artes 10. In this chapter, you will learn: General Introduction Partnership Agreement Profit and Loss Appropriation Account Partners’ Equity Financial Statements of Partnership moom> oo 8 & Anes w General Introduction ls Under Partnership Ordinance (#0801), partnership (4) is defined as the relation that subsists between people carrying on a business together. It is a business owned by more than one person (known as partner 495A ) to make profit. Partners contribute their capital, intelligence, management skill and competence to the business. Usually, itis formed by the professionals, e.g. accountants and solicitors. 18] ‘Partnership Agreement " : Partners can operate the business with or without Partnership agreement ( 4%324i ). Partnership agreement is a voluntary contract to specify the rights and obligations of the partners,5. PARTWERSHiF(3] AN ietRobUCTION AND PREPARATION OF FINANCIAL STATEMENTS with Partnership Agreement tal iecite: partnership agreement is implemented, the following accounting terms should be Wat Tawa to The amount of money or assets that each partner introduces into the business. ese B. Division ( 4% ) of profit or loss Each partner is entitled ( #47 ) to a fixed percentage of interest on the capital they have ‘capital contributed. It aims to reward them for their devotion ( Hitt). (ii) Rare ofimteresron |E2°h partner is entitled to a fixed percentage of interest on the balances of their current accounts. _ current account Interest will be charged on partners’ drawings. It aims to discourage partners to withdraw assets out of the business. iv) smmmmumnisienany THerefore, they are entitled to an agreed amount ‘Some partners may work in the business. of salaries as rewards for their time and effort spent on running the business. (¥) ‘Share-of profit a. Tt is an agreed ratio for the residual (ME&#!)) profit or loss to be shared by each partner after adjusting the items (i) to (iv). By Without Partnership Agreement IFthere is no partnership agreement implemented, the following terms are implied: Partners will share profit or loss equally. * There will not be any partners’ salaries, and interest allowed or charged. of borrowing. As for partners’ Joan, an interest at 5% per annum should be given from the date * No new partners can be admitted to the partnership without the consent ofall existing partners. rest at 5% per annum on their Retired partners are entitled to receive an inte share of partnership assets retained within the partnership after their retirement.( Profit’and Loss Appropriation Account ( sem)" After a net profit is reached from profit and loss account, an appropriation account is, prepared to distribute the net profit to the partners in a fair way. Daniel, Martha and Jill are in partnership with a profit and loss sharing ratio of 1:2:1 respectively. Their capital contributions are: Daniel $200 000, Martha $800 000 and Jill $500 000. On 31 December 20X6, the balance on current accounts of Daniel, Martha and Jill were $150 000, $22 000 and $36 000 respectively. According to the partnership agreement, annual interest allowed on capital and current accounts are 2% and 4% respectively. Interest charged on drawings is 10% per annum, Besides, Daniel and Jill are entitled to salaries of $120 000 and $60 000 per annum respectively. For the accounting year ended 31 December 20X6, net profit was $512 960, Drawings of Daniel, Martha and Jill were $180 000, $75 000 and $90 000 respectively. REQUIRED: Prepare a profit and loss appropriation account for the year ended 31 December 20X6. Working Steps 1+ Identity which items tobe added to or deducted trom the net profit: Add: Interest on drawings Less: Partners’ salaries Interest on capital Interest on current accounts Alter appropriating the it Talo, PP*>Praling the tems instep 1, share the residual amount in Profit and loss sharingDaniel, Martha and Jill AW Intmopucrgw ano PREPARATION a ar Financia STATEMEN Profit and Loss Appropriation Account forthe year ended 31 December 20X6 512960 netproft pgprpstions fai. Interest on drawings = Daniel $180 000 x 10% “Martha $75 000 x 10% = Jil $90 000 x 10% Partners’ salaries Daniel sill Interest on capital Danie! $200 000 x 2% Martha $800 000 2% ~ Jil $500 000 x 2% Interest on current accounts = Daniel $150 000 x 4% -Martha $22 000 x 4% = Jill $36 000 x 4% Less’ Share of profit Daniel (1/4) Martha (2/4) sill (4) x of the double entry system. a ‘As mentioned in Compulsory. ‘e nominal accounts (i.