Wednesday, January 11, 2023

ACCOUNTANCY FORM SIX TOPIC 1:PARTNERSHIP ACCOUNTING

  Eli-express       Wednesday, January 11, 2023

 

TOPIC 1:  PARTNERSHIP ACCOUNTING

  1. PARTNERSHIP
    WHAT IS IT?

Is a relationship between persons who have agreed to share profit and loss of the business carried by all with a profit meditative.

Partners: Are persons making an agreement to carry business for a common purpose/intention.

  • Individual – these are partners (Persons by nature).
  • Collectively – This is a firm (legal persons).

MAIN FEATURES OF PARTNERSHIP;

  1. Two or more persons.
  2. There must be an agreement between partners.
  3. Lawful business.
  4.  Profit Motive.
  5. Principal to agent relationship.
  6. Unlimited liabilities.
  1. CAPITAL ACCOUNTS

Capital can be contributed

(a) In kind

Anything equivalent to cash e.g. A house, a car etc

   ENTRIES
   DR ; Motor car A/c
   CR ; Capital A/c
    b) In cash
   – It is in cash
   ENTRIES
    DR ; Cash A/c
    CR ; Capital A/c
 c) Both cash and in kind
– Partner brought part in cash and part in kind.

TYPES OF CAPITAL ACCOUNTS

There are two types of Capital Account

(a)     Fluctuating capital Account

  • Also it is known as floating capital account.
  • This system partners capital account do not remain intact (as its original balance but fluctuates quite frequently)
  • It means the capital account changes with all items concerning partners e.g. Interest on drawings, interest on capital, Partners salaries, commission, Drawings, Properties brought in, Profit and less distribution.

(b)     Fixed Capital Account

Under this system the original capital invested by the partners remain unaltered unless additional capital is invested or capital itself is withdrawn by mutual agreement.

(c)     Partner’s Current Account

It is an account that carries all items concerning Partners e.g. Interest on capital, Interest on drawings, Drawings, Partner’s salaries and wages/ commission to partner.

(d)    Profit and Loss Appropriation Account

This is an extension of usual profit and loss Account, it Is prepared for adjusting transaction relating to the partnership deed.

Contents

  • Interest on partner’s capital.
  • Interest on partner’s drawings.
  • Interest on partner’s loans.
  • Partners salaries.
  • Partner’s commission.

NOTE

These transactions are treated separately without mixing up with general trading transaction.

                                             ENTRIES



DR CR
1 Interest on Partner’s Capital


DR; Interest or past Capital   a/c xx

CR; Partner’s capital (current a/c
xx

Transfer (fx)


DR; Profit and loss appropriation a/c xx

CR; Interest on Partner’s capital
xx




2 Interest on drawings


DR; Partner’s Capital/Current     a/c xx

CR; Interest on Partner’s Drawings
xx

Transfer (fx)


DR; Interest on Partner’s Drawings       a/c xx

CR; Profit and loss Appropriation         a/c
xx




3 Interest on Partner’s Loans


DR; Interest on Partner’s Loan xx

CR; Partners capital   a/c
Xx

Transfer (fx)


DR; Interest on partner’s Loan xx

CR;
Xx
4 Partner’s salaries/Commissions


DR; Partner’s salaries/commission xx

CR; Partner’s capital   a/c
Xx

Transfer (fx)


DR; Profit and loss appropriation   a/c xx

CR; Partner’s salaries/commission
Xx




EXERCISE 1

Amake and Babake started a partnership on 1st January, 2010. Both agreed in the partnership did the following;

  1. To contribute Shs.100, 000 each as capital.
  2. To share Profit and loss equally.
  3. Interest on capital at a rate of 5%.
  4. Interest on drawings at a rate of 10%.
  5. Partner’s salary Shs.50, 000 per month each.

Transactions for the Month of January, 2010

1st January,2010 Invested required capital as per deed
Purchased goods from RTC 700000
Purchased goods from Ally cash 100000
Babake inject additional funds in cash 200000
Amake took 50,000 shs from the firm to pay school fees for his son
31st January 2010 Sold goods to NMC worth 2,000,000

Sold goods to NMC by cash 500,000

Goods counted physically worth 100,000

Paid rent 10,000

Rent received 100,000

Paid to partner’s January salaries

Paid salaries 2000

Paid productive wages 5000

Required

-Journal Proper to record all the transaction (No narration needed)

-Prepare ledger a/c’s to record all transactions relating to the months 1/2010

-Prepare trading profit and loss a/c and appropriation account for the period in a  question.

-Show by extracting financial position of the A and B partnership (Amake and Babake).

PROFIT AND LOSS APPROPRIATION ACCOUNT

Commission xxx Net profit b/d Xxx
Net loss xxx interest on drawings
partner’s salaries   A- xx
                               A – xx
                            B – xx xxx                                B   – xx Xxx
Bonus to partner’s


Interest on loan   xx


general reserve   xx


Residual profit


                           A – xx


                           B – xx xxx


xxxx xxxx




PROFIT APPORTIONMENT BASIS

We are having two Basis of Apportioning residual profits

  1. Time Basis Apportionment.
  2. Profit analysis basis.

TIME BASIS APPORTIONMENT

In this method profit is apportioned between the various periods. That is to say the profit is accrued evenly.

Example

A and B are in partnership with share profit of .3:2 respectively on 1st January their capital stood at 500,000 and 400000 respectively. They decided to admit C as a new partner on 1st October, 2010, their new share profit ratio is 2.2.1. During the year the following Transaction took place.


