prepare financial statements of a partnership business
Partnership
according to the partnership act, a partnership business is the relationship between two or more individuals who wish to carry on business with the objective of making profits.
section 24 of the partnerhsip ordinance of 1890
where there is no agreement in writing regarding a condition that had not been included in an agreement. partnership disputes must be resolved according to this section.
capital and current accounts
while the capital and the current account must be maintained separately, it can be in subsidiary columns. the totals of the capital account balances and current account balances represent the total equity. the loans provided by partners is not a part of equity and must be considered as a liability.
ways to commence a partnership business
1. in writing 2. verbally 3. by the actions of the partners.
legislations that cover carrying of business partnership
1. partnership act of 1890 (controls the partnership) 2. section 519 of the companies act no.7 of 2007 (no. of partners) 3. section 7 of 1840 prevention of fraud ordinance (need of written agreement) 4. section 6 of the 1918 registration of business name ordinance( register the partnership)
conditions that may be included in a partnership agreement
1. the basis of contribution of capital 2. the profit sharing ratio 3. entitlement to interest on the capital 4.entitlement of partnership salaries 5. how goodwill is recorded.
situations where profit or loss ratio changes
1. when a new partner is admitted to the partnership. 2.Retirement of a partner.
section 42 of the partnership ordinance of 1890
according to this, when a partner retires,leaves,dies,unless he is entitlement is paid on the same day, is entitled to receive a minimum 5% annual from that day until the date of payment. maximum number of members in a partnership is 20. where there is no partnership agreement any disputes that arise must be resolved according to the provision in the act.
section 24 of the partnerhsip ordinance 1890
in which ever ratio the contributions to he capital may have been made, profits or losses must be shared equally. in respect of loan funds provided to the partnerhsip in addition to the capital, the partner lending the capital is entitled to minimum 5% annual interest per year. while all 0artners must share administration of the business there is no entitlement to a salary in respect of such assistance. no entitlement to I terest on the capital contribution. if a partner has spent his personal funds for business activities he is entitled to be reimbursed.
Returns on partnership
it is appropriate to pay interest on the capital because the partner has invested capital in the partnership having forgone the opportunity to invest in another. the returns that the partnerhsip gives the partner is a distribution from the profits that had been earned, -interest on capital -partners salaries - share of profits Returns are not considered as expenses , they are considered as a distribution of profits.
Accounts in a partnership
it is essential to prepare the capital a/c and current a/c of the partners to enable the calculation of the equity.
change in the goodwill
the journal entry to record the goodwill can be stated at follows, capital a/c of all partners in new partnership Dr. (new ratio) Capital a/c of all partners in the old partnership Cr. (old ratio) even though the adjusting if goodwill through capital accounts of partners may impact the equity of partners, there is no effect on the total equity of the partnership business.
Current account
the variable equity is recorded in the current account. It includes the following items, -interest on capital -partneship salaries -drawings -share of profits or losses -interest for loans provided -business exp borne by the partners.
capital account
while the fixed equity is recorded in the capital accounts, emphasis is on the following items, -opening balance in the capital acc. -additional capital -withdrawlas of capital as agreed.