2. PARTNERSHIP JOIN KHALID AZIZ COACHING CLASSES ICMAP STAGE 1,2,3,4,5
ICAP MODULE A,B,C,D
PIPFA
BBA & MBA
B.COM & M.COM
ACCOUNTING OF O/A LEVEL
MA-ECONOMICS
KARACHI, PAKISTAN.

3. Learning Objectives
Define a partnership and the major attributes of a partnership
State the advantages and main characteristics of the partnership structure of business
Explain the purpose of a partnership agreement and describe its typical contents
Describe the special features applicable to accounting for partnerships

4. Learning Objectives (cont’d)
Explain the accounting entries for the formation of a partnership
Explain the accounting entries for the allocation of profits and losses of a partnership
Explain the accounting entries for drawings and advances or loans made by partners
Describe content of the financial statements of a partnership

5. Partnership Defined Partnership Act: Necessary attributes
the relationship that ‘subsists between persons carrying on a business in common, with a view to profit’
Necessary attributes
Must be an agreement
View to earning a profit
Co-ownership of the business

6. Advantages Pooling of resources Low cost Taxation
Formed at little or no cost
Subject to little regulation
Not required to publish financial statements
Taxation

7. A partnership combines
CAPITAL
TALENT
EXPERIENCE
of the partners

8. Characteristics Mutual Agency Unlimited liability Each partner:
Acts as agent for the partnership
Has authority to act on behalf of the partnership
Unlimited liability
Each partner personally responsible for all the debts of the business
No limit to liability
Personal assets are exposed
Unattractive to wealthy individuals

9. Characteristics (cont’d)
Limited life
Ended if member dies, withdraws or retires, or becomes incapacitated
Ended on the admission of a new member
Ended via bankruptcy
Ended if formation purpose is over
Transfer of partnership interest
Capital interest is personal asset

10. Partnership Agreement
Agreement covers:
Name, location and nature
Name, investment and duties of each partner
Sharing of profits and losses
Administrative details
Withdrawals (drawings)
Dispute resolution
Admission/withdrawal of partners
Partnership liquidation

11. Accounting for a Partnership
Formation
Drawings
Distribution of profits
Change in partnership members
Liquidation

12. Accounting for a Partnership (cont’d)
Method 1: Capital accounts which include profits and losses
Capital a/c credited with investments
Drawings a/c debited with withdrawal of assets or personal expenses
Drawings a/c closed to capital
P&L summary closed to profit distribution and allocated to capital a/c’s

13. Accounting for a Partnership (cont’d)
Method 2: Fixed capital accounts
Capital a/c credited with investments and debited with withdrawals of capital
Drawings a/c debited with withdrawal of assets or personal expenses
Drawings a/c closed to retained profits
P&L summary closed to profit distribution and allocated to retained profits a/c’s

14. Formation of a Partnership
Investment of both assets and liabilities
Contributions
Recorded as for sole trader
Date Assets XXXX
Liabilities XXX
Partner’s Capital XXX
being initial investment by partner

15. Allocation of Partnership Profits and Losses
Consider for each partner:
services performed
capital invested
business risk assumed
Common methods
fixed ratio
fixed ratio based on capital balances
fixed ratio allowing for interest and salary

16. Allocation of Partnership Profits and Losses (cont’d)
Allocation entry — Method 1:
June 30 P & L Summary XXX
Profit Distribution XXX
transfer of profit to distribution account
June 30 Profit Distribution XXX
Partner A, Capital XX
Partner B, Capital XX
distribution of profit to partners

17. Allocation of Partnership Profits and Losses (cont’d)
Allocation entry — Method 2:
June 30 P & L Summary XXX
Profit Distribution XXX
transfer of profit to distribution account
June 30 Profit Distribution XXX
Partner A, Retained Earnings XX
Partner B, Retained Earnings XX
distribution of profit to partners

18. Allocation of Partnership Profits and Losses (cont’d)
Fixed ratio
split based as stated e.g. 7:3, say profit of $60 000
June 30 P & L Summary $60 000
Profit Distribution $60 000
transfer of profit to distribution account
June 30 Profit Distribution $60 000
Becker, Capital $42 000
Cook, Capital $18 000
distribution of profit to partners

19. Allocation of Partnership Profits and Losses (cont’d)
Ratio based on capital balances
profit of $60 000
Capital investment
Becker $
Cook $
Profit allocation
Becker ( / ) x = $36 000
Cook ( / ) x =
$60 000

