Partnership – Part 1
AS WE get closer to the examination date, it is our desire to take you through the syllabus, and I hope you are doing well with your solving of past-paper questions. That will give you an idea of how the questions are structured. This week, we are highlighting Partnership Accounts; pay keen attention to the principles and retain them for future use.
To set up a business, capital is needed. It is not at all times that one person can find enough cash to start a business, so others may be invited to contribute to the capital needed. Those types of transactions allow for the start-up of a partnership account. We are going to look at exactly what partnership account is, and how to distinguish between limited partners and the ones with unlimited liability.
Partnership is needed for instances when:
■ Capital is more than one person can facilitate.
■ Management experience is needed and may not be adequately supplied by one person.
■ Profit and loss can be shared.
WHO IS A LIMITED PARTNER?
A limited partner is not liable for the debts as they have the following characteristics:
■ They can lose their capital but cannot be made to pay any money from their personal account.
■ They are not allowed to be part of the management team of the partnership.
WHAT IS GOODWILL?
Goodwill is the benefit derived from a favourable reputation among customers. It is composed of elements such as location of the business, manufacturing efficiency, nature of reputation of service.
WORKED EXAMPLE
James and Karl traded separately up to December 31, 2017, at which date their balance sheets were shown as:
James and Karl agree to amalgamate their businesses and become partners as from January 1, 2018. They agreed that:
1. The partnership should take over all the assets and liabilities of the two businesses, except for premises belonging to James and the loan owed by Karl.
2. Equipment should be revalued at $36,000 for James and $30,000 for Karl.
3. $1,200 of Karl’s debtors were bad and should be written off.
4. Karl’s bank overdraft should be paid off by him.
5. Goodwill was to be valued at $18,000 for James and $14,400 for Karl.
6. All other items were to be taken over by the partnership at the balance sheet values.
You are required to: a. Draw up the TWO capital accounts for the partners, showing clearly how the final balances at January 1, 2018, are obtained.
b. Prepare the balance sheet of the partnership at January 1, 2018.
The capital accounts should show only the assets and liabilities to be taken over by the partnership, including goodwill.
Partners do not have to contribute amounts of capital, so each partner can contribute whatever is agreed.
PROFIT OR LOSS SHARING RATIO
Partners can agree to share profit or loss by whatever ratio they agree on, so there is no difficulty.
INTEREST ON DRAWINGS
This is the amount that is required to be paid on drawings by the partners.
Visit again next week, when we present PartnershipPart 2.
This is all we have time for this week. Always bear in mind, you must get up each morning with renewed determination if you want to go to bed with full satisfaction. Never let what you cannot do stand in the way of what you can.