Introduction to Partnership Account including video presentation

Partnership is a form of business where two or more persons with similar ideology come together for the purpose of carrying on business. It can also be seen as a business relation between or among persons who come together to carry out a form of business with a view to making a profit.

In doing this, and to avoid disagreement in the course of operations, certain agreements are usually laid down by the partners. This is to avoid any kind of argument that may arise.

Partnership Agreement

The agreement between the partners usually take the following forms:

a.    The ratio of sharing profit or loss

b.    Amount of capital to be contributed by each partner

c.    Rate of interest on the capital contributed

d.    Amount of drawings to be allowed

e.    Rate of interest to be charged of partners’ drawings

f.     Salary amount to be paid, if any

g.    Whether or not loans to partners should be allowed

h.    Rate of interest, if any, to be charged on partners’ loans

i.      Method (or condition) of admitting new partner

j.      Method of valuing goodwill
These are also explained in the following video below 

Absence of Partnership Agreement

Where no partnership agreement is made, the partnership Act of 1890 requires that the following be followed:

                      i.        Profit or loss is to be shared equally

                     ii.        No interest is paid on partners’ capital

                    iii.        No salary is paid to any partner

                   iv.        Interest shall be charged on partners’ loans at 5% per annum

                    v.        No interest should be charged on partners’ drawings

Final Account of a Partnership

The approach adopted in the preparation of partnership account takes the same style as that of a sole proprietorship, excepting that:

                      i.        There is added what is known as appropriation account

                     ii.        Items of owners’ equity are treated in a different account – either in capital account or in current account – and the result is transferred to the statement of financial position.

Appropriation Account

This is the section of the partnership final account that deals with sharing of profit or loss. It takes into consideration items as salaries of partners, etc.

Methods of Accounting for Partners’ Equity

The reporting methods for partners’ equity tend to describe the treatment of the under listed items:

                      i.        Partners’ drawings

                     ii.        Interest on partners’ drawings

                    iii.        Partners’ share of losses

                   iv.        Partners’ salaries

                    v.        Interest on partners’ capital

                   vi.        Interest on loans from partners

                  vii.        Partners’ share of profit

There are basically two methods of accounting for partners’ equity. These are

1.    Fixed capital method and

2.    Fluctuating capital method

Fixed Capital Method

Under this method, all items (i – vii) listed above are treatment in the current account of the partners while the balance in the capital account remains unchanged. This means that no posting is made to the capital account. The capital account will only change when additional capital is brought in.

Fluctuating Capital Method

Here, the above listed items of equity (I – vii) are treated in the capital account. This changes the position of the capital account. While items (I – iii) are debited to the capital account, items (iv – vii) are credited to the capital account. With this, the balance in the capital account changes from period to period.