Partnership Accounting Chapter 15 Partnership Accounting

Nature of a Partnership Partnerships are a form of business organization owned by two or more persons, called partners, for the purpose of making a profit. All partners, with the exception of sleeping partners, take part in decision making.

A Typical Partnership Deed profit and loss sharing ratio amount of capital to be contributed by each partner rate of interest (if any) to be paid on capital rate of interest (if any) to be charged on drawings rate of interest (if any) on loans given by partners to the partnership salary (if any) to be paid to partners and procedure to be followed for the admission of new partners.

Partnership Act of 1890 In the absence of a partnership deed, we look to the Partnership Act of 1890 for direction. The Act states, among other things, that: profit and losses are to be shared equally; partners are not charged or entitled to: interest on drawings, interest on capital, or salary; and partners are entitled to a 5% interest on loans made to the partnership.

Partnership Records The records of a partnership comprise of the: Trading, Profit and Loss Account Appropriation Account Current Accounts Capital Accounts Balance Sheet.

Appropriation Account Some common appropriations of net profit include: Interest on Capital Partners’ Salaries Interest on drawings Share of Residual Profit.

Current Account A credit balance in a Current Account indicates that the business owes the specific amount to the partner. A debit balance in a Current Account indicates that the partner owes the business the specific amount.

Accounting Entries Accounting Entries Debit Credit Interest on Drawings Partners' Current a/c Appropriation a/c Partners' Drawings Drawings a/c Loan Interest Paid Profit & Loss a/c Bank a/c Loan Interest Owing Partners' Salaries Paid Partners' Salaries Owing Interest on Capital Share of Residual Profit