Tshs
Purchases were 1,000,000
Sales were 2,500,000
Partner’s salaries 600,000



C brought 100,000 as capital
Interest on capital 10% p.a

Electricity 100,000
Salaries and wages 200,000

Required;

-Prepare Profit and loss appropriation on time basis for A and B partnership and ABC partnership. Financial year ended 31st Dec. 2010:

Workings (W).

A AND B

PROFIT AND LOSS APPROPRIATION ACCOUNT FOR THE PERIOD ENDED

                                           30TH SEPTEMBER, 2010

(Trading) (shs)

Purchases 750,000.00 sales 1,875,000.00
gross profit c/d 1,125,000.00


1,875,000.00 1,875,000.00
electricity 75,000.00 gross profit b/d 1,125,000.00
salaries and wages 150,000.00

net profit c/d 900,000.00


1,125,000.00 1,125,000.00
interest on capital
Net profit b/d 900,000.00
                           A – 45,000


                           B – 30,000 75,000.00

Partner’s salary 450,000.00

residual     profit


                           A –   225,000


                           B –   150,000 375,000.00


900,000.00 900,000.00




Working ; – W2purchases (A, B & C)

Total 1,000,000 x 9/12   = 250,000

Sales (A, B & C)

Total 2,500,000 x   9/12 = 625,000

Electricity (A, B &C)

Total 100,000 x   9/12 = 25,000

Salaries and wages (A, B & C)

Total 200,000 x 9/12= 50

Interest on capital (A, B & C)

Total A – 600,000 x10/100 x9/12 = 15,000

B – 400,000 x10/100 x 9/12= 10,000

C – 100,000 x x = 2500

Partner’s salaries (A, B & C)

Total 600,000 x = 50,000

Residual value

For A; Total 123,500 x = 49,400

For B; Total 123,500 x = 49,400

For c; Total 123,500 x = 24,700

A, B & C PROFIT AND LOSS APPROPRIATION ACCOUNT FOR THE PERIOD END 30TH SEPT.

(Trading) shs

purchases 250,000 sales 625,000
gross profit c/d 375,000


625,000 625,000
electricity 25,000 gross profit b/d 375,000
salaries and wages 50,000

net profit c/d 300,000


375,000 375,000


net profit b/d 300,000
interest on capital


           A – 15,000


           B – 10,000


           C – 2500 27500

Partner salary 150,000

residual profit


               A – 49,400


               B – 49,400


                 C – 24,700 123,500


300,000 300,000




SECOND METHOD; PROFIT ANALYSIS BASIS

In this method profit is apportioned by using analyzed profit and loss. This requires the use of separated column in the profit and loss account for the period in question.

a) Gross Profit

Is apportioned between the period on basis of turn over.

  1. b) Fixed charges

Fixed charges are apportioned on the basis of time.

  1. c) Variable charges

Variable charges are apportioned on the basis of turnover.

  1. d) Other charges

Other charges with special information given are apportioned according to that given information.

EXERCISE

X and Y are carrying on a business in partnership sharing profit and losses in the ratio of 3:2 but during the year ended Dec 31st 2007 two other member were admitted namely W and Z on July 1st and sept 30th 2007 respectively. Net sale during the year amounted to shs. 250,000, selling and distribution on expenses amount to shs. 12,000.

However the firms sales break down were;          Tshs.

January 1st to march 31st                                     62,500

April 1st to June 30th                                            93,750

July 1st to sept 30th                                            31,250

Oct 1st to Dec 31st                                               62,500

The firm normally fixes the Gross profit at 25% above the cost

Their profits and losses sharing ratios were;

X and Y and W was 2; 2; 1

X, Y, W and Z was 4; 3; 2; 1

Prepare;

  1. a) The profit and loss account for the year ended 31st Dec 2007
  2. b) An appropriation account for the year ended Dec 2007.

SOLUTION;

W1; GROSS PROFIT AMOUNT

If the gross profit is 25% above the cost

Thus

Sales are at 25%

G.P = x 250,000; from where r = rate

= 50,000

W2; First 6 month’s G.P; (sales; – 62500 + 93750 = 156250)

6 months G.P = Gross profit x sales for the period

=   x 156,250 = 31250.

W3; Gross profit from July 1st – 30th sept (sales = 31250)

3 months G.P = x 31250

= 6250

W4 = Gross profit from October1st– Dec 31st (sales = 62500)

Lost 3 month’s G.P

= 12,500

W5; Administrative expenses 12,000

  1. a) X 12,000 = 6000
  2. b) X 12000 = 3000
  3. c) X 12,000 = 3000

Selling and distribution expenses 25,000

  1. a)  For 6 month’s sales = 156250

6 month’s selling and distribution exp.

Total expenses  x sale for the period

Total sales

25,000   x 156,250

250,000

= 15,625

  1. b)   For next 3 months sales = 31,250

3 months selling and distribution exp. = 25,000 x 31250

250,000

= 3125

  1. c) For the last 3 month’s sales = 62,500

Last 3 month’s selling and distribution exp. =

25,000 x 62,500   = 6250

250,000

 DR     PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST DEC 2007            CR

DETAILS 6 3 3 DETAILS 6 3 3
Admin. Expenses 6000 3000 3000 Gross profit 31250 6250 12500
selling & distr. Exp 15625 3125 6250



9625 125 3250





31250 6250 12500 31250 6250 12500








PROFIT AND LOSS APPROPRIATION A/C FOR THE PERIOD ENDED 30/6/07

SHS
SHS
Capital   X ; ½ x 9625 5,775.00 Net profit b/d 9,625.00
                 Y ; 2/5 x 9625 3,850.00


