Partnership changes usually occur during a financial year and the accounting records are contrived without interruption. Final accounts are prepared at the end of the financial year. When a partner leaves the firm or a new partner joins, it marks the end of one partnership and the beginning of a new one. No records and entries are made in the books as at the period of change until the end of the financial year. In the process, revaluation of asset, valuation of goodwill and changes in the profit/loss sharing ratio may occur.
Illustration 5: Admission of a new partner
Dami and Lola have shared profits and losses in the ration of 3:2. On 1 October 2010, they decided to admit Bola as a partner. No entries to record Bola’s admittance as a partner were made in the books before the end of the financial year on 31 December 2010.
Information extracted from the books for the year ended 31 December 2010 include the following:
| N | |
| Turnover
Cost of sales Wages Rent General expenses Deprecation of fixed assets: 1 January to 30 December 2010 1 October to 31 December 2010 |
400,000
240,000 40,000 8,000 9,600
6,000 4,350 |
(based on the asset revaluation as shown below)
At December 2009, the balances on Dami and Lola’s capital and current accounts were as follows:
| Capital Accounts | Current Accounts | |
| N | N | |
| Dami | 50,000 | 2,000 |
| Lola | 30,000 | 3,000 |
On 1 October 2010, the partnership assets were revalued as follows:
| N | |
| Freehold premises
Other fixed assets Current assets |
50,000 increase
14,000 decrease 3,000 decrease |
The partners agreed the value of goodwill on 1 October 2010 at N40,000 and decided that no goodwill account should be opened in the books.
On 1 October 2010, Bola paid N20,000 into the firm’s bank account as capital. On the same day, Dami lent the partnership N20,000. He is entitled to interest at a rate of 100% per annum on the loan.
The balances on the partners drawings account at 31 December 2010 were as follows:
| N | |
| Dami
Lola Bola |
23,000
17,000 3,000 |
The new partnership agreement provided for the following as from 1 October 2010.
- Interest was allowed on the balances on capital accounts on 31 December each year at a rate of 5% per annum.
- Lola was entitled to a salary of N12,000 per annum.
- The balance of profits and losses were to be shared. Dami – , Lola and Bola –
Required:
- Prepared the capital accounts of Dami, Lola and Bola as at 31 December 2010.
- Prepare the partnership trading, profit and loss and appropriate account for the year ended 31 December 2010.
- Prepare the partners current accounts as at 31 December 2010.
Solution
Workings
Revaluation a/c
| Particulars | N | Particulars | N |
| Other fixed assets
Current asset Profit to capital a/c Dami ( x 33,000) = Lola ( x 33,000) = |
14,000
3,000
19,800 13,200 50,000 |
Freehold premises | 50,000
50,000 |
- Goodwill: Since the partners agreed that no goodwill account should be opened, then working of the share of goodwill to capital account is only shown as follows:
Value of goodwill N40,000 as at 1 October 2010 share to Dami and Lola in their old profit-sharing ratio as follows:
Dami ( x 40,000) = 24,000
Lola ( x 40,000) = 16,000
Goodwill to be written off immediately from the books as follows using new profit-sharing ratio:
Dami ( x 40,000) = 16,000
Lola ( x 40,000) = 16,000
Bola ( x 40,000) = 8,000
- Partners Capital Account
| Dami
(N) |
Lola
(N) |
Bola
(N) |
Dami
(N) |
Lola
(N) |
Bola
(N) |
||
| Goodwill w/off
Bal c/d |
16,000
77,800
93,800 |
16,000
43,200
59,200 |
8,000
12,000
20,000 |
Bal. b/d
Bank Profit on Revaluation Goodwill
Bal b/d |
50,000
19,800 24,000 93,800 77,800 |
30,000
13,200 16,000 59,200 43,200 |
–
20,000
– – 20,000 12,000 |
- Dami, Lola and Bola
Trading, Profit and loss and Appropriation Account for the Year Ended 31 December, 2010
N
Turnover 400,000
Less: Cost of Sales 240,000
Gross profit c/d 160,000
9 months to 30 3 months to 31 year to
September 2010 December 2010 31 December 2010
| N | N | N | N | N | N | |
| Gross profit b/d | 120,000 | 40,000 | 160,000 | |||
| Wages | 30,000 | 10,000 | 40,000 | |||
| Rent | 6,000 | 2,000 | 8,000 | |||
| General expenses | 7,200 | 2,400 | 9,600 | |||
| Interest on loan | – | 500 | 500 | |||
| Depreciation | 6,000 | (49,200) | 4,350 | (19,250) | 10,250 | (68,450) |
| Net profit | 70,800 | 20,750 | 91,550 | |||
| Interest on capital at 5% p.a. | ||||||
| Dami – | 973 | 973 | ||||
| Lola – | 540 | 540 | ||||
| Bola – | 150 | 150 | ||||
| 1,663 | 1,663 | |||||
| Salary – Lola | 3,000 | 3,000 | ||||
| (4,663) | (4,663) | |||||
| 70,800 | 16,087 | 86,887 | ||||
| Share of profit | ||||||
| Dami (3/5), (2/5) | 42,480 | ( ½ ) 6,435 | 48,915 | |||
| Lola (2/5), (2/5) | 28,320 | ( ) 6,435 | 34,755 | |||
| Bola (1/5) | ( ) 3,217 | 3,217 | ||||
| 70,800 | 16,087 | 86,887 |
- Partners’ Current Account
| Dami | Lola | Bola | Dami | Lola | Bola | ||
| N | N | N | N | N | N | ||
| Drawings | 23,000 | 17,000 | 3,000 | Bal. b/d | 2,000 | 3,000 | – |
| Bal. c/d | 29,388 | 24,295 | 367 | Loan interest | 500 | – | – |
| Int. on capital | 973 | 540 | 150 | ||||
| Salary | – | 3,000 | – | ||||
| Share of profit | 48,915 | 34,755 | 3,217 | ||||
| 52,388 | 41,295 | 3,367 | 52,388 | 41,295 | 3,367 | ||
| Bal. b/d | 29,388 | 24,295 | 367 |
Essay Type Questions
- (a) Define ‘partnership’.
