Accounting for Partnership. Topic 9

1. Topic 9: Accounting for Partnership

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ACC30305 Principles of Accounting
Topic 9:
Accounting for
Partnership

2. Learning Objectives

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Learning Objectives
1.
2.
3.
4.
5.
6.
Explain the characteristics and types of a partnership.
Explain the contents of a partnership agreement.
Explain accounting for a partnership business.
Prepare the partners’ capital and current accounts.
Prepare the Financial Statements of a partnership
business.
Compute allocation of profit / loss to the partners.

3. Learning Objective 1

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Learning Objective 1
Identify the characteristics and types of
partnerships

4. The need for a partnership

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The need for a partnership
(a)Additional capital
an incoming partner may be able to bring in the
additional capital required to expand the business.
(b)Additional expertise
new skills (e.g. technical skills required for the new line
of business undertaken by the partnership.
(c) Additional management time
to manage the expanded business operations

5. What are the Characteristics and Types of Partnerships?

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What are the
Characteristics
and
Types of
Partnerships?
Registration
Registered with the Companies Commission of Malaysia
under the Business Registration Act 1956 & 1957.
Capital
Contributed by partners according to the Partnership
Agreement or Partnership Act 1961.
Ownership
Owned by between 2 and 20 partners.
Management
Control
& Managed and controlled by partners or by a board which
consists of a few partners.
Liability
Each partner has unlimited liability for the partnership’s
debt. If the business fails and the assets are not enough to
cover the debts, the accounts payable have a right against
the partner’s / partners’ personal properties.
Profit or Loss
Shared by partners according to their profit-sharing ratio as
stated in the Partnership Agreement or Partnership Act
1961.
Book of accounts
No legal obligation to keep the books and prepare accounts.

6. Types of Partnerships

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Types of Partnerships
* Limited partner: A partner whose liability is limited to the amount of
capital invested by him into the partnership business. His personal
possessions cannot be taken to pay the partnership debts.

7. Partnership agreements

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Partnership agreements
It is best to have a written agreement drawn up by a lawyer or
accountant to avoid problems later on. It should include:
1)The name and nature of the business of the partnership
2)The capital to be contributed by each partner.
3)The profit/loss sharing ratio.
4)The responsibilities of each partner.
5)The rate of interest paid on capital.
6)The rate of interest charged on drawings.
7)Salaries to be paid.
8)Arrangements for admitting new partners.
9)The procedures for the exit of a partner.

8. Learning Objective 2

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Learning Objective 2
The Partnership Agreement

9. The Partnership Agreement

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The Partnership Agreement
The agreement may contains matters relating to:
(i) Capital: To state the amount to be contributed as well as any interest and the
rate of the interest.
(ii) Profit shared: To state the division of profit.
(iii) Withdrawals: To state the amount and charges.
(iv) Advances or loans: To state the rate, if any, on the advances or loans actually
made to the business.
(v) Remunerations: To state the amount if partners are to be paid salaries and /
or commissions.

10. Partnership Act 1961

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Partnership Act 1961
In Malaysia, a partnership is governed by the Partnership Act 1961.
The following terms according to Section 26 of the Partnership Act 1961 shall apply if an
agreement does not exist:
1. Profit or loss is divided equally.
2. Interest on capital is NOT allowed.
3. Remunerations: Salary and any compensation to partner are NOT allowed.
4. Interest of 8% per annum is allowed to partners who provide loans to the partnership.
5. All partners can actively managed the partnership.
6. New partner can only join upon majority agreement from existing partners.
7. The form of the partnership or the principle activities can be changed upon agreement from
all parties.
8. Accounting records must be kept diligently and can be viewed by all partners.

11. Learning Objective 3

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Learning Objective 3
Accounting for a Partnership Business

12.

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The usual business transactions for a partnership
business are no different from those of any type of
business.
● The transactions may involve those affecting assets,
liabilities, expenses and owner’s equity.
● However, each time a transaction affects a particular
partner, the account must be specifically state the name
of the partner who is involved in that transaction.
● E.g.: if a partner contribute office furniture to the
partnership business, the partner’s capital account is
affected and thus must be credited.

13. The transactions that may affect a partnership business are:

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The transactions that may affect a
partnership business are:
a)
b)
c)
d)
e)
f)
Interest on drawings.
Interest on capital.
Remunerations such as salaries and commissions.
Loan made by a partner to the business
Drawings made by a partner
Interest on loans, if any.

14. Recording Interest on Drawings

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Recording Interest on Drawings
Interest on drawings
• Partners may withdraw their share from the business.
• Withdrawal by partners will decrease the business’ cash balances.
• Therefore, intereston drawings is charged on drawings made by the partners during
the financial year. Charging interest on drawings is a means of discouraging
partners from withdrawing excessive amounts from the business.
• Interest on drawings will be added to the net profit before the profit is
between the partners.
DR. Partner’s Current Account
CR. Profit & loss appropriation account
shared

15.

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Interest on drawings – EXAMPLE:
Harry withdrew cash of RM6,000 on 1st June 2019 and RM5,200
on 1st September 2019, with interest on drawings at 5% per
annum, at the end of 31 December 2019.
The calculation is as follows:
1st June 2019 RM6,000 x 5% x 7/12 = RM175
1st Sept 2019 RM5,200 x 5% x 4/12 = RM87
Total interest on drawings at the end of December is RM262.