9,625.00 9,625.00




PROFIT AND LOSS APPROPRIATION FOR THE PERIOD ENDED 31ST DEC.2007

Capital   X; 2/5 x 125 50

               Y ; 2/5 x 125 50 Net profit b/d 125

25





125 125




PROFIT AND LOSS APPROPRIATION A/C FOR THE PERIOD ENDED 31ST DEC.2007

Capital x: 4/10 x 3250 1300 Net profit       b/d 3250
               y: 3/10 x 3250 775

               z: 2/10 x   3250 650

               w: 1/10 x 3250 325


3250 3250




ADMISSION OF PARTNERS

  • When additional capital or managerial stalls or both are required in the course of expansion it is quite usual to take new partner or partners into partnership firm.
  • The new partner usually invests additional capital to the firm.
  • Admission of a new partner raises the following thins.
  1. Treatment of Goodwill
  2. Revaluation of Assets and liabilities
  3. Re-arrangement of old partners capital balances after admission
  4. Re-arrangement of old partners profit sharing rations

GOODWILL

  • Goodwill simply means the good name or the reputation of the business
  • Attraction of more customers depends on Goodwill and helps in earning more profit in future
  • Goodwill is an asset
  • New partner gets benefit of the extra asset and old ones lose their shares
  • In other words when a new partner get some shares in the profit of the firm he acquire the same rights in the existing Assets of the firm and in the extra Asset (Goodwill).
  • If that’s the case automatically incoming partner, he has to compensate the old partners either:

By paying in cash for his share of Goodwill

By allowing the old partners capital account to be raised rate-ably

Method of Valuing Goodwill/Methods of calculating Goodwill

  • The Goodwill of any business whether sole trader, Firm or company is generally determined by sharing.
  • But it depends upon the following factors;
  1. Present earning capacity of the business.
  2. Results of the operations of a few previous years.
  3. The future prospectors of the business.
  4. Efficiency of management and employers.
  5. Efficiency of advertising machinery and possession of trade marks.

WHEN VALUATION NEEDED

(a)   On admission of a new partner.

(b)   On retirement of a new partner.

(c)   When changing profit sharing ratios.

(d)   On sale of the business.

(e)   During Amalgamation.

(f)    On dissolution.

METHOD OF VALUATION OF GOODWILL

We are having four methods of valuation of Goodwill

    1. Purchases of Past profit methods
    2. Purchase of super profits methods
    3.  Inferred or Implied Goodwill method
    4. Valuation by bargaining (Arbitrary methods).

– The value of goodwill is decided by direct bargaining between the buyer and seller.

– For Examination purposes such an amount is usually mentioned.

(a)   Purchase of Past Profit Method

In this method Goodwill is valued at an agreed number of years (2-3 years) of an average profits of a given number of past years) illustration.

Goodwill is valued at two years purchased of the average profits of four years.

  • It means average of four years profit multiply by two
PROFITS YEARS
60,000 2011
50,000 2010
40,000 2009
5,000 2008

Goodwill =  x  no. years of purchase

= x 2= 100,000/=

Goodwill = 100,000

  1. Purchase of super profit method

Super profit is the difference (Excess) between average annual earning (actual) of the business and the expected or normal return on capital invested.  If the average annual profit of the business is Shs.5000,000/= and the normal earning capacity is 6%, if the capital invested is shs.300,000. Find super profits.

Super Profit = Average profit (Actual) – Normal return of capital invested.

= 50000 – x 800,000

= 50000 – 48,000

= 2000

Then super profit is taken as a base in compilation of Goodwill.

The goodwill be valued at a certain years of purchase of that super profit

3 years purchase: 2000 x 3 = 6,000

  1. Inferred or implied goodwill method        

When a prospective buyer of a business agrees to pay more than the value of the business taken over, the difference between the purchase price and actual value of the business is known as inferred or implied goodwill.

Example

If the Assets worth 1,000,000 Tshs along with the liabilities of Tshs.30, 000 Tshs are taken over by a buyer for Shs.1, 000,000 then the goodwill is;

Goodwill = Purchase Price – Value of the business

= 1,000,000 = [1,000,000 – 30,000]

= 1,000,000 – 970,000

:. Goodwill 30,000

  1. Valuation by bargaining (arbitrary valuation)

–        The value of goodwill is decided by direct bargaining between the buyer and seller.

–        For examination purposes such an amount is usually mentioned.

ACCOUNTING TREATMENT OF GOODWILL ON ADMISSION

There are two methods in which goodwill can be accounted in the books on admission

(a)   When the goodwill is not appeared in the books

(b)   When the goodwill is already appearing in the books (in the balance sheet)

(c)     When goodwill is not appearing in the books

(d)   When new partner pays cash for goodwill, it is always equal to his share in the total goodwill.

MODE OF PAYMENT

(i)   Cash paid to all partners outside the business or paid privately

(ii)   Cash paid through the firm or business, such cash may be

(a)   Raised in the business as additional working capital

(b)   written drawn by old partners either full or partial

(iii)   Goodwill raised in the books

  • When the new partner cannot pay in cash for his share in goodwill and partners capital accounts will be raised rate-ably by raising or bringing in goodwill in the books.
  • In this case goodwill must be recorded at it is full value ways.

(i)     Goodwill raised and retained in the books at full value

(ii)   Goodwill raised and written off either fully or partly

(iii)   Goodwill raised without opening goodwill account in the books

  1. b) When the goodwill is already appearing in the Books
  • When goodwill appears in the books (Appeared in the Balance sheet) it means it has been already recorded and credit given told partners
  • Therefore new partner need not to contribute for goodwill
  • If new partner brings in cash for goodwill in this case should treated as additional capital and the goodwill should cancelled out.

