chapter 15 partnership accounting. nature of a partnership partnerships are a form of business...
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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 Partners' Current a/c Drawings a/c
Loan Interest Paid Profit & Loss a/c Bank a/c
Loan Interest Owing Profit & Loss a/c Partners' Current a/c
Partners' Salaries Paid Appropriation a/c Bank a/c
Partners' Salaries Owing Appropriation a/c Partners' Current a/c
Interest on Capital Appropriation a/c Partners' Current a/c
Share of Residual Profit Appropriation a/c Partners' Current a/c
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