20. Allocation of Partnership Profits and Losses (cont’d)
Ratio based on capital balances (method 1)
June 30 P & L Summary $60 000
Profit Distribution $60 000
transfer of profit to distribution account
June 30 Profit Distribution $60 000
Becker, Capital $36 000
Cook, Capital $24 000
distribution of profit to partners

21. JOIN KHALID AZIZ ICAP STUDENTS MODULE B FINANCIAL ACCOUNTING
BUSINESS ECONOMICS
MODULE D COST ACCOUNTING
COMPLETION OF SYLLABUS IN 2 MONTHS
JOIN KHALID AZIZ
0322*
R1173, ALNOOR SOCIETY, BLOCK 19. F.B.AREA, KARACHI.

22. Allocation of Partnership Profits and Losses (cont’d)
Ratio based on capital balances (method 2)
June 30 P & L Summary $60 000
Profit Distribution $60 000
transfer of profit to distribution account
June 30 Profit Distribution $60 000
Becker, Retained Earnings $36 000
Cook, Retained Earnings $24 000
distribution of profit to partners

23. Allocation of Partnership Profits and Losses (cont’d)
Fixed ratio allowing for interest and salaries
Becker Cook Total
Interest on capital
$ x 10% $15 000
$ x 10% $ $25 000
Salaries to partners
Total interest & salary credited
Residual to be divided equally
Equity increase $ $ $60 000

24. Allocation of Partnership Profits and Losses (cont’d)
Ratio based on capital balances (method 1)
June 30 P & L Summary $60 000
Profit Distribution $60 000
transfer of profit to distribution account
June 30 Profit Distribution $25 000
Becker, Capital $15 000
Cook, Capital $10 000
distribution of interest on capital to partners

25. Allocation of Partnership Profits and Losses (cont’d)
Ratio based on capital balances (method 1)
June 30 Profit Distribution $28 000
Becker, Capital $18 000
Cook, Capital $10 000
distribution of salaries to partners
June 30 Profit Distribution $7 000
Becker, Capital $3 500
Cook, Capital $ distribution of residual profit to partners

26. Allocation of Partnership Profits and Losses (cont’d)
Ratio based on capital balances (method 2)
June 30 P & L Summary $60 000
Profit Distribution $60 000
transfer of profit to distribution account
June 30 Profit Distribution $25 000
Becker, Retained Earnings $15 000
Cook, Retained Earnings $10 000
distribution of interest on capital to partners

27. Allocation of Partnership Profits and Losses (cont’d)
Ratio based on capital balances (method 2)
June 30 Profit Distribution $28 000
Becker, Retained Earnings $18 000
Cook, Retained Earnings $10 000
distribution of salaries to partners
June 30 Profit Distribution $7 000
Becker, Retained Earnings $3 500
Cook, Retained Earnings $ distribution of residual profit to partners

28. Drawings and Loans Made by Partners
Drawings (method 1)
20 March Partner, Drawings XXX
Cash at Bank XXX cash drawings by partner
30 June Partner, Capital XXX Partner, Drawings XXX closing entry for partner’s drawings

29. Drawings and Loans Made by Partners (cont’d)
Drawings (method 2)
20 Mar Partner, Drawings XXX
Cash at Bank XXX
cash drawings by partner
30 June Partner, Capital XXX
Partner, Retained Earnings XXX
closing entry for partner’s drawings

30. Drawings and Loans Made by Partners (cont’d)
Interest on drawings (method 1)
30 June Partner, Capital XXX Profit Distribution XXX charging interest on drawings
Interest on drawings (method 2)
30 June Partner, Retained Earnings XXX Profit Distribution XXX charging interest on drawings

31. JOIN KHALID AZIZ PIPFA STUDENTS INTERMEDIATE FINANCIAL ACCOUNTING
PERFORMANCE MEASUREMENT
COMPLETION OF SYLLABUS IN 3 MONTHS
JOIN KHALID AZIZ
0322*
R1173-ALNOOR SOCIETY BLOCK 19 F.B.AREA-KARACHI.

32. Loans or Advances Date Cash at Bank XX Advance from partner A XX
Date Interest expense X Cash at bank/Interest Payable X

33. Financial Statements General-purpose or special-purpose report?
Each partner’s equity reported separately on the Balance Sheet
Salaries, interest on capital and interest on drawings are not expenses

34. Financial Statements (cont’d)
No income tax expense
Profit/loss allocation disclosed
Balance Sheet
Statement of Partner’s Equity