Download partnership document and more Thesis Accounting in PDF only on Docsity!
INTRODUCTION
A partnership: is an agreement, preferably in writing; between two and twenty persons (except in circumstances provided for in section 30(1) of the Companies Act 61 of 1973 (as amended); to carry on a lawful business; in which each person contributes something to a common cause, in the form of money, labour or skills in a common venture; with the objective of making a profit; and that the said profit be for the joint benefit of the partners.
The partnership agreement should contain at least the following:
The contribution of each partner (including money, skills and assets).
Duties of each partner in the running of the business.
Rewards in the form of bonuses or salaries.
The profit-sharing ratio.
The basis for calculating interest on capitals, interest on current accounts and interest on drawings.
Joint insurance policies.
Agreements in restraint of trade.
The formalities for changes, retirement and dissolution of the partnership.
DIFFERENCES BETWEEN A SOLE TRADER AND A PARTNERSHIP
The main difference between a sole trader and a partnership is in the equity structure. The trading activities of a sole trader and of a partnership may be very similar and consequently the financial statements will only differ where equity is concerned. Because of this multiple ownership the equity structure, and hence the equity section in the Statement of financial position, will differ significantly from a sole trader. The profit in a partnership is not transferred directly to the Capital accounts. Profit must now be shared according to the terms of the partnership agreement. The Statement of comprehensive incomes of a sole trader and a partnership are identical to the point where the profit is calculated. After the net profit has been calculated, the Statement of comprehensive income is extended to include the ‘appropriation section’ wherein the full profit is allocated.
The partners’ contribution to a partnership is seldom equal. Their contributions may differ in: the amount of capital contributed; the amount of drawings, taken for personal use; and labour and skills.
It is becomes necessary (and fair) to reward the individual partners for their input. These ‘rewards’ are the first claim against the net profit. Similarly, ‘penalties’ in the form of interest on drawings are charged to the partners.
It is generally accepted that for a business to grow, a portion of its profit must remain in the business. A General reserve account (a saving of profit) may be created for this purpose.
Once the net profit has been established, the sequence of events is as follows:
Each partner receives interest on his capital contribution.
Each partner is rewarded for his input of labour and skills (with a salary or bonus).
Each partner is charged interest on his drawings.
The remaining profit is shared in the profit-sharing ratio.
To provide for the above, the following nominal accounts are typical in a partnership:
Interest on capital account.
Interest on current account.
Interest on drawings account.
Partner’s salary account.
Partner’s bonus account.
These accounts: are directly related to the partners’ involvement in the business; do not have any effect on normal trading results; and appear in the Statement of comprehensive income, after the net profit is calculated.
The Statement of comprehensive income of a partnership is extended to include the ‘appropriation’ section.
This means that the Statement of comprehensive income is a presentation of three final accounts:
the Trading account;
the Profit and loss account; and
the Appropriation account.
Note that all partners’ profits and losses are recorded in the Appropriation account and not (as is the case in a sole trader) in the Capital account.
The example that follows is a partnership consisting of two partners. When there are three of more partners in the business, the entries are merely repeated.
FINANCIAL STATEMENTS OF A PARTNERSHIP
Illustrative example (Redoak Suppliers)
The following information of Redoak Suppliers is presented to you on 31 December 2008, the end of their financial; year.
The Profit and loss account had already been drawn up and the net profit calculated.
Required: 1 Prepare the accounts in the ledger to record the transactions that follow; and 2 prepare the Appropriation statement for the year ended 31 December 2008. 3 Show the Statement of changes in equity at 31 December 2008.
Quick solution − Ledger of Redoak Suppliers
Capital account: A. Petty B Dec 31 Balance b/d 200 000
Capital account: B. Crew B Dec 31 Balance b/d 100 000
Current account: A. Petty B 4 Dec 31 Int. on drawings 2 000 Dec 31 Balance b/d 4 000 8.4 Drawings 18 000 Interest on capital 20 000 3 Balance c/d 48 010 Int. on current a/c 600 5 Partner’s salary 21 000 7 Appropriation (3/5) (^) 22 410 8. 68 010 68 010 2009 Dec 31 Balance b/d 48 010
Current account: B. Crew B Dec 31 Balance b/d 3 000 Dec 31 Interest on capital 10 000 3 4 Interest on 1 500 Partner’s bonus 25 000 6 5 Interest on 450 Appropriation^ (^2 /5)^ 14 940 8. 8.4 Drawings 12 000 Balance c/d 32 990 49 940 49 940 2009 Dec 31 Balance b/d 32 990
Drawings account: A. Petty B Dec 31 Balance b/d 18 000 Dec 31 Current a/c:A. Petty 18 000 8.
Drawings account: B. Crew B Dec 31 Balance b/d 12 000 Dec 31 Current a/c:B. Crew 12 000 8.
General reserve account B Dec 31 Balance c/d 90 000 Dec 31 Balance b/d 50 000 General reserve (exp) (^) 40 000 2 90 000 90 000 2009 Dec 31 Balance b/d 90 000
General reserve (expense) account N 2 Dec 31 General reserve 40 000 Dec 31 Appropriation 40 000 8.
