PARTNERSHIP

1. LECTURE 1 PARTNERSHIP

2. Coverage • Introduction • Partnership agreement and Partnership Act 1961 • Accounting for partnerships (including interest on a partner’s loan) • Changes in partnership – profit sharing, admission and retirement • Revaluation accounts • Treatment of goodwill

3. Introduction Partnership: • A form of business • Jointly owned by 2 or > (but not more than 20 persons except for professionals practice such as accountants, lawyers, doctors) • View to make profit – Section 3(1) of Partnership Act 1961 ‘ the relation ..subsists bet. persons carrying on a business in common with a view of profit’ Partnership not aseparate legal entity from its owners – Similar as sole proprietor

4. Continue…… • Owners of Partnership called Partners • Not separate entities from p/ship • Responsible for ALL liabilities and actions of p/ship business • Limited and Unlimited Partners • Unlimitedcould be force to use private properties to settle p/ship debts • Limited – Liabsettlmntrestricted to p/ship agreement . For instance ratio of capital contribution; Not allowed take part in mgt of bus; This type still under discussion in Msia; Law - they are still liable to 3rd parties

5. Formation of Partnership • To register with Registrar of Business same as sole proprietor • Govern by Partnership Act 1961 • License for operation – Grant by local authorities . Eg clinics, law firm, audit firm

6. Partnership Vs Sole Proprietor Similarity: • Both owners of the business • Mgrs of the business (Unlimited partners) • Receive all profits, bear all losses and personally liable to debts of the business • Ease of formation? Any More? Differences: • Share profits earned and losses based on agreed % (lessen burden of loss) • Capital contribution by many • Share Liability obligations Any More?

7. Characteristics of Partnership • Ownership – 2 or ≥ 20 (except professional see Section 47(2) of P/ship Act 1961 else contravenes with section 14(3) of Companies Act 1965 • Mutual Agency – Agent of p/ship and other partners • Profit Motive – Form to make $ . Sect 3(1) P/ship Act 1961; Profit dist? • Partnership Agreement – Not a requirement by law. Written agree provide clarification of partners mutual rights and duties. Point of reference for any issues or conflict arise in future • Limited Life – Dissolve when any of the partner withdraw , decease (heirs have right to the share), bankrupt, insane (without court order) or with court order • Share of Liability – Unlimited liability for all liabilities incurred by the business (except limited partners), settlement to the extent of private properties • Co-ownership of property – Properties bought by partner(s) or p/ship business are property of the p/ship. Also via agreement identified which are and aren’t properties of partnership. Absence of agreement, 3 circumstances considered (1) circumstances of acqn(2) purpose of acqn(3) subsequent usage of assets vii Taxation – Partnership not subject to income tax. Individual partners separately liable for income tax based on their share of reported profit.

8. PartnershipAdvantages Vs Disadvantages Advantages • Accumulatn of Skills, Knowledge and Experiences • Pool of Capital – Cash, Assets • Losses – Share than bear alone • Ease of formation compare to company Others? Disadvantages • Unltdliab • Liable for actions conducted by other partners on behalf of firm • Dissolution when partner(s) withdraw, decease, bankrupt… • Restricted authority and decision mkg -Fundamental decisions need consent of partners eg changes in nature of bus and admission of new partner(s), • Success of the p/ship bus depends on quality of relationship amongst partners Others ?

9. Homework… Pro and Cons of Partnership Vs Sole Trader Vs Company

10. Partnership Law • Partnership Act 1961 (revised 1974) • Similar to English Partnership Act 1980 (contents similar) • Divided into 5 main parts, • Preliminary, • nature of partnership, • relations of partners to persons dealing with them • Relations of partners to one another • Dissolution of partnership of professional • Contains 47 sections

11. Continue… • Does not require writing of p/ship agreement (though it recommended) • Members of the partnership business called collectively a ‘firm’. • Not the same as incorporated firm. Not separate legal entity though name of the p/ship bus may be used in court proceedings or persons suing them • Used of the term firm not grant members any other facility • Companies Act prohibit use of limited if the association is not limited company. Why?

12. Partnership Agreement • Can be ….Verbally or Formally written • Written – Partnership Agreement setting out the arrangements, rights, duties and liabilities between partners. • Not a requirement by law, hence its content up to partners. • Contents might include: • Name & address of partnership • Names of partners • Nature of business • Responsibility and duty of each partner • Ratio for sharing profits or losses • Capital to be contributed by each partner Others? In the case partner is guaranteed share of profit, guaranteed to receive at least amt agreed and Other partners to top up if share of profit fall below the guaranteed amt

13. When no partnership agreement exists, expressed or implied? Section 26 of Partnership Act 1961 requires…. • Each partner may take part in mgt of p/ship • No partner entitles to remuneration or salary • No changes on nature of business unless get majority consent from partners • Partnership books need to be kept at place of business and every partners have access to them • Partners are entitled to share equally in profit and losses of the business

14. Continue….. (6) Partners not entitled to interest on capital subscribed, EXCEPT make payment or advance beyond capital subscribed, interest on capital at rate of 8% per annum starting from date such payments made (7) No interests charged on drawings made by partners (8) No admission of new partners without consent of existing partners

15. Accounting for Partnership Legal point of view -Partners and Partnership business are not separate entities Accounting Perspective - Partners and Partnership business assume separate entities

16. Continue…. • Accounting for Partnership in preparation Similar to Sole Trader wrt the basis of accounting concepts and principles for Assets, Liabilities, Revenue, Expenses DIFFERENCES ? (i) Profits are distributed amongst partners in partnership……Profit and Loss Appropriation A/c (ii) Owner’s equity – Maintain in respective partners’ capital a/cs (iii)Current Accounts – Identified by Partners (iv) Realisation Accounts - A realisation account is opened in order to ascertain whether a profit or a loss has been resulted upon the dissolution.

17. Continue… • Partnership is not like company where it is required to prepare and publish annual finl state Nevertheless the finl statements are prepared for • Assessing performance and position • Profit and Loss distribution • Documentation Purposes • Loan Application

18. Partnership Capital and Current Accounts • When partnership is formed capital a/c will be opened for each partner. • Partnership has an option to adopt one of these capital a/c: (a) Fixed Capital A/c (b) Fluctuating Capital A/cs

19. Fixed Capital A/c • Maintain 2 SETS OF ACCOUNTS (1) Partner’s capital a/c - Record transactions relating to movement in partner’s capital contribution - Remain at figure of Capital contributed - Debit : Reduction in Capital - Credit: Initial capital investment and subsequent addition (2) Partner’s current a/c - Record transactn other than capital - Debit: Withdrawals, Share of losses, Interest on withdrawals, Interest on loan made by resp partner - Credit: Share of Profit, Interest on Capital, Partners’ Salaries accrued, Interest on Loan

20. Continue…. Merits of Fixed capital a/c : • Partners can identify easily actual amount of capital contributed ease for computation of interest on capital • Ensure withdrawals made by partners x exceed capital contributed by partners which will be shown in current a/c whether debit or credit bal? Which can be used as word of caution to not withdraw more than they earn

21. Fluctuating Capital A/C • All transactions related to capital reflected in the a/cs • No Current A/c will be opened • Maintain only Capital A/c • Debit: Withdrawals, Interest on Withdrawals and Share of Losses • Credit: Original capital invested, additional capital, partners’ salaries accrued, Interest on Capital, Interest on Loan and Share of Profits

22. Take home Notes • What is partnership • Formation • Vs Sole Trader and Company • Partnership Act 1961 • Legal vs Actg View • Partnership Actg vs Sole Trader • Fixed Capital A/c • Fluctuating Capital A/c