ACCOUNTING ENTRIES FOR GOODWILL

  1. When no goodwill appears in the balance sheet

– When incoming pays money for goodwill privately

In this there is no Entry.

  1. When incoming partners brings in cash and is retained in the business

Debit: Cash a/c                                   (with cash) brought

Credit: Goodwill a/c

Debit; Goodwill     a/c                            (Old profit)

Credit; old partner’s capital a/c         (sharing ratio)

Example I

A and B are partners carrying on a Business, their profit sharing ratio is 3:2. They decide to admit C in the firm. Their new profit sharing ratio is 2:2:1 for A, B and C respectively C pays shs.10, 000/= as goodwill. These money were left into the business.

Required;   Draw journal entries to record the goodwill

JOURNAL ENTRIES

DETAILS DEBIT CREDIT
Cash a/c (premium) 10,000
Goodwill a/c
10,000
(being cash received for goodwill)

Goodwill a/c 10,000
         A’s capital (3/5 x 10,000)
6000
         B’s capital (2/5 x 10,000)
4,000
(being the distribution of goodwill

III. When incoming partner pays ash for Goodwill and that money is withdrawn by old partners

Debit; Cash a/c                        (with Cash brought)

Credit; Goodwill   a/c

Debit; Goodwill     a/c

Credit; old partner’s capital   a/c

Debit; old partner’s capital a/c

Credit, Cash   a/c

(With old profit sharing ratio).

Example 2

X and Y are equal partners carrying on business as accountants and auditors they decided to admit W with share of profit to the business. W paid Shs.30,000 as goodwill in the business in cash. But old partners decided withdraw all the money paid for business.

Required

-Draw up Journal entries to receive the above.

                                   JOURNAL ENTRIES

DETAILS DEBIT CREDIT
Cash a/c        30,000.00
       Goodwill a/c
       30,000.00
being cash received for goodwill

Goodwill a/c        30,000.00
                 X   capital a/c
       15,000.00
                 Y capital   a/c
       15,000.00
being the distribution of good

will to partners

               X capital a/c        15,000.00
               Y capital a/c        15,000.00
                     cash a/c
       30,000.00
being withdrawal of money paid

for goodwill

IV   When Incoming Partner does not Bring Cash

  • When new partner does not bring cash for goodwill the goodwill accounts is raised in the books of account is raised in the books of accounts and it is allowed to remain in the books.
  • It is agreed to estimate the value of Goodwill for that particular business. However an adjustment is made in the old partners capital accounts in proportion to less suffered by old partners

ENTRIES

  1. ADJUSTMENTS

Dr: New partner’s capital a/c

Cr: Old partner’s capital a/c

Dr: Goodwill a/c

Cr: old partner’s capital a/c (With old profit sharing ratio).

Example

M and N are partners with PSR 3:2. They decided to admit O as a new partner to the business; they agreed new profit sharing ratio is 4:3:3 for m, N and O respectively. But it was further agreed that unrecorded goodwill of Shs 105,000.00 is to be raised in the Books of the firm.

Required; Show journal entries to show

(a)   Loss suffered by M and N

(b)   Goodwill shared by M and N

Determine the proportion of loss suffered on admitting O


M N O
Old Profit sharing ratio x = x =
Less;


New profit sharing ratio


Gain/Loss Ratio ()

Determine O share of Goodwill

O share = Amount of Goodwill x sacrificed Ratio

= 105000 x () = 31,500


DETAILS DEBIT CREDIT
a) O capital a/c        31,500.00

             M (2/3 x 31500)
       21,000.00

               N (1/3 x 31500)
       10,500.00

(Loss suffered by admission


of O)

b) Goodwill a/c      105,000.00

               (M 3/5 x 10500
       63,000.00

               (N 2/5 x 10500
       42,000.00

Goodwill distributed to old


partners)


REVALUATION OF ASSETS AND LIABILITIES

When a new partner is admitted is very important to revalue all assets depending on market value rather than in their cost or written down value.

Open revaluation account

INCREASE IN ASSETS DR CR
Debit; Asset     a/c xx
Credit; Revaluation   a/c
Xx



Decrease in assets

Debit; Revaluation a/c xx
Credit; assets   a/c
Xx



( c) Increase in Liability

Debit; Revaluation     a/c xx
Credit; Revaluation   a/c
Xx



d)Decrease in liability

Debit; Liability     a/c xx
Credit; Revaluation   a/c
Xx
  1. Revaluation Account results   (Transfer)

In case of Profit on revaluation

Debit; revaluation   a/c

Credit; Capital       a/c

In case of loss on revaluation

Debit; capital       a/c

Credit; Revaluation   a/c

Exercise

BALANCE SHEET AS AT 31/12/1997

Capital
Fixed Assets
         S – 20,000
Free hold property        20,000.00
         D – 10,000        30,000.00 Motor cars          5,000.00


office equipments          3,000.00
Creditors  5,000



CURRENT ASSETS


Stock          3,000.00


Debtors          2,500.00


cash at bank          1,500.00

On First January 1998, they admit John to bring in 10,000 as capital, the profit and loss sharing ratio is 3:1:1 respectively, old profit and loss sharing ratio 3.2.

The Asset to be revealed.

