1. INTERMEDIATE ACCOUNTING
Partnership Accounts
By
Juma Bananuka
Makerere University Business School
Department Of Accounting
jbananuka@mubs.ac.ug

2. DEFINITION OF PARTNERSHIP
A partnership is an agreement between two or
more people who enter into business with a
view of earning profits. A partnership includes at
least two individuals (partners). In certain
jurisdictions, there may be an upper limit to the
number of partners.

3. Definition continued………..
It is a relationship between persons competent
of entering into a contract or an agreement
according to their own management or
dictation by law. Partnerships may be
established formally by means of a partnership
agreement / deed or a partnership may be
presumed to exist from the actions of
individuals.

4. Contents of a partnership deed
 A partnership agreement / deed is a written
agreement in which partners among others set out the
terms of the partnership.
 The contents of the partnership include the following;
 The names of the partners
 Capital to be contributed by each partner
 Interest on capital if any
 Drawings to be made by the partners

5. Contents of a partnership deed
cont………..
 Interest on drawings if any
 Salaries to be paid to active partners
 Nature and kind of business
 Contractual duties of the partners
 Valuation of goodwill in case of changes in the partnership
 Preparation and auditing of accounts
 Procedure of admission and retirement of partners
 Duration of the partnership business

6. Advantages of Partnership
 Partnerships are relatively easy to establish.
 The ability to raise funds is increased, either because two or
more partners may be able to contribute more funds and/or
their borrowing capacity may be greater.
 Benefit from the combination of complementary skills of two or
more people. There is a wider pool of knowledge, skills and
contacts.
 Partnerships can be cost-effective as each partner specializes
in certain aspects of the business.

7. Advantages continued…….
 Business can be easily expanded since new partners can be
admitted and there is a pool of talent to draw from to support
business growth.
 Partnerships provide moral support and may allow for more
creative brainstorming.
 In case of difficulties, discussions among partners are likely to
yield solutions.
 Losses and liabilities are shared, hence reducing on the
burden placed on an individual.
 Proper accounting and other systems.

8. Disadvantages of partnership
 Partners are jointly and individually liable for the
actions of the other partners. If one partner makes a
mistake all the others partners will be affected.
 Profits must be shared with others, hence reducing
the potential amount receivable by an individual.
 Partners may have difficulties in deciding on how
they value each other’s time and skills. Partners with
better skills and more hardworking may not be
appropriately rewarded for their input in the business.

9. Disadvantages cont……………..
 Since decisions are shared, disagreements can occur
hence slowing down the decision making process.
The partnership may have a limited life; it may end
upon the withdrawal, death or bankruptcy of a
partner.
A major disadvantage of a partnership is unlimited
liability. General partners are liable without limit for all
debts contracted and errors made by the
partnership.

10. Characteristics of partnerships
 Association of two or more persons: Partnership is formed by the
association of two or more persons. However, the maximum number of
partners cannot exceed ten in case banking business and twenty in
case of other business, otherwise it will be illegal.
 Contractual relationship: Partnership arises from contract as the partners
enter into agreement to carry on a business. The contract may be oral
or written. To become a partner must be of the age of majority and is of
sound mind. A minor cannot be a partner but can admitted to the
partnership for benefits only with the consent of all the partners.

11. Characteristics continued……..
 Existence of lawful business: Partnership is formed for the purpose of
carrying on lawful business only. The term business is very wide and
includes every trade, occupation or profession. But when the purpose is
to do some charitable work or to share the income of property held in
joint ownership, it will not constitute partnership.
 Sharing of profits on agreed basis: Sharing of profits is one of the essential
characteristics of partnership. The partners share the profits as per
agreement. This implies at the partnership must have the motive to earn
profit. Therefore, business carried on with philanthropic motive or only
one partner entitled to the entire profit of the business shall 3t be
considered as a partnership.

12. Characteristics continued………
 Principal-agent relationship: In partnership, there is existence of
principal-agent relationship. Every partner is entitled to take part in the
management of the business. When one or few partners do manage
the business they represent the firm and other partners. As gents, they
can bind the firm and the other partners for their action in the ordinary
course of business. The principal-agent relationship is a real test of the
existence of partnership.
 Unlimited liability: The liability of the partners is unlimited. This implies that
the private properties of the partners are at risk as these can be used to
meet the obligations of tie firm when the assets of the firm are not
sufficient for the purpose. Each partner is jointly id severally liable for the
debts and obligations of the business.

13. Characteristics continued………….
 Restriction on transfer of shares: A partner cannot transfer his
share in the business an outsider without the consent of all
other partners. When there is transfer of share, a new
partnership comes into existence even though the same
business is continued. Every addition pr deletion of a partner
changes the entire partnership deed.
 Utmost good faith: There is mutual trust and confidence
among the partners. Therefore, every partner must be just
and faithful to one another render true and proper accounts
and provide full information concerning the business.

14. Partnership concepts
 Capital –is the amount of money required to start partnership business. it
is contributed by every partner according to the deed
 Profit and loss sharing ratios –it states how each partner should share in
profit or loss i.e. proportion of profit or loss a partner takes
 Interest on capital –this guaranteed on partners capital contributed i.e.
on capital, a partner contributes him or she has to get interest.
 Interest on drawings - is charged on the amount withdrawn by a
partner for private use. This is charged to deter partners from
withdrawing money any how (not to steal)
 Salaries – a salary is paid to an active partner who takes daily work.

15. Types of partners
 Sleeping / dormant partner
Is one who does not actively participate in partnership activities.
A dormant partner shares profits and has a right to access all
the partnership books of accounts and is liable to third parties
who deal with him on behalf of the partnership.
 Nominal partner
Is a person whose name is used as if he or she was a member of
the firm, but in actual sense is not a partner. He is liable to third
parties who give credit to the firm on the strength of his being a
partner.

16. Types continued…..
 Minor
A person who is under the age of majority according to the law to which
he or she is subject may be admitted to the benefits of partnership but
cannot be made personally liable for any obligation of the firm; but the
share of that minor in the property of the firm is liable for the obligation of
the firm. A person who has been admitted to the benefits of partnership
under the age of majority becomes, on attaining that age, liable for all
obligations incurred by the partnership since he or she was so admitted,
unless he or she gives public notice within a reasonable time of his or her
repudiation of the partnership.

17. Types cont……
 Sub partners
Is one who gets a share of profits through one of the partners. Is
not liable against the firm and is not liable to third parties of the
firm.
 Partners in profits only
Is one who shares profits only and does not share losses.

18. THE DOUBLE ENTRY SYSTEM UNDER
PARTNERSHIP
 In case of capital contribution
Dr Cash / Bank A/C
Cr Capital A/C
 When partners are entitled to interest on capital
Dr Profit & loss appropriation A/C
Cr Current / Capital A/C

19. Double entry continued…..
 When partners are entitled to a partnership salary
Dr Profit & loss appropriation A/C
Cr Current / capital A/C
 In case of drawings
Dr Capital / Current A/C
Cr Bank / Cash A/C
 In case of interest on drawings
Dr Partners capital / Current A/C
Cr P & L Appropriation A/C

20. Double entry continued…..
 In case of sharing profits
Dr P & L Appropriation A/C
Cr Current / Capital A/C
 In case of a loss,
Dr Partners capital / Current A/C’s
Cr P & L Appropriations A/C

21. Note
 Interest on a loan is a business expense and treated as
business expenses in the profit and loss account.
 If a partnership gives out a loan in return for interest, the
interest received is treated as miscellaneous income.
 If a partner extends a loan to the partnership, interest
charges on the loan is a business expense and charged
against the profits.

23. The place to be