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Partnerships There are two other types of businesses, apart from sole proprietors, that you are required to know. These are partnerships and limited liability.

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Presentation on theme: "Partnerships There are two other types of businesses, apart from sole proprietors, that you are required to know. These are partnerships and limited liability."— Presentation transcript:

1 Partnerships There are two other types of businesses, apart from sole proprietors, that you are required to know. These are partnerships and limited liability companies.

2 A partnership is a type of business entity that is owned by a minimum of two persons and a maximum of 20.

3 All partnership firm's must adhere to the laws laid out in the partnership Act of 1980. When a partnership is set up, the partners usually form an agreement called a 'Partnership Agreement' or 'Deed of Partnership'.

4 This agreement usually contains the following details. The total capital contributed by each partner. The rate of interest to be paid on each partner's capital. The rate of interest to be charged on Drawings. Salary (s) to be paid to a partner(s) The ratio in which profits and losses should be shared. The procedures to be followed if a partner dies, or if a new partner wishes to enter.

5 The Trading and Profit and Loss account of a partnership is the same as that of a Sole Trader, as long as it is a Trading concern.

6 However, the profit and loss extends to another section called the appropriation account. The Net Profit is brought down in this account and is shared up among the partners. Using the horizontal format, here is an example of the appropriation account. Each item is later discussed.

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8 Appropriation A/c for Dick and Jane Ltd for the year ended Dec 20 th 2005 $ $ $ Net Profit B/D x xxxx Add Interest on Drawings xxxxxxxx xxxxxxxxxxxxx Less: Interest on Capital xxx Salary: Dick xx Jane xx xxxx xxxxxxx xxxxxx Share of Profits: Dick.5 xxx Jane.5 xxx xxxxxx

9 INTEREST ON DRAWINGS This is an amount that is charged to each partner in an effort to discourage them from withdrawing profits from the firm. The lesser the amount withdrawn, the greater the amount that will be available for distribution.

10 INTEREST ON CAPITAL This represents revenue to each partner, as sometimes they contribute different amounts of capital. The idea is that, if the partners had invested or saved that money otherwise, they would have earned interest on it.

11 SALARY A partner may be awarded an additional amount as 'salary', if he has additional responsibilities. The interest on Drawings is added to the Net Profit, in order to 'swell' the firm's revenue. Interest on Capital and Salary are paid before profits are shared up.

12 SHARE OF PROFITS After paying the interest on capital and salary, the balance of profits is shared up according to the 'profit ­ sharing ratio' decided by the partners. This ratio may vary, for example, they may decide to share profits according to the proportion in which capital was contributed.

13 Current Accounts The Current Accounts of partners is like a mirror image of the appropriation account. On the credit side are items which represent what the partners are entitled to, that is, salaries, share of profits and interest on capital.

14 The Debit side has items which represent a cost to the partners, such as "drawings" and "interest on drawings". The current account is balanced off at the end of the month.

15 Here is an example of the format.

16 Merged Current A/c It is also possible to merge the partners current a/c into one. As is shown in the example below: DetailsDick$Jane$DetailsDick$Jane$ Drawings Interest on drawings Balance c/d XxxXxxXxxxxxXxxXxxXxxxxx Bal b/f Salary Interest on capital XxxXxxXxx____xxxXxx___Xxx____xxx

17 Problem 1 Joan and John are in partnerships sharing profits and/or losses equally. The following balance were extracted from there books at 31 December 2003: Joan John Capitals 20,000 30,000 Current A/c’s 10,000 5,000 Drawings 8,000 6,000 Net Profit $ 40,000

18 The partnership agreement provides that: Interest on capital is to be paid at 10% per annum Joan is to receive a salary of $8,000 Interest on drawings is 15%

19 Construct Joan and John’s appropriation a/c. Draw up the merged/joint current account for the partners showing the balances at the end. Required:

20 The End


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