¢ Therefore, in order to close th: nd loss account (oF i period end, a trading and profit a opened under double entry system. both of them have the same P! Financial Statements Income Statement f Profit Statement of Division o come satere!) (dn practice, itis usually included in in “ecrctererrrrrrrnccttstsiseneidttttllee 120000 60000 4.000 16000 40.000 6000 880 1440 is op: the rt Appropriation Account pitti Shah pA AA TMAreececTALLALIQLA TIMI tTALALAH A tllttenTAdit s 18.000 7.500 9000 180000 30000 8320 82.285 164.570 2085. ‘Part income statements financial statement, but NOT a part e, revenue and expense accounts) at the income summary account) should be vation account is opened under double entry system. Meanwhil raft ‘can be prepared as a part of the financial statements, itonighe yurpose, i.e. division of profit among partners, ble Ent Trading, Profit and Loss Account + UIIILUMILLLLLLLLLLTLLLLLYLLALUL LALLA LLL Wilh 34 500 TTT 218 320 29140 ste SY 23wl om 28 om Dy Partners’ Equity" nn a There are two methods for posting figures from an appropriation account to each partner’s personal account: 1. Fixed capital (Capital account + Current account) 2. Fluctuating capital (Capital account only) Under this method, partners will keep both capital accounts and current accounts, The capital accounts will be fixed and include only capital contribution and revaluation of assets. Drawings and the figures in appropriation account will be entered in partners’ current accounts. Ina nutshell, { Capital accounts | To record partners’ contribution and revaluation of assets * | To record daily and regular transactions related to partners’ | Current accounts | equity, e.g. drawings and the corresponding entries in ke appropriation account. Note: * Details will be discussed in Chapter 12. of maintaining both current accounts and capital accounts fee * . . It is because transactions between partners and the ip wil 4 Partnership will be sho accounts instead of capital accounts, IP wn through current * Any© im — Referring to Worked E; for 0X6: ‘ample 1, prepare the partners’ capital and current accounts 5 Capital : janiel | Martha] Jill Daniel | Martha] Jill as S| s | $_ |eoxe soles $ ec 31 Balance cif — |200.000]800.000)500 000/Jan 4 Balance bit 200 000) 800 000) 500.000 = Current Accounts i Daniel [Martha] Jill Daniel | Martha] Jill 20X6 $ $ $ (20X6 $ s $ ‘Step 2 Dec 31 Drawings 180.000] 75000) 90.000|Jan 4 Balance bit 150000] 22000] 36 000/ St ‘Appropriations: | ‘Dec 31/Appropriations: Step 3 Intereston | 18000] 7.500) 9.000) |Partners’ salaries | 120 000] 60 000/ | drawings ‘Interest on capital | 4000] 16000] 10.000 |Step 4 Balance off 4 |164 285] 120 950] 90725 Interest on 6000] 880] 1 440) Step 3 (current account | ‘Share of proit__| 82285] 164570] 82.285) [362 285|203 450] 189 725) 362.285] 203 450] 189725 35" items inthe appropriation account echt will be transferred tothe ered side of partners" current accounts “Add” iwems in the appropriation account will be transferred 0 the. side of parmers" current accounts a De Profit ands appropriation r Partners” current | Gr Parter’s current Cr Profit and loss appropriation La! oo ‘As shown above, partners’ capi its are usually drawn up in » capital and current account ove, columnar form ( 448% ). rry question)S is curret Under this method, partners will keep capital accounts only. There i be ia ae account. Hence, drawings and all items in the appropriation accoun' ly entered in the partners’ capital accounts. [Ey] Summary of Accounting Entries for the Terms in Partnership Agreement ; tt Dr Assets 1. Capital contribution Cr Partner's capital 2. Interest on capital / current Dr Profit and loss appropriation accounts Cr Partner’s current * 5 * 3. Interest on drawings Dr Partner’s current Cr Profit and loss appropriation 4, Partners’ salaries a es Residual profit: Dr Profit and loss appropriation Cr Partner’s current * 5. Share of profit and loss Residual loss: Dr Partner’s current * Cr Profit and loss appropriation * oo Vote: uating capital method is used, partners” cay Note: a ng capital method is used, partners Capital account is entered instead of their current accow© | Sane