Freehold = 27,000

Motor cars = 4,000

Office Equipment = 2500

Stock = 3750

Unrecorded liabilities = 500

Creditors’ overcast by 200

Required;

-Journal Entries

JOURNAL ENTRIES AS AT 1ST JANUARY, 1998

DETAILS DEBIT CREDIT
Free hold property a/c            7,000.00

           Revaluation a/c
           7,000.00




Revaluation a/c            1,000.00

               Motor car a/c
           1,000.00




Revaluation a/c                500.00

               office equipment a/c
               500.00




stock a/c                750.00
                 Revaluation a/c
               750.00






Revaluation a/c                500.00
Unrecorded liabilities a/c
               500.00






Creditors a/c                200.00


Revaluation a/c
               200.00


EXERCISE

Ofwang and Onyango are in partnership sharing Profit and loss equally. They decided to admit Othorong’ong’o on agreement that goodwill will value at Shs.600, 000/= is to be introduced in the books. Othorong’ong’o was required to produce capital equal to that of onyango after he has been credited with his share of goodwill. The new sharing is to be 4:3:3 respectively. The balance sheet before admission of Othorong’ong’o was as follows;

Fixed Assets
1,500,000
cash
200,000


1,700,000
Financed by

capital – ojwang 800,000
               – onyango 400,000 1,200,000
current liabilities
500,000


1,700,000

Required

  1. Journal Entries for Admission of Othorong’o
  2. Immediate balance sheet after admission of Othorong’ong’o

Solution

                                     JOURNAL ENTRIES

DETAILS DEBIT CREDIT
Goodwill a/c 600,000.00
                   Partners capital

                           Ojwang A/c
300,000.00
                           Onyango A/c
300,000.00
Partners capital A/c

Ojwang A/c 240,000.00
Onyango A/c 180,000.00
Othorong’ong’o A/c 180,000.00
                       Goodwill A/c
600,000.00
Cash A/c 520,000.00
     Othorong’ong’o A/c
520,000.00



OJWANG, ONYANGO AND OTHORONG’ONG’O STATEMENT OF FINANCIALPOSITION AS AT DATE.

Fixed Assets 1,500,000.00


Current assets
cash at bank 720,000.00

2,200,000.00
Financed by;
Capital – Ojwang                       860,000
                 Onyango                     520,000
                 Othorong’ong’o           340,000 1,720,000.00
current liabilities 500,000.00

2,200,000.00


Exercises (NECTA 2002)

  1. Polpot and Golberg are in partnership with capitals of Shs 20,000,000 and shs.12, 000,000 respectively. The partnership agreement provided that profits shall be shared and after giving Goldberg a salary of shs 2,240,000 and giving both partner interest on capital at 8 percent annum.

The Net profit for the year was Shs.10, 320,000, Shs.40, 000 is to be written off the Goodwill Account.

Required,

– Write up the Appropriation Account for the years.

              DR               Profit and Loss Appropriation A/C           CR  

DETAILS AMOUNT DETAILS AMOUNT
Partner salary
Net profit (from P&L) 10,320,000.00
Goldberg – 2,240,000 2,240,000.00





Interest on capital


     Goldberg   960,000


     Polpot       1,160,000 2,560,000.00

share of profit


           Goldberg 3,450,000


           Polpot       2,070,000 5,520,000.00










10,320,000.00
 10,320,000
  1. Queen and Malkia are in partnership with capital of Tshs.10,000,000 and Tshs 6,000,000 respectively. The partnership agreement provides that profit and losses shall be shared and after giving Malkia a salary of Tshs 1,120,000 and giving both partners interest on capital at 8 percent per annum.

The results for the year show a net loss of Tshs. 1,824,000, sh. 200,000 is to be written off the goodwill a/c.

Required;

  • Write up Appropriation account for the year.


DR         PROFIT AND LOSS APPROPRIATION ACCOUNT   CR

  TSHS   TSHS
Net loss 1,824,000.00 share of loss
Interest on capital;
Queen (5/8 x 4,224,000) 2,640,000.00
Queen         800,000
Malkia (3/8 x 4,224,000) 1,584,000.00
Malkia         400,000 1,200,000.00

Partner salary


Malkia 1,200,000.00






4224,000.00
4,224,000.00

RETIREMENT OF A PARTNER

This is when a partner leaves partnership firms due to various reasons e.g. Age, limit.

Example; NECTA 2007

A, B, and C were carrying on a business as partner’s sharing profit in the ratio of 5:3:2 respectively on 31st March 1991 their balance sheet stood as follows;

LIABILITIES Tshs ASSETS Tshs
   A      100,000.00 free hold premises          75,000.00
   B        60,000.00 furniture &fittings          22,500.00
   C        35,000.00 stock          69,840.00
Trade creditors        31,180.00 Trade debtors          26,900.00
outstanding expenses            2,745.00 Bills          10,000.00


cash at bank          24,635.00

     228,925.00
     228,925.00

C Retired on the above mentioned date on the following terms;

(a)  Freehold Premises to be appreciated by 20%

(b)  Furniture & Fitting to be reduced by Tshs 2,255

(c)  Provision for doubtful debts to be created on trade debtors at 5%

(d)  Goodwill account be raised by Tshs 60,000 the agree value of the firm’s goodwill. The amount finally due to C be paid immediately A and B brings in Tshs 20,000 each to facilitate the payment. A and B agree to share profits in the ratio of 3:2 respectively immediately after c’s retirement and write off goodwill account.

You are required to prepare;

-Partner’s capital a/c

-Cash Book.