16. Recording Interest on Capitals

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Recording Interest on Capitals
• When partners contribute some amount of capital into the business, they are
entitled to an additional reward in terms of interest.
• The rate is usually fixed in the partnership agreement.
• The calculation of interest is based on the duration of
the capital
contributed.
• The interest is treated as a deduction of net profits before distribution
according to the profit sharing ratio in the appropriation account.
• Journal entry :
Debit Profit & Loss Appropriation Account
Credit Partners’ Current Account

17.

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Interest on capitals – EXAMPLE:
• On 1st January 2019, capital contributed by Abu is RM20,000 and that of Bakar is
RM15,000.
• On 1st August 2019, Bakar contributed additional capital of RM10,000. Each partner
is entitled to interest on capitals allowed 10% per annum. Calculation of interest on
capital at the end of December is as follows:
Abu: RM20,000 x 10% = RM2,000
Bakar: RM15,000 x 10% = RM1,500
: RM10,000 x 10% x 5/12 = RM417
*at the end of December 2019, the interest on capital for Abu is RM2,000 and Bakar is
RM1,917 (RM1,500 + RM417).

18. Recording the Partners’ Salary

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Recording the Partners’ Salary
• Partners do not only place their capital into the business, they can also work and be
treated as employees of the business.
• They are paid salaries as stated in the partnership agreement.
• Salary for the partners are deducted from the net profit before sharing the balance
of profits.
• The journal entry is as follows:
Debit profit & loss appropriation account
Credit Partner’s Current account

19. Distribution Net Profit/ Net Loss

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Distribution Net Profit/ Net Loss
• At the end of the financial year, the balances of net profit or loss will
be divided between partners according to the profit sharing ratio
stipulated in the agreement.
• The profit sharing ratio depends on the capital contributed by the
partners.
• After considering the interest on drawings, salaries, interest on
capital and other allocations of profit, the balances of net profit
or loss will be distributed.
• The profit shared by each partner are credited and losses will be
debited to the Partners’ Current Account.

20. Distribution Net Profit/ Net Loss

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Distribution Net Profit/ Net Loss
Example
Chong and David are partners sharing profit according to their partnership’s capital
contribution ratio. Chong’s capital is RM30,000 and David’s capital is RM60,000. The
balance of net profit after considering interest on drawings, interest on capital and
partners’ salaries is RM14,500. Calculate the profit or loss shared by each of the
partners.
Capital contribution ratio between Chong and David
= 30,000 : 60,000
= 1:2
Profit shared:
Chong = 1/3 x RM14,500 = RM4,833
David = 2/3 x RM14,500 = RM9,667

21. Learning Objective 4

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Learning Objective 4
Prepare the partner’s capital and current
account.

22. Preparing the Partners’ Capital & Current Account

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Preparing the Partners’ Capital & Current Account
• Capital Account
- Records capital contributed and must be prepared for each partner.
- The amount of capital will generally remain unchanged and fixed unless there is
additional capital introduced by partners.
• Current Account
- Record frequent transactions between the partners and the business.
- It represent each partner’s accumulated share of profit less any amount withdrawn
to date.
- Interest on capital, interest on loan, salaries and shared profit will increase the
current account.
- Drawings by the partners and interest on drawings will decrease the current
account.

23.

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Normally, Partner's Current Account has a Credit Balance but, if a partner
has withdrawn more than his or her share of profits, then it will have a
Debit Balance.

24. Learning Objective 5

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Learning Objective 5
The Financial Statement of a Partnership
Business

25. Financial Statements of a Partnership Business

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Financial Statements of a Partnership
Business
● An additional statement called the “Profit & Loss Appropriation
Account” is another statement that needs to be prepared for a
partnership business.
● This account is peculiar to a partnership business as it shows how the
business’s profit and loss is altered after taking into consideration the
interest or the involvement of the partners in the business.

26. Example of Profit & Loss Appropriation Account

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Example of
Profit & Loss
Appropriatio
n Account

27. Example of Profit & Loss Appropriation Account (t-format)

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Example of Profit & Loss Appropriation
Account (t-format)

28. Partnership’s Statement of Financial Position

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Partnership’s Statement of Financial Position
● The asset and liability sections for a partnership Statement of Financial
Position (balance sheet) do not differ from other forms of business.
● A partnership equity statement is called the statement of partners’
equity.
● The equity section of a partnership balance sheet reports a separate
capital balance for each partner.

29.

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30. ILLUSTRATION (1/3)

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ILLUSTRATION (1/3)
• Taylor and Clarke formed a partnership business
on 1 January 20X3.
• Taylor and Clarke share profits in the ratio = 3 : 2
• They are entitled to 5% interest on capital.
• Taylor invested £20,000 capital and Clarke
invested £60,000 capital.
• Clarke receives a salary of £15,000.
• Taylor is to be charged £500 interest on drawings
and Clarke £1,000.
• Net profits amounted to £50,000.

31.

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ILLUSTRATION (2/3)
Profit and Loss Appropriation Account

32.

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ILLUSTRATION (3/3)

33. Thank You

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Thank You