Principles of Accounting: Introduction to Accounting for Partnerships

• It is quite common for two or more people to enter into a business partnership with one another
• We have already looked at types of business entities here
• You can also read more about Partnerships in a post found here
• While most of the accounting concepts we have learnt thus far apply to Partnership businesses as well
• The nature of partnership business means there are certain accounts, concepts, issues and techniques that are unique to them

Important things to remember when dealing with Partnerships

• While you can learn more about partnerships by following the links above it is important to remember the following things
• The partnership ceases to exist when:
  • death of a partner
  • admission of a new partner
  • When a partners leaves partnership
  • It becomes bankrupt
  • or is dissolved
• Partnerships can have an oral or written agreement called a Partnership deed
• This covers issues such as:
  1. The amount of Capital to be contributed by each partner
  2. The ratio used to share profit and losses
  3. The amount each partner can take out as drawings
  4. The interest payable on capital or current accounts if any
  5. The interest chargeable on drawings if any
  6. The life of the partnership
  7. Arrangements to be made in the event of death of a partner or when a partner leaves
  8. Procedures to be followed when settling disputes
  9. Arrangements to be made when admitting a new partner
• This information is useful when preparing accounts pertaining to partnerships
• In any case this information is clearly given in examination questions pay particular attention to it when accounting for partnerships
• All these things have to be recorded in the books

Unique partnership accounting concepts

• It is important to take note of this very important fact:
• There are no such things a partnership accounts
• The misnomer is frequently used to refer to accounting techniques that are commonplace in Partnerships

1 Income Statements of Parnerships

• These are no different in form and content when compared to those of sole proprieters and companies
• It is important to note that we can have a manufacturing partnership in which case the partnership would also prepare the usual manufacturing account
• The net profit figure is then transferred to an Appropriation Account which will be looked at

2 Capital Accounts

• These will be looked at in detail
• However unlike those of a sole trader there are columns showing the capital contribution of each partner
• We will examine Capital Accounts in detail here

3 Salaries and Drawings

• It is possible for partners to earn a salary
• In such cases the salary is shown in the Appropriation Account rather than in the Income Statement
• Drawings are shown in separate columns for each partner

4 Other items

• Other issues such as interest on drawings
• Interest on capital etc
• Current Accounts
• Have to be dealt with these will be dealt with once we encounter them

To access more topics go to the Principles of Accounts Notes.