-The balance sheet of A and B for the year ended March 1994

             DR                               PARTNER’S CAPITAL ACCOUNT                   CR

DETAILS A B C DETAILS A B C
Goodwill A/c 36000 24,000          – Balance b/d 100,000 60,000 35,000
cash A/c            –              – 49,280 Revaluation A/c


Balance c/d 119700 77420            – share of profit 5700 3420 2280




Goodwill A/c 30,000 18,000 12,000




cash A/c 20,000 20,000        –

155,700 101,420 49280
155,700 101,420 49,280

DR                                                  CASH AT BANK                                                       CR

Balance b/d 24,635 To c’s capital 49,280
             A’s capital 20,000 Balance c/d 15,355
             B’s capital 20,000


64,635
64,635

       BALANCE SHEET FOR THE YEAR ENDED 31ST MARCH 1994



LIABILITIES AMOUNT Fixed Assets AMOUNT
Capital
Freehold premises 90,000
           A – 119,700
furniture & fittings 20,295
           B – 77,420 197,120 Current Assets


stock 69,840
Current liabilities
Bills 10,000
trade creditors 31,180 Trade debtors           26,900
outstanding expenses 2745 less;prov.for BD         1345 25,555


cash at bank 15,355

230,145
230,145

RETIREMENT OF A PARTNER:

We have discussed the accountancy problems that arise on admission of a new partner.

In this character, we shall look at the problems that arise on retirement or death of a partner which are;

(a)   Treatment of Goodwill

(b)     Revaluation of Assets and liabilities

  1. a) Treatment of Goodwill;

on the retirement or death of a partner, his share of Goodwill will have to be valued in according with the terms of the partnership Deed, and in the absence of such provision in the Deed, by mutual agreement or understanding among the partner. Then one of the following courses may be adopted to give to the distribution in the Books of Accounts.

    1. Goodwill raised in the Books:

Entries are

Debit; Goodwill Account,

Credit: are all partners’ (including retiring) Capital Accounts in their profit sharing    proportions.

  1. ii)   Goodwill raised in the Books but immediately written off Entries are;

Debit; Goodwill Account

         Credit; All partners’ (including retiring) capital Access in their profit sharing    proposition.

         Debit; Remaining partner’ (In new profit sharing proportion)

Credit: Goodwill Account.

iii).   Only Goodwill share of the retiring partner is brought into books. The entry is,

Debit; Goodwill Account

   Credit; Retiring partner (with his share)

It is advisable to write – off the goodwill to the remaining partners in the ratios in which they gain on the retirement.

It may be noted carefully that if Goodwill Account already exists in the books, entries for raising Goodwill should be made only for difference.

Illustration; Mukosa, Mosoke and Ochieng are partners sharing profit in the proportion of and respectively. Mosoke retires and the Goodwill is valued at Tshs 21,600/=. No Goodwill Account appears in the books of the firm. Assuming that Mukasa and Ochieng share future profit in the ratio of 5:3, pass entries for Goodwill if (a) Goodwill is raised in the books (b)Goodwill is raised and written – off (c)Goodwill share of the retiring partner only is brought into the books.

1968 Particular Debit Credit
CASE A Goodwill account raised


Goodwill A/c 21600

To Mukasa capital A/c(4/9)
9600

To Musoke’s capital A/c(3/9)
7200

To Ochieng’s A/c (2/9)
4800

(value of Goodwill raised


on Musoke’s retirement





CASE B Goodwill Account raised but w.off


I) Goodwill A/c 21600

To Mukasa’s capital A/c (4/9)
9600

To Musoke’s capital A/c(3/9)
7200

To ochieng’s capital A/c (2/9)
4800

value of Goodwill raised on


Musoke’s retirement






II) Mukasa’s capital A/c (5/8) 13500

   Ochieng’s capital A/c(3/8) 8100

       To Goodwill A/c
21600

C Goodwill written off to


remaining partners in their


new profit sharing ratio





CASE C Only Musoke’s share of


Goodwill


I) Goodwill account  7200

To Musoke’s capital account
 7200

C Musoke’s share (3/9) of


Goodwill will be paid.


II) Mukasa’s capital A/c(13/24) 3900

Ochieng’s capital A/c(11/24) 3300

 Musoke’s capitl A/c
7200

REVALUATION OF ASSETS AND LIABILITIES

After ascertaining the share of good will payable to the retiring partner. The next problem that arises in the revolution of assets and liabilities for the purpose of ascertaining the fair amount due to the out-going partner in respect of his share of firm’s assets.

Even if the partnership deed is silent on this point Assets and liabilities should normally be valued. The partner can, of course, agree not to revolve the assets and liabilities either on retirement or death or on both but such provision in the Deed is, that the balance of his capital Account represents his true interest in the partnership. Apart from the question of Goodwill which has already been dealt with some of the assets may have appreciated in value without any adjustment having been made in the books, whilst others may have been insufficiently depreciated or completely written-off.

A Revolution Account for profit and loss Adjustment (is prepared to which all differences in value are debited or credited as the case may be and the resultant balance is transferred to all the partners including retiring) in the old profit sharing ratios. The Assets and liabilities appear in the books of the new firm at the changed values.

But if it’s desired that Assets and liabilities should continue to appear in the books at the old values. A memorandum Revolution Account is prepared. It’s balance will be transferred to all the partner in the profit sharing ratio’s, and then the same account will be put on the reverse side and transferred to the remaining partners in the new profit sharing ratio.

Important Hints, Any reserve or accumulated profit appearing in the books should be transferred to all partners in their old profit sharing ratios. Alternatively only the retiring partner may be credited with his share and the remaining reserve side and transferred to the remaining reserve side and transferred to the remaining reserve may continue to appear in the books and the reduced figure.

Payment to the retiring partner.

