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Partnership Notes

Accounting Notes > Principles of Accounting Notes

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Page |1 Partnership: An Introduction


A partnership is an association of 2 or more persons who operate a business for profits. Every partnership should draw up a Partnership Agreement However, if a partnership is formed without a Partnership Agreement, any dispute arose can be settled by referring to the Partnership Act Main Differences between Partnership & SoleProprietorship Features No. of owners Resources Profits/Losses



2 or more, but less than 20

Only 1

Funds, skills, and knowledge are pooled

Contributes all resources needed

Partners will share the profits

Owner takes all the profits

Business Partnership Advantages

1. 2.

3. 4.

Partnerships are relatively easy to establish. The ability to raise funds may be increased. Prospective employees may be attracted to the business if given the incentive to become a partner. There is a wider pool of knowledge, skills and contacts.

Business Partnership Disadvantages

1. 2.

3. 4.

Partners are jointly and individually liable for the actions of the other partners. Profits must be shared with others and decision also be shared. The partnership may have a limited life; it may end upon the withdrawal or death of a partner. A major disadvantage of a partnership is unlimited liability.

Contents of Partnership agreement Following are normally included in Partnership (written) agreement:???Capital invested by each partner Profit and loss sharing ratio Interest on capital (% per annum) Interest on drawings (% per annum) Partners' salaries Conditions for admission of a new partner Procedures, when a partner dies or retire

If there is no Partnership agreement, Following rules should apply (given by Partnership act 1890)

1) 2) 3) 4) 5)

Profit and loss are to be shared equally(50:50) Interest on capital is not allowed Interest on drawing is not allowed Partner's salaries are not allowed If any partner provides a loan to partnership, he will get 5% per annum interest on loan.

Principle of accounts by Sir Qubair Salim Chartered Certified Accountant. Contact# 0336-2311246 Email: qubair

Final Accounts of a Partnership: Type(s) of Final Accounts (1)Trading and Profit & Loss Account

*** Same as SoleTrader ***
Additional/Different items:
? P&L Appropriation Account;
? Interest on Capital;
? Interest on Drawings;
? Partners' Salaries

(2)Balance Sheet

*** Same as SoleTrader ***
Additional/ Different items:
? Capital Account for each Partner;
? Current Account to record share of profits &

(1) Profit & Loss Account (including Profit & Loss Appropriation Account) In Partnership up to Net Profit everything is same as sole trader. Net Profit obtained from the Profit & Loss Account is then transferred to "Profit & Loss Appropriation Account". The main purpose of Appropriation Account is to appropriate the net profit among all partners based on the Partnership Agreement.

Partnership (Name) Profit and Loss Appropriation Account for the year ended ............................

Net profit Add: Interest on drawings
? Partner A
? Partner B

xxx xx xx

Less: Interest on capital
? Partner A
? Partner B

xx xx

Less: Partner's salary Partner A Residual Profit

xxx xxx

(xx) (xx) xxx

Profit share
? Partner A
? Partner B

xx xx

xxx **Residual profit is shared in the ratio stated in the partnership agreement

*Now we will look at the items of appropriation account in detail: Principle of accounts by Sir Qubair Salim Chartered Certified Accountant. Contact# 0336-2311246 Email: qubair

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