partnership accounts

• Partnership


  The relationship which subsists between persons carrying on a business in common with a view of profits
• Elements of a partnership

  • Minimum 2 persons - maximum 20
  • Business activity
  • Profit object
  • Common goal
• Methods of commencing partnerships

  • Verbally
  • Behavior
  • With a written agreement
• Partnership agreement


  The terms and conditions agreed and signed by all partners in a partnership
• Contents of a partnership agreement

  • Name and address of partnership
  • Names and addresses of partners
  • Amount of capital to be introduced
  • Profit or loss sharing ratio
  • Salaries to partners
  • Interest on capital
  • Limitations and interest on drawings
  • Procedures to be followed in an admission or retirement of a partner
• Laws relating to partnerships

  • Companies Act No. 07 of 2007 (section 519)
  • Prevention of Frauds Ordinance No. 07 of 1840
  • Business Names Registration Act No. 06 of 1918
  • Section 24 of the Partnership Ordinance of 1890
  • Section 42 of the Partnership Ordinance of 1890
• If the initial capitals more than 1000, it should be started with the written agreement.
• If a different name is used as a business name, it should be register with in 14 days.
• According to section 24 of the Partnership Ordinance of 1890


  • Capital should be introduce equally
  • Profits and loss sharing equally
  • No interest on capital
  • No salaries to partners
  • 5% interest for the loans provided
• According to section 42 of the Partnership ordinance of 1890, 5% interest should be paid on the unsettled balance for the retired partners.
• Comparison of Partners Agreement and Section 24 of Partnership Ordinance


  • Sharing of profits and losses
  • Payment of interest on capital
  • Payments of salaries to partners
  • Interest on advances by partners
• Partners Salaries


  Salaries paid for the works provided by partners, treated as a mode of profit appropriation
• Interest on capital


  Interest paid to partners on their capital introduced, before sharing the profit or loss
• Partners may share the profits or losses based on the capital invested by them. However, if the capital introduced by them is not equal, sharing profits or losses equally is not reasonable.
• Accounts maintained by partnerships

  • Partner's capital a/c
  • Partner's current a/c
  • Partner's drawing a/c
  • Partner's loan a/c
• Partner's capital accounts


  Transactions in capital nature are recorded, e.g. introduction of capital, withdrawal of capital, surplus or losses on revaluation of assets and liabilities and goodwill adjustments
• Partner's current accounts


  Transactions related to current accounting period are recorded, e.g. share of profits/losses, partners' drawings, interest on capital/current account balances and salaries to the partners
• The transactions related to current accounting period such as share of profits/losses, partners' drawings, interest on capital/current account balances and salaries to the partners are recorded in a current account.
• The transactions in capital nature will be recorded in a capital account.
• A format for a capital account is given.
• A format of a current account is given.
• Ishini, Bhanu and Amaya were carrying a partnership business sharing profits and losses in the ratio of 5:3:2. Their current account balances as at 01.04.2019 were Ishini Rs. 900 000, Bhanu Rs. 700 000, and Amaya Rs. 600 000.
• Transactions occurred during the year ended 31.03.2020 include interest on capital, salaries to partners, partners' drawings, and profit share.
• Sathsarani, Shaveen and Lirushi were carrying a partnership business sharing profits and losses in the ratio of 3:2:1. Their current account balances as at 01.04.2019 were Sathsarani Rs. 800 000, Shaveen Rs. 400 000, and Lirushi Rs. (200 000).
• Interest on capital


  Amount paid to partners based on their capital account balances
• Interest on capital for the year ended 31.03.2020


  • Sathsarani: Rs. 300,000
  • Shaveen: Rs. 500,000
  • Lirushi: Rs. 400,000
• Partner's salaries


  Monthly salary paid to partners
• Partner's salaries for the year ended 31.03.2020


  • Sathsarani: Rs. 30,000 per month
  • Shaveen: Rs. 20,000 per month
  • Lirushi: Rs. 20,000 per month
• Partner's drawings


  Amounts withdrawn by partners from the business
• Partner's drawings for the year ended 31.03.2020

  • Sathsarani: Rs. 400,000
  • Shaveen: Rs. 300,000
  • Lirushi: Rs. 500,000
• Profit share


  Portion of net profit allocated to each partner
• Profit share for the year ended 31.03.2020


  • Sathsarani: Rs. 600,000
  • Shaveen: Rs. 400,000
  • Lirushi: Rs. 200,000
• Prepare the partners' current account for the year ended 31.03.2020
• Prepare income statement and appropriation account
• Learning Outcomes


  • Calculates financial performance (profit/loss) of a partnership business
  • Indicates the method of distribution of profit/losses
  • Prepares Income Statement
  • Transfer of appropriated items to current accounts
• Items in a partnership financial statements

  • Interest on capital
  • Method of appropriating profits and losses
  • Net Profit
  • Profit & Loss appropriation statement
  • Partner's salaries
  • Share of profits/losses
  • Income Statement
  • Transfer to Current Accounts
• Income statement of a partnership is similar to the income statement prepared by a sole trader
• Profit or loss earned by a partnership should be shared among the partners according to their profit and loss sharing ratio, after paying interest for the capital and salaries for the partners
• Profit and Loss Appropriation Account


  Shows how the net profit or loss has been shared among partners
• Journal Entries for Basic Adjustments

  1. Interest on Capital accounts

  2. Partners' Salaries

  3. Interest on Loans

  4. Commission and Rent to the Partners

  5. Profit shares of partners