ACCOUNTING FOR PARTNERSHIPS

Definition: A partnership can be defined as an association of two or more persons but not
exceeding twenty who come together to carry on business for profit as co-owners or joint
owners.

This type of business enterprise is used widely in all types of business ( retail/wholesale) and
also in professional fields ( Accounting/Medicine).

FEATURES OF A PARTNERSHIP:

 Ease of formation: It is much easier to form a partnership than a company as no

legal formalities are necessary. When two or more persons agree to become
partners, such an agreement constitutes a contract and a partnership is formed
automatically. The membership to a partnership is therefore said to be voluntary. It
is however desirable that an agreement to form a partnership be in writing. WHY?
 Limited Life: A partnership may be ended at any time by either withdrawal
(voluntary) or death of a member. The admission of a new member or retirement of an
existing member signals the end of an old partnership although business may be continued
under a new name.
 Mutual Agency: Each partner acts as an agent of the partnership which means the
partnership is bound by the actions/ acts of any partner so long as these activities are within
the normal scope of business. This feature signals the need for exercising great caution in
the choice of who your partner will be.
 Unlimited Liability: Like a sole proprietor, each partner is personally liable for all the
obligations of the partnership.
New partners may however not assume liabilities incurred prior to their admission to the
partnership. Similarly, retiring partners may be held only liable for partnership obligations
existing at the time of their withdrawal.
 Co –ownership of Partnership property and profits: Where a partner invests property
into a partnership, he/she does not retain personal rights to the assets so invested in the
partnership. He /She also has an ownership right in the profit of the partnership.

ADVANTAGES OF A PARTNERSHIP:

o A partnership brings with it an opportunity to raise sufficient funds to carry with

the business. Pooling together of resources by the partners as opposed to a sole
proprietor.
o A partnership also brings with it an opportunity to combine specialised skills and
experiences of the partners.
 o Flexibility in the management of the partnership is enhanced. Decision making is
much easier than it is in a limited liability company (Mutual agency- without
formal meetings).

DISADVANTAGES:

o Limited life – lack of continuity.

o Unlimited liability.
o Mutual Agency
o Insufficient capital outlay ( as compared to companies).

LIMITED PARTNERSHIP: This is where limited liability is extended to the partners ( limited partners).
A limited partner is one who enjoys limited liability and is basically regarded as an investor rather as
a partner. For a limited partnership to operate there must be at least one general partner( one runs
the affairs of the partnership and the attendant risk). A limited partner is also referred to as a
sleeping partner.

PARTNERSHIP DEED (AGREEMENT).

A partnership can be formed through a verbal agreement as earlier stated, It is however desirable/
advisable to have a written Partnership Agreement. Such an agreement will clarify issues such as the
following:

o Names of the partners.

o Duties/ rights of each partner.
o Amount to be invested by each partner including the mode for valuation of non-cash
assets invested by the partners.
o Methods of (considerations to make) sharing partnership profits to the partners.
o Dispute resolution mechanisms including rules for admission / withdrawal of partners.

Where no written agreement exists, the partners are considered to have agreed as here below:

 Equal share of profit/ Losses

 No interest on partners’ Capital accounts
 No interest on partners’ drawing accounts
 Salaries to partners are not allowed.

FORMATION OF A PARTNERSHIP (Example)

On 1 January 2020, A and B who operate competing retail stores in the neighbourhood decided to
form a partnership by consolidating their two businesses.
The financial position of A’s business prior to the formation of the partnership was as follows;

Ksh

Cash 80,000

Debtors 120,000

Stock 180,000

Creditors 60,000

The financial position of B’s business prior to the formation of the partnership stood as here below:

Ksh

Cash 20,000

Stock 120,000

Land 120,000

Buildings 200,000

Creditors 140,000

REQUIRED:

a) Prepare journal entries to the investment of each of the partners in the new partnership.

b) Prepare the partnership statement of Financial position immediately after formation.

SUGGESTED SOLUTION

a) JOURNAL ENTRIES.
Partner A
Ksh Ksh

Cash 80,000
Debtors 120,000
Stock 180,000

Creditors 60,000
A Capital 320,000
( To record the investment of A in the new Partnership).
 Partner B.
Ksh Ksh

Cash 20,000
Stock 120,000
Buildings 200,000
Land 120,000

Creditors 140,000
B Capital 320,000
( To record the investment of B in the new Partnership).