When the accounting formalities are over, the final balance standing to the credit of a retiring partner’s capital Account in paid either in cash (if cash position permit) or transferred to his loan account until it paid off. In the modern business world, some other method s are also evolved for payment of the amount such as÷

(i)   Policy of survivorship assurance.

(ii)   Annuity method.

(iii)   Installment method

Example 1.

The balance sheet of A and B partnership, who are sharing profits and losses in the ratio 2:1 between A and B respectively as on 31st Dec 1984.

BALANCE SHEET AS AT 31ST DEC 1984

capital                       A      100,000.00 Fixed Assets
                                   B        50,000.00 plant & machinery        90,000.00


furniture and fittings        20,000.00
current a/c                A        75,000.00 vehicles        50,000.00
                                   B        (5,000.00)

Long-term liabilities        40,000.00

current liabilities        20,000.00






       280,000.00
       280,000.00

On 1st January 1985 they decided to admit (into Partnership on the following terms;

(i)     “C” to bring in Tshs.75, 000 in cash for his capital.

(ii)     Profit sharing ratio to be 3:2:1 as for A, B and C respectively

(iii)   Goodwill to be revalued at shs12, 000/= but is not be maintained in the books “C” is to pay for his share of goodwill

(iv)   Plant and Machinery Furniture and Fittings and Vehicle to be revalued at Shs120, 000, 15,000 and 70,000 respectively.

(iv)   5% of stock is absolute. 10% of Debtors to written off

(v)     Current liabilities amounting to Tshs 500/= was overlooked

(vi)     Long term liabilities to forge Tshs.2000/=

(vii)   A and B are to pay Tshs 8,000/= in respect of the revaluation costs

Required;

show the following: – 1. Revaluation account   2.Bank account.


DR                     REVALUATION ACCOUNT               CR

furniture & fittings 5,000.00 plant & machinery 30,000.00
stocks 4,000.00 vehicles 20,000.00
provision for bad debts 3,000.00 long term liabilities 2,000.00
revaluation costs
current liabilities 5,000.00
                   A – 5333


                   B- 2667 8,000.00

To partners current A/c


                   A – 24,667


                   B-12,333 37,000.00






 57,000.00
 57,000.00

            DR                               PARTNER’S CURRENT ACCOUNT                                 CR

Details A B C Details A B C
Balance b/d      – 5000          – Balance b/d 75,000      –              –




revaluation costs 5333                  2667
balance c/d 105,000 10,000          – revaluation(profit) 24667 12,333              –

105,000 15,000          –
105,000       15,000








                             A, B & C     BALANCE SHEET AS AT DATE

Capital A/c     A –     102,000
Assets
                             B – 50,000
furniture &fittings 15,000
                             C – 73,000 225,000 plant &machinery 120,000


vehicles 70,000
CURRENT A/C
Current Assets
                 A – 105,000
stock 76,000
               B – 10,000 115,000 bank 85,000
Long-term liabilities 38,000 debtors                       30,000
current liabilities 15,000 less; provision .for BD 3000 27,000

,


393,000
 393,000

BALANCE SHEET AS AT 1ST JAN 1998

Capital   S; 23750
Fixed Assets
                 D; 12,380
Freehold premises          90,000.00
                   J; 10,000              45,950.00 Motor cars            4,000.00


office equipment            2,500.00
CURRENT LIABILITIES
Current Assets
Creditors                4,800.00 stock            3,750.00
Unrecorded liabilities                    500.00 Debtors            2,500.00


cash at bank          11,500.00

             51,250.00
         51,250.00

PARTNERSHIP (CONTRACT).

Death of a partner:

From the Accountancy point of view, the only difference between retirement and the death of the partner is that in the former case the retiring partner’s share if not paid at once is credited to “loan Account’’ in the name of the outgoing partner, where as in the case of a partner is death, the adjusted balances of a capital and current Accounts of the deceased partner are transferred to an account called “Executor’s to Deceased” pending payment.

There are no special problems of death except that death may occur any time of the year and this would mean Executors of the deceased partner would be entitled to his share of profit arising after the last closing up to the date of his death.

Death/Retirement.

Treatment of Goodwill

Goodwill Account existed before retirement or death.

(i)   Increase in values Goodwill

DR; Goodwill A/c

CR; All partners’ capital A/c, In old sharing ratios

(ii)   Decrease in values of Goodwill.

DR; All partners’ capital A/c

C/R; Goodwill A/c, In old sharing ratios.

Admission of New Partner.

Treatment of Goodwill

A new partner pays as his/her share of Goodwill. If a new partner to pay a portion of his Goodwill in cash, such cash paid is called PREMIUM.

Entries;

Cash received from a new partner as his share of Goodwill

DR; Cash/Bank A/c

CR; Premium A/c

Premium is divided between old partners in old profit sharing ratio.

DR; Premium A/c

CR; Old partner’s capital A/C

DISSOLUTION OF A PARTNERSHIP.
Is the situation whereby the firm ceases its operation and its property are disposed off.

REASONS FOR DISSOLUTION
Partnership firm or organization may dissolve due to the following reasons;
(a) If entered into for a specific reason they by expire of that term.

(b) If entered for a single adventure by termination of that adventure.

(c) If entered for undefined time but one partner giving notice to other one his intention to dissolve partnership.

Upon dissolution the following are formulae to follow

(a) Open a realization account and debt it with the total of assets  except cash or a debit balance of partners capital.

(b) Open account for cash, creditors, partner’s loan (if any) partner’s capital.

(c) Debit cash and credit realization account with the proceeds from sell of asset.