Interest on capital account N 3 Dec 31 Current a/c: A. Petty^ 20 000 Dec 31 Appropriation 30 000 8. 3 Current a/c: B. Crew^ 10 000 30 000 30 000
Interest on drawings account N 8.2 Dec 31 Appropriation 3 500 Dec 31 Current a/c: A. Petty^ 2 000 4 Current a/c: B. Crew (^) 1 500 4 3 500 3 500
Interest on current account N 5 Dec 31 Current a/c: A. Petty^600 Dec 31 Current a/c: B. Crew^450 Appropriation 150 8. 600 600
Partner’s bonus account N 6 Dec 31 Current a/c: B. Crew^ 25 000 Dec 31 Appropriation 25 000 8.
Partner’s salary account N 7 Dec 31 Current a/c: A. Petty^ 21 000 Dec 31 Appropriation 21 000 8.
Appropriation account N 8.2 Dec 31 General reserve 40 000 Dec 31 Profit & loss(net profit) 150 0 00 8. 8.2 Interest on capital 30 000 Int. on drawings 3 500 8. 8.2 Int. on current a/c 150 8.2 Partner’s bonus 25 000 8.2 Partner’s salary 21 000 8.3 Current a/c: A. Petty^ 22 410 8.3 Current a/c: B. Crew^ 14 940 153 500 153 500
Statement of changes in equity
Redoak Suppliers Statement of changes in equity for the year ended 31 December 20 08 R Capital account: A. Petty
R Capital account: B.Crew
R Current account: A. Petty
R Current account: B.Crew
R General reserve
R Net profit
R Total
Equity at 1 Jan. 2008 200 000^ 100 000^ 4 000^ − 3 000^ 50 000^ 351 000 Profit for the year 150 000^ 150 000 Transfer to general res. 40 000^ − 40^0 Interest on capital 20 000^ 10 000^ − 30 Interest on drawings − 2 000^ − 1 500^ + 3 500 Interest on current a/c 600 − 450^ − 150 Partner’s bonus 25 000^ − 25 Partner’s salary 21 000^ − 21 200 000 100 000 43 600 30 050 90 000 37 350 501 000 Share of profit (3 : 2) 22 410^ 14 940^ − 37 Less: Drawings − 18^ − 12^ − 30 Equity at 31 Dec. 20 08 2 00 000^ 100 000^ 48 010^ 32 990^ 90 000^0 471 000
The total equity (R471 000), as displayed in the Statement of changes in equity, is reported in the Statement of financial position under the heading ‘Equity’.
STEP-BY STEP EXPLANATION
- Introduction PARTNERSHIPS
- Differences between a sole trader and a partnership
- Statement of comprehensive income of a sole trader
- Financial statements of a partnership
- Illustrative example (Redoak Suppliers)
- Quick solution − Ledger of Redoak Suppliers
- Appropriation statement
- Statement of changes in equity
- Step-by-step explanation
- 1 – Identify the necessary information, with the given balances
- 2 − General reserve
- 3 − Capital and interest on capital
- 4 − Drawings and interest on drawings
- 5 − Current accounts and interest on current accounts
- 6 − Partner’s bonus
- 7 − Partner’s salaries, credited at year-end
- 8 − Closing procedures
- 8.1 − The net profit is introduced into the Appropriation account
- 8.2 − Nominal accounts transferred to the Appropriation account
- 8.3 − Share of (remaining) profit
- 8.4 − The Drawings accounts are transferred to Current accounts
- Partner’s salaries paid out monthly (alternative method)
- Formation of a partnership
- Two individuals merge to form a partnership (O.Osborn and F.Fuller)
- Two existing businesses merge to form a partnership (B.Bailey and E.Enslin)
- The opening statement
- Changes in the ownership of a partnership
- Admission of a new partner into a partnership (Bobby Stores) (2 + 1 = 3)
- Question
- Quick solution − Ledger of Bobby Stores
- Step-by-step explanation
- Goodwill in a partnership
- Options for the Goodwill account
- Changes in the profit-sharing ratio
- Liquidation of a partnership
- Retirement of a partner (Cattery Traders) (4 – 1= 3)
- Question
- Quick solution − Ledger of Cattery Traders
- Step-by-step explanation
- Complete liquidation of a partnership (Ramesh Traders) (3 – 3 = 0)
- Question
- Quick solution − Ledger of Ram Stores
- Step-by-step explanation
- Piecemeal liquidation of a partnership (Northern Stores) (3 – 3 = 0)
- Garner vs. Murray rule
- Question
- Quick solution − Ledger of Northern Stores
- Step-by-step explanation
- Step
- Capital account: A. Petty Cr Identify the necessary information, with the given balances
- Capital account: B. Crew Cr
- Current account: A. Petty Cr
- Current account: B. Crew Dr
- Drawings account: A. Petty Dr
- Drawings account: B. Crew Dr
- General reserve account Cr
- Profit and loss account Cr
The General reserve account balance (R50 000) is given in the trial balance.
This is the account ‘survives’ in the records of a business.
To increase the general reserve, means to credit (increase) the General Reserve account.
A General Reserve (expense) account − is opened to complete the double entry.
The General Reserve (expense) account is closed off to the Appropriation account.
Adjustment No 2 2 An amount of R40 000 is to be transferred to the general reserve.
The entry to record the increase of R40 000 in the General reserve account:
General reserve (expense) account Dr 6 900 General reserve account Cr 6 900
