Partnership Accounting

Partnership Accounting

Partnership is business carried out by few person and shared profit. Individual who shares profit are known as partner, while collectively organization is known as firm.

a)    Association or two or more persons.

b)   Agreement to share profit & loss.

c)    Business is carried out by all or some of them.

Types of Partners Accounts

There are two types of accounts for partner

a)    Capital Account

b)   Current Account

Capital Account

Every amount is required to contribute a fixed amount as per agreement. This amount will remain fixed. It means partner cannot draw any amount from the Capital account.

Current Account

Partner current account is used to transfer the accumulate profit; drawings are also deducted charged to current account. Drawing will reduce the current account of partner, while profit will increase the current account.

Opening Balance	10,000
Add: profit	5,0000
Less: Drawing	(2,000)
	13,000

 Profit Sharing in Partnership Accounting:

Profit can share profit in any agreed ratio. It is important to note that profit sharing ration and capital contribution by the partners are two independent issues. Profit sharing ratios not necessarily depends on the capital contribute by them. This can be explained with an example

Example

Three partner = A, B, C

Capital Contribution by each partner= 100,000

Profit Share Ratio among A,B and C = 4, 5, 6

Profit = 500,000

Divided the profit as per above profit share ratio?

Solution

A	4/15 x 500,000	133,333
B	5/15 x 500,000	166,667
C	6/15 x 500,000	200,000

Notional Salary in Partnership Accounting:

Some partner may be given salary out of profit. The following are important point for notional salary

a)    It is not an expense.

b)   It is given from the profits.

c)    Notional is an additional profit.

d)   Profits are shared between partners after deducting such salary from profit.

Example

Three partner = A, B, C

Share Ratio = 4, 5, 6

Profit = 500,000

Notation salary of A= 100,000

Divided the profit as per above profit share ratio?

Solution

	Total	A	B	C
Salary	100,000	100,000
Profit(500,000-100,000)	400,000	106,667	133,333	160,000
Total	500,000	206,667	133,333	160,000

Notional Interest in partnership Accounting:

Notional interest accounting treatment is same as it is for notional salaries.

a)    It is not an expense.

b)   It is deducted from cumulative profit.

c)    Remaining profit is share among the partners.

Example

Three partner = A, B, C

A,B, and C Capital = 200,000, 300,000 and 500,000

Rate of interest = 5%

Share Ration = 4, 5, 6

Profit = 500,000

Notation salary of A= 100,000

Divided the profit as per above profit share ratio?

Notional Interest Calculation

Partners	Capital	Interest
A	200,000	10,000
B	300,000	15,000
C	500,000	25,000
		50,000

Profit to be distributed (appropriated)

Profit – Notional Salaries- Notional interest

= 500,000-100,000-50,000

=350,000

Profit Sharing in Partnership Accounting

	Total	A	B	C
Salary	100,000	100,000
Interest	50,000	10,000	15,000	25,000
Profit	350,000	93,333	116,667	140,000
Total	500,000	203,333	131,667	165,000

Guaranteed Minimum profit

Some or more partner is offered guaranteed profit. In such circumstance , the profit are share as normal, however, if shared profit is less than guaranteed profit, then difference is contributed by other partners.

Example

Profit = 400,000

A notional Salary= 100,000

Profit sharing ratio (A,B,C)= 2, 3, 4

Guaranteed profit A = 100,000

Solution

	Total	A	B	C
Salary	100,000	100,000
Profit (2/9,3/9, 4,/9)	300,000	66,667	100,000	133,333
Guaranteed Profit (3/7,4/7)		33,334	(14,286)	(19,048)
	400,000	100,000	85,714	114,285