N/B
Immediately upon formation, the following statement of financial position will be drawn
up to reflect the new status.

A and B Partnership
Statement of Financial Position
As on 1 January 2020

Non –Current Assets: Ksh

Land 120,000

Buildings 200,000 320,000

Current Assets:

Stock 300,000

Debtors 120,000

Cash 100,000

Less: Current Liabilities;

Creditors (200,000) 320,000

Net Assets 640,000

Financed by:

A .capital 320,000

B. Capital 320,000 640,000

You have just been introduced on how to prepare an opening Statement of financial position of a
partnership immediately upon formation. Our next step is now to allow the partnership to carry on
operations for some time . After trading for a period of one year we shall be required to report on
their results of operation i.e. whether they made a profit or loss and how to dispose of that profit or
loss to the respective partners. Our next illustration will now show how this done.

ILLUSTRATION 1:

Kaka and Dada are in partnership and the trial balance extracted from their books as on 31
December 2019 is as shown below;

DR CR

Ksh Ksh

Premises 60,000

Carriage 1,000

Bad Debts 500

Purchases and Sales 160,000 280,000

Returns 800 600

Salaries 14,000

Rates 4,000

Insurance 1,400

Cash on Hand 7,000

Stock 1 Jan 2019 35,000

Fixtures and Fittings 45,000

Wages 26,000

Capital A/CS: Kaka 60,000

Dada 60,000

Current A/CS: Kaka 1,000

 Dada 1,500

Drawings: Kaka 8,000

Dada 9,000

Debtors and Creditors 80,000 50,000

Provision for Bad Debts 2,500

Discounts 1,000 200

Other Expenses 1, 1 00

454,800 454,800

Additional information:

1) Stock 31 December 2019 Ksh 28,000

2) Ksh 600 of carriage is for carriage in
3) Depreciate fixtures and fittings at 10% per annum
4) Interest on partners’ capital accounts agreed at 5% per annum
5) Kaka paid a salary of Ksh 5,000
6) Wages unpaid as on 31 December 2019 Ksh 4,000
7) Balance of profit to be shared equally between the partners
8) Provision for bad debts to be made at 10% of debtors at year end

REQUIIRED:

a) An income Statement and appropriation statement for the year ending 31 December 2019
b) Partners’ Current Accounts
c) Statement of financial position as at 31 December 2019.

SUGGESTED SOLUTION:
 KAKA AND DADA PARTNERSHIP

INCOME STATEMENT

FOR THE YAER ENDING 31 DECEMBER 2019.

Ksh

Sales 280,000

Less: Returns inwards (800)

Net sales 279,200

Less Cost of sales:

Stock 1 Jan 2019 35,000

Add Purchases 160,000

Add Carriage In 600

Les Purchase returns ( 600)

Less Stock 31 Jan 2019 ( 28,000) 167,000

Gross Profit 112,200

Add Discount received 200

Less Expenses:

Wages 26,000

Add Accruals 4,000 30,000

Salaries 14,000

Rates 4,000

Insurance 1,400

Bad debts 500

Increase in provision of debts 5,500

Carriage Out 400

Discount allowed 1,000

Other expenses 1,100

Depreciation 4,500 62,400

Net Income 50,000

Appropriation:

Salaries: Kaka 5,000

Interest on Capital: Kaka 3,000

Dada 3,000 6,000

Balance of profit: Kaka 19,500

Dada 19,500 39,000 50,000

KAKA AND DADA PARTNERSHI

STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2019

ksh

Non – Current Assets:

Premises 60,000

Fixtures 45,000

Less Depreciation 4,500 40,500

Current Assets:

Stock 28,000

Debtors 80,000

Less provision (8,000) 72,000

Cash on Hand 7,000

107,000
Less Current Liabilities:

Creditors 5 0,000

Accruals 4,000 (54,000) 53,000

Net Total Assets 153,500

Finance by:

Capital Accounts : Kaka 60,000

Dada 60,000 120,000

Current Accounts: Kaka 26,500

Dada 24,000 50,500

Drawings: Kaka (8,000)

Dada (9,000) ( 17, 000)

153,500

PARTNERS’ CURRENT ACCOUNTS:

KAKA C URRENT ACCOUNT

Balance b/d Ksh 1,000 Salary Ksh 5,000

Interest 3,000

Profit share 19,500

Balance c/d 26,500

27,500 27,500
 DADA CURRENT ACCOUNT

Balance b/d Ksh 1,500

Interest on Capital 3,000

Share of profit 19,500

Balance c/d 24,000

24,000 24, 000

ILLUSTRATION TWO:

A and B are in partnership sharing profits and losses equally .On 31st May 2019 their account
balances were as shown below:

DR CR

Ksh Ksh

Bank Current Account 1,430

Bank Deposit Account 16,000

Capital Accounts: A 80,000

B 60,000

Transport In 1,280

Transport Out 3,220

Cash 280

Commission 1,360

Debtors / Creditors 14,780 18,650

Discounts 2,240 1,960

Drawing Accounts: A 12,000

B 19,600

Fixtures and Fittings 12,600

General Expenses 9,870

Insurance 1,230

Premises ( Cost) 80,000

Purchases and Sales 140,900 235,380

Returns 4,580 2,340

Stock 1 Jan 2019 35,440

Salaries and Wages 47,100

401,120 401,120

Additional Information:

1) For managing the business, A is to be credited with a partnership salary of Ksh 20,000 per
annum.
2) Interest is to be allowed on Partners’ n capitals at the rate of 6%per annum, but no interest
to be charged on drawings.
3) Stock on 31 December 2019 was valued at Ksh 52,400
4) Accruals as at the end of the year were as follows :Carriage inwards Ksh120, Commission
owing to an agent by the firm Ksh 580
5) Insurance prepaid on 31 December 2019 Ksh 280
6) Furniture and Fittings were valued at Ksh11,340
7) Bad debts amounting to Ksh380 are to be written off

REQUIRED:

a) Income statement and appropriation statement for the year ending 31 May 2019.
b) A statement of financial position as on 31May 2019.
SUGGESTED SOLUTION

A and B Partnership

Income Statement

For the year ending 31 May 2019.

Ksh Ksh Ksh

Sales 235,380

Less Sales returns (4,580)

Net Sales 230,800

Less Cost of Sales:

Stock 1 Jan 2019 35,440

Purchases 140,900

Add transport In 1,280

Accrued transport 120

Less Purchase returns ( 2,340) 139960

175,400

Less Stock c/d ( 52, 400) 123,000

107,800

Add Commission earned 1,360

Discount received 1,960

Less: Expenses:

Commission 580

Transport Out 3.220

Discount allowed 2,220

General expenses 9,870

Insurance 1,230

Less prepaid (280) 950

Salaries and Wages 47,100

Reduction in value of furniture 1,260

Bad debts 380 65,600

Net Profit 45,520

Appropriation:

Salaries to partners A 20,000

Interest on Capitals A 4,800

B 3,600

Share of Profit A 8,560

B 8,560 45,520

A and B PARTNERSHIP

STATEMENT OF FINANCIAL POSITION

AS ON 31 May 2019.

Ksh Ksh Ksh

Non- Current Assets:

Premises 80,000

Furniture 11,340

91,340

Current Assets:

Stock 52,400

Debtors 14,780
Less Bad debts w/o (380) 14,400

Prepaid Insurance 280

Bank Deposit Account 16,000

Cas at Hand 280

83,360

Less Current Liabilities:

Bank Current Account 1,430

Creditors 18,650

Accrued Wages 120

Accrued Commission 580 20,780 62,580

153, 920

Financed by:

Capital Accounts A 80,000

B 60,000

Current Accounts : A 21,360

B ( 7, 440) 153,920

A CURRENT ACCOUNT

Drawings 12,000 Salary 20,000

Interest 4,800

Balance c/d 21,360 Share of profit 8,560

33,360 33, 360

 B CURRENT ACCOUNT

Drawings 19,600 Interest on capital 3,600

Share of profit 8,560

Balance c/d 7,440

19,600 19,600