Partnership Accounting: Dealing with Profits, Losses, and Transactions

1. Chapter 15 Partnership Accounting

2. Nature of a Partnership • Partnerships are a form of business organization owned by two or more persons, called partners, for the purpose of making a profit. • All partners, with the exception of sleeping partners, take part in decision making.

3. A Typical Partnership Deed • profit and loss sharing ratio • amount of capital to be contributed by each partner • rate of interest (if any) to be paid on capital • rate of interest (if any) to be charged on drawings • rate of interest (if any) on loans given by partners to the partnership • salary (if any) to be paid to partners and • procedure to be followed for the admission of new partners.

4. Partnership Act of 1890 • In the absence of a partnership deed, we look to the Partnership Act of 1890 for direction. • The Act states, among other things, that: • profit and losses are to be shared equally; • partners are not charged or entitled to: • interest on drawings, • interest on capital, or • salary; and • partners are entitled to a 5% interest on loans made to the partnership.

5. Partnership Records The records of a partnership comprise of the: • Trading, Profit and Loss Account • Appropriation Account • Current Accounts • Capital Accounts • Balance Sheet.

6. Appropriation Account Some common appropriations of net profit include: • Interest on Capital • Partners’ Salaries • Interest on drawings • Share of Residual Profit.

7. Current Account • A credit balance in a Current Account indicates that the business owes the specific amount to the partner. • A debit balance in a Current Account indicates that the partner owes the business the specific amount.

8. Accounting Entries