for Partnerships

Partners current accounts
Interest on
drawings

1,200

1,200

800 Bal b/f

65,000

52,000

38,000

Bal c/f

37,60
0

24,60
0

25,60 Interes
0 t on
capital

10,000

10,000

6,500

(36,20
0)

(36,20
0)

(18,100)

38,800

25,800

26,400

Share
of
losses
38,80
0

25,80
0

26,40
0

Accounting for
non-profit organisations
The receipts and payments book of
the ABC Sports Club as at 31
December 2010 showed the following:
Members subscriptions - 5,110
Sales of annual dinner tickets 2,500
Annual dinner expenses 1,749
Electricity and water expenses - 1,250
Donations to charities - 3,000

Accounting for
non-profit organisations
The following balances as at 31
December are also relevant:
As at
2009

Prepaid subscriptions
Subscriptions in arrears
Rent unpaid

RM
310
24

As at
2010
RM
410
40
200

Prepare an Income and Expenditure

Account for the ABC Sports Club for
the year ended 31 December 2010.

Accounting for
non-profit organisations

Arrears b/f
(Debtors)

Subscriptions
24 Prepaid
b/f
(Creditors
)

Prepaid c/f
Income &
Expenditure A/c

410 Received in
2010
5,02 Arrears
6 c/f
5,46

310

5,110
40
5,460

Accounting for
non-profit organisations

ABC Sports Club

Income and Expenditure Account for the year ended
31.12.2010
Income

RM

Net members subscriptions

5,026

Sales of concert tickets

2,500

Total income

7,526

Expenditure
Concert expenses

1,749

Electricity & water expenses

1,250

Rent

200

Donations to charities

3,000

Total expenditure

6,199