einie Peter, Paul and Mary are partners sharing profits and losses in the ratio of 1:2: 3 respectively. The following balances were extracted from the books of the partnership as at 31 December 20X6, Office rent and rates Purchases Inventory as at 1 January 20X6 Cash in hand Discounts received Wages and salaries Sales Carriage outwards Motor vans at net book value Accounts payable Capital as at 1 January 20X6 —Peter — Paul —Mary Cash at bank Net accounts receivable Bad debts Drawings —Peter —Paul — Mary Loan from Mary Discounts allowed Electricity Current account as at 1 January 20X6 —Peter —Paul = Mary s 39 700 61 328 15 240 2937 43 43513 136 316 1360 45 810 8720 15 000 15 000 15.000 4158 14435 500 1500 1800 700 20.000 132 966 9.000 8000 7000Additional information: 7. . + 4 ies account. (i) Partners’ salaries were included in the wages and salari (ii) Interest allowed $4,000 on the loan from Mary had not been paid and recorde It was to be directly transferred to Mary’s current account. ' Depreciation on motor vans was 10% per annum, on a reducing balance basis, No entries were made this year. (iv) Decrease in allowance for doubtful debts $62 had not been recorded. (v) Inventory as at 31 December 20X6 amounted to $54 770. A (vi) The partnership agreement states that: (1) Interest on partners’ capital and current accounts are both 5% per annum. (2) Interest on partners’ drawings is 8% per annum. (3) Peter and Paul are entitled to annual salaries of $5 000 and $6 000 respectively. (4) Mary is guaranteed a minimum profit of $8 500. REQUIRED: (a) Prepare the partnership's trading and profit and loss and appropriation account for the year ended 31 December 20X6. (b) Prepare the partnership’s statement of financial position as at 31 December 20X6. s Teme, item vi) in the additional information. Go through em after the net profit for the year is calculated.= (a) Panties Trading, Profit and Loss and App Peter, Paul and Mary ropriation Account for the year ended 31 December 20X6 Sales Less: Cost of goods sold Beginning inventories ‘Add: Purchases Less: Closing it Gross profit ne ‘Add: Other revenue Discounts received Decrease in allowance for doubtful debts Less: Expenses Depreciation - motor vans $45 810 x 10% Interest paid on partner's lan ———> Interest on loan from Mary is treated as normal business expense. Eliminate partners" salaries which are merely a way to eppropriate net profit. They are NOT expenses Guaranteed profit (18047 ) 4s the minimum amount of rofit to be shared. As Mary's Actual share of profit (ie. $16741 «3/6 = $8 370.5) is lower than the ‘Buaranteed profit, she will ‘receive the guaranteed profi Asa result, the residual profit Jor the remaining partners will ‘be apportioned (S¢t) in profi ‘and ass sharing ratio, ie. 1:2. Office rent and rates ‘Wages and salaries $43 513-5 000 - 6 000 Carriage outwards Bad debts Discounts allowed Electricity Net profit Appropriations ‘Add: Interest on drawings Peter $1 500 x 8% = Paul $1 800 « 8% — Mary $700 x 8% Partners’ salaries ~Peter Paul Less: Interest on capital = Peer $15 000 x 5% = Paul $15 000 x 5% = Mary $15 000 x 5% Interest on current accounts = Peter $9 000 x 5% Paul $8 000 x 5% — Mary $7 000 x 5% Share of profit Peter (1/6) Paul (2/6) Mary (3/6) $ $ 5 136 316 15240 61328 54770 21798 T4516 43 2 105 14 4581 4000 39700 32513 1360 500 132 966 _ 83752 30877 | 120 | 144 | 56 320 31197 | 5000 6000 11.000 | | 750 | 750 | 750 2250 | 450 400 350 1200 14.450 ie74t 2747 5.494 8500 Te7ai) Peter, Paul and Mary Statement of Financial Position as at 31 December 20X6 $ $ $ $ ASSETS Non-current assets Motor vans at net book value $45 810-4 681 eas Current assets Inventory 54770 ‘Net accounts receivable $14 435 + 62 14497 Cash at bank 4158 Cash in hand 2937 76 362 Total Assets 117 591 EQUITY AND LIABILITIES Capital Peter 15.000 Paul 15000 Mary 15000 800 Current accounts Peter Paul Mary Balance as at 1 January 20X6 9.000 8000 7000 Add: — Interest on capital 750 750 750 Interest on current accounts 450 400 350 Share of profit 2747 5.494 8500 Loan interest 4000 12947 14644 20.600 Less: Drawings 1500 1800 700 Interest on drawings 120 144 56 1137 12700 19.844 43.871 88871 Non-current liabilities Loan from Mary 20000 Current liabilities ‘Accounts payable 8720 Total liabilities 28720 Total Equity and Liabilities 117591