(d) Credit cash and debit realization account if any of the assets are not sold but are taken over by one of the partner then debit that partner capital account and credit realization account with the agreed value.

(e) Credit cash and debit realization account with the expenses of winding up.

(f) Pay off (a) creditors (b) partners loans i.e credit cash and debit these accounts.

(g) Balance the realization account and transfer the balance profit/ loss the partner’s capital accounts.

(h) Balance partner’s capital accounts and divide cash according to this credit balances of capital.

Example 1

Pendo and Upendo decided to dissolve their partnership on 31st Dec 2010. They shared profit and equally. Their balances as the date on dissolution were as follows.

Liabilities;
Assets
capital
Premises             120,000
           Pendo     250,000
fittings                   25,000 145,000
         Upendo   200,000 450,000



Current Assets
current liabilities 150,000 cash                       30,000


stock                       250,000


Debtors                 175,000 455,000

600,000
600,000

Additional Information’s

(i)   Sale proceeds were as follow from their Assets

(ii) Premises 140,000 stock was Tshs 270,000

(iii) Stock was 270,000 Debtors was 170,000

(iv) Upendo took over the fittings at an agreed Price of 20,000

(v) Dissolution expenses was Tshs.10, 000

Cash at bank Tshs.30, 000

Required;

Prepare the Necessary book of Accounts

DR                                          REALIZATION ACCOUNT                     CR

Details Amount Details Amount
premises 120,000.00 premises 140,000.00
fittings 25,000.00 stock 270,000.00
stock 250,000.00 Debtor 170,000.00
Debtors 175,000.00 Upendo (fittings) 20,000.00
Dissolution expenses 10,000.00

To partners capital


         profit on realisation


           Upendo – 10,000


             pendo – 10,000 20,000.00










 600,000.00
 600,000.00

DR                                                   CASH ACCOUNT                             CR

DETAILS AMOUNT DETAILS AMOUNT
Balance b/d 30,000.00 Dissolution Expenses 10,000.00
Premises 140,000.00 creditors 150,000.00
stock 270,000.00 Pendo 260,000.00
Debtors 170,000.00 Upendo 190,000.00





 610,000.00
 610,000.00

     DR                                PARTNER’S CAPITAL ACCOUNT                            CR                                          

DETAILS PENDO UPENDO DETAILS PENDO UPENDO
Realization (fittings)            – 20,000.00 Balance b/d 250,000.00 200,000.00
cash 260,000.00 190,000.00 profit on realization 10,000.00 10,000.00

260,000.00 210,000.00
260,000.00 210,000.00






LOSS ON REALIZATION

Any Partner with a deficit capital Account must paying efficient cash to clear the deficit cash

GARNER VERSUS MURRAY’S RULE CASE;

This rule states that, in the event of a partner’s insolvency share of deficiency shall be borne by solvent partner in their capitals and not in their P & L sharing ratio.

Example

Assume capital Account of A;B;C Tshs 200,000, Tshs 300,000, Tshs 100,000, C’s capital A/c run top a debit balance of Tshs 95,000 thousand out of which he is able to pay 45,000 on his own bank A/c. This will leave a deficiency of Tshs. 50,000 in his capital a/c and this deficiency will be borne by A and B in the ratio of their capital immediately before dissolution.

Soln;

  1. Tshs 200,000
  2. Tshs 300,000

A share to C – x 50,000 =20,000

B share’s to C= x 50,000=30,000

JOURNAL ENTRIES

DETAILS DEBIT CREDIT
Bank 45,000
           C’s capital
45,000
A’s capital 20,000
B’s capital 30,000
             C’s capital
50,000

DR                             PARTNER’S CAPITAL ACCOUNT                                       CR

DETAILS A B C DETAILS A B C
C’s capital 20,000 30,000
Balance b/d 200,000 300,000 100,000
Motor van 10,000

A’s capital              –          – 20,000
Investment                  – 80,000                  – B’s   capital              –          – 30,000
loss on realization 19,500 19,500 19,500 Realization expenses              – 600            –

               – 1,000                – Cash 25,000              – 45,000
Balance c/d 175,000 175,500 175,500




225,000 306,000 195,000
225,000 306,000 195,000




Balance b/d 175,000 175,000 175,000

AMALGAMATION OF PARTNERSHIPS

Amalgamation, this is when two or more firms join together to form a partnership firm.

Amalgamation can be between;-

  1. A sole trader and sole trader
  2. A sole trader and partnership
  3. A partnership and a partnership
  • Each business must choose its own books of accounts and transfer them to a new partnership firm
  • But before closing the books of the following adjustment might own; Reserves are shared by partners in profit or loss sharing ratios of the old business.

CONDITION NECESSARY FOR PARTNERSHIP TO AMALGAMATE.

(a)  To see each other Balance sheet presents a true statement of financial position of each business.

(b)   Asset must be stated at their fair value and all liabilities to be disclosed.

Unequal goodwill of the business will be assessed accordingly at the time of amalgamation by making the right allowances to compensate the owner of the more valuable business.

( c)  Balance sheet business is redrafted taken into consideration the adjustment agreed up and this re-drafted balance sheets is then combined to form the initial balance sheet of the partnership. Statement used in the process of Amalgamation.

Statement used on the Process of Amalgamation

(a)  A completed and signed copy of form of articles of amalgamation

(b)  A completed and signed copy of form of initial registered office address and first board of directors.

(c )  A statutory declaration from a director or office of each amalgamation/corporation

(d)   Name search report unless the amalgamated corporation will use the corporate name of the amalgamation corporation

(e)   B/sheet of the two amalgamations

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