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6. Prepare partnership statements

6. Prepare Partnership Statements

A partnership involves two or more individuals carrying on a business with shared profits and liabilities. Accounting for partnerships requires proper preparation of agreements, accounts, and financial statements.

6.1 Contents of a Partnership Agreement

A partnership agreement is a legal document that defines the rights and responsibilities of partners. It usually includes:

  1. Capital Contributions – Amount each partner invests.

  2. Profit and Loss Sharing Ratio – How profits and losses are divided.

  3. Interest on Capital – Interest payable on partner’s capital, if any.

  4. Interest on Drawings – Charges on money withdrawn by partners.

  5. Salary or Remuneration – Fixed salaries for partners if agreed.

  6. Admission or Retirement of Partners – Procedures for changes in partnership.

  7. Dissolution Terms – How assets and liabilities will be handled on dissolution.

Note: The partnership agreement must comply with SOPs and legal requirements.

6.2 Preparation of Current and Capital Accounts

Each partner usually has:

  • Capital Account: Shows the original investment and permanent changes (e.g., additional capital, share of profit).

  • Current Account: Shows temporary changes like drawings, salary, interest, and share of profit/loss.

Double Entry Examples:

  1. Investing Capital:

    • Dr Cash/Bank

    • Cr Partner’s Capital Account

  2. Partner’s Drawings:

    • Dr Partner’s Current Account

    • Cr Cash/Bank

  3. Share of Profit:

    • Dr Profit & Loss Appropriation Account

    • Cr Partner’s Current Account

6.3 Partnership Income Statement

The Income Statement (Profit & Loss Account) for a partnership is similar to a sole trader but includes gross profit, expenses, and net profit to be shared among partners.

Steps:

  1. Calculate revenue and expenses.

  2. Deduct expenses from revenue to get net profit.

  3. Net profit is transferred to Profit & Loss Appropriation Account for distribution.

6.4 Appropriation of Profit and Loss Account

This account distributes profits (or losses) among partners according to the agreement.

Steps:

  1. Add interest on capital (if any).

  2. Deduct partner salaries (if any).

  3. Deduct interest on drawings (if any).

  4. Allocate remaining profit/loss according to profit-sharing ratio.

Example:

Particulars Amount (Ksh)
Net Profit 100,000
Add: Interest on Capital 5,000
Less: Partner Salaries 10,000
Remaining Profit 95,000
Share of Profit (Partner A 60%, Partner B 40%) A: 57,000, B: 38,000

6.5 Partnership Statement of Financial Position (Balance Sheet)

The Statement of Financial Position shows assets, liabilities, and partners’ equity.

Steps:

  1. List current and non-current assets.

  2. List liabilities (loans, payables).

  3. List partners’ capital accounts and current accounts under equity.

Format Example:

Assets Ksh Liabilities & Equity Ksh
Cash 50,000 Loans Payable 20,000
Accounts Receivable 30,000 Accounts Payable 10,000
Inventory 40,000 Partner A Capital 60,000
PPE 70,000 Partner B Capital 30,000
Total Assets 190,000 Total Liabilities & Equity 190,000

Short Exam-Ready Summary

  1. Partnership Agreement: Defines capital, profit-sharing, interest, salaries, and dissolution terms.

  2. Capital & Current Accounts: Record capital investments, drawings, and share of profits/losses.

  3. Income Statement: Calculates net profit/loss.

  4. Profit & Loss Appropriation: Distributes profit or loss among partners.

  5. Statement of Financial Position: Shows assets, liabilities, and partners’ equity.