Lecture Notes: Partnership Fundamentals

Introduction

• Topic: Partnership Fundamentals
• Objective: To understand partnership concepts thoroughly.
• Comparison: Transition from sole proprietorship to partnership.

Sole Proprietorship Recap

• Definition: A single owner business.
  • One individual invests all money.
  • Manages all risks and rewards.
  • Net profit is added to the capital account (balance sheet capital).

Need for Partnership

• Growth Potential: More resources and skills are needed.
  • Investment Limitations: Single person has limitations in money, time, managerial skills, and risk-taking.
  • Partnership Advantages:
    • More capital.
    • Divided risk.
    • Enhanced managerial skills and talent.
    • Easier profit-sharing.
• Partnership Structure:
  • Minimum 2 partners, Maximum 50.
  • Create a partnership agreement or deed.

Partnership Deed

• Purpose: Written document outlining terms and conditions.
• Terms Include:
  • Profit sharing.
  • Extra effort compensation (salary, bonus, commission).
  • Loan interest terms.
• Other Name: Articles of Partnership.

Separate Legal Entity Concept

• Definition: Partners are different from the firm.
• Implication:
  • Accounting and books are maintained for the firm.
  • Partners' individual accounts are separate.

Accounts in Partnership

• Main Accounts:
  • Profit and Loss (P&L) Appropriation Account.
  • Capital Account.
  • Current Account.
  • Additional Accounts: Rent Payable Account, Partners Loan Account.

Profit and Loss Appropriation Account

• P&L Account Recap:

  • Nature: Nominal (Debit all expenses and losses, credit all incomes and gains).
  • Structure: Gross Profit → Incomes → Expenses → Net Profit

• Transition to Partnership:

  • Sole Proprietorship: Sole owner takes net profit.
  • Partnership: Net profits must be divided among partners.
  • P&L Appropriation Account:
    • Extension of P&L account to distribute profit.

Components of P&L Appropriation Account

• Expenses to Partners:

  • Interest on Capital (IOC).
  • Partners' Salary, Bonus, Commission (SBC).
  • Reserve allocation.

• Income to Firm:

  • Interest on Drawings (IOD).

• Final Profit:

  • Called Divisible Profit.
  • Distributed in profit-sharing ratio (PSR).

Rules in Absence of Partnership Deed

• No Interest on Capital.
• No Interest on Drawings.
• No Salary, Bonus, or Commission.
• Profits/Losses shared equally.
• Interest on Loan paid at 6% per annum.

Learning Plan

• Next class focus: Calculate Interest on Drawings.
• Gradual exploration of IOC, SBC, Reserve.
• Capital and Current Account explanation followed by journal entries.

Conclusion

• Objective: Strengthen fundamentals in partnership accounting.
• Advice: Revise notes, review class materials, and prepare questions for further clarification.
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