(b) Is it possible for a partnership to exist without agreement? If so, why do you consider a written agreement to be desirable?
(c) Is it possible for a person
(i) To receive a share in the profits of a business without being liable as a partner therein;
(ii) To be liable as partner without receiving a share of the profits of a business?
- The following trial balance has been extracted from the books of Sam and Dan at 30 April 2011.
| N | N | |
| Sales | 425,000 | |
| Purchases | 200,000 | |
| Stock at 1 May 2010 | 30,000 | |
| Wages | 98,000 | |
| Rent | 25,000 | |
| Heating and lighting | 16,000 | |
| Office expenses | 12,600 | |
| Vehicle expenses | 5,510 | |
| Advertising | 3,500 | |
| Bad debts written off | 416 | |
| Plant & machinery at cost | 125,000 | |
| Provision for depreciation plant & machinery | 36,000 | |
| Motor vehicle at cost | 41,000 | |
| Provision for depreciation of motor vehicle | 22,000 | |
| 18,000 | ||
| Trade debtors and creditors | 45,750 | |
| Provision for doubtful debts | 1,000 | |
| Bank balance | 15,724 | |
| Loan from Sam | 60,000 | |
| Capital a/c – Sam
– Dan Current a/c – Sam – Dan Drawings a/c – Sam – Dan |
30,000 13,500 |
50,000
40,000 7,000 3,000 |
| 662,000 | 662,000 |
Additional Information
- Stock at 30 April, 2011 is valued at N27,000
- Sam is to be credited with interest on the loan at a rate of 10% per annum.
- The bank reconciliation shows that bank interest of N314 and bank charges of N860 have been debited in the bank statements. These amounts have not been entered in the cash book.
- On 30 April 2011, rent of N1,500 and advertising of N2,000 have been paid in advance.
- Depreciation is to be provided as follows:
- Plant and machinery 10% per annum on cost.
- Motor vehicles 20% per annum on their written down values.
- The partners are to be charged interest on drawings and allowed interest on capital at a rate of 10% per annum.
- Partnership salaries are to be allowed as follows: Sam N10,000 per annum, Dan N8,000 per annum.
- The balance of profits and losses is to be shared as follows: Sam – 3/5; Dan 2/5.
Required:
- Prepare the partnership trading, profit and loss and appropriate accounts for the year ended 30 April 2011.
- Prepare the partners’ current accounts for the year ended 30 April 2011.
- Prepare the balance sheet as at 30 April 2011.
- Bose, Bukky and Biola are partners sharing profit and losses in ratio 3:2:1 respectively.
The partners’ trial balance as at 31 December 2010 is as follows:
| Dr (N) | Cr (N) | |
| Capital account
– Bose – Bukky – Biola Current account – Bose – Bukky – Biola Premises Plant Vehicles Furniture Loan – Biola Creditors Stock Debtors Bank
|
5,018
180,000 74,000 30,000 4,000
125,758 69,960
487,736 |
170,000 130,000 70,000
7,428
9,356
56,000 38,072
6,880 487,736 |
Biola retires on 31 December 2010 and Shola was admitted as a partner on that date.
The following matters were agreed on:
- Assets revalued – premises N24,000 plant N60,000 and stock N108,358.
- Goodwill of N84,000 is to be recorded in the books on the day Biola retires.
- Provision is to be made for doubtful debts of N 6,000.
- The partners in the new firm do not wish to maintain goodwill account
- Bose and Bukky are to share profits in the same ration as earlier and Shola is to have the same share of profit as Bukky.
- Biola is to take over car at its book value of N7,800 in part payment and the balance of all she is owed by the firm in cash except N40,000 which she is willing to leave as a loan.
- The partners in the new firm are to start on an equal footing so far as capital and current accounts are concerned.
- Shola is to contribute cash to bring the capital and current accounts to the same amount as the original partner from the old firm who has the lower investment in the business.
- The original partner in the old firm who has the higher investment will draw out cash so that his capital and current account balances equal those of his new partners.
Required:
- Prepare account for the above transactions including goodwill and retiring partners account.
- Balance sheet of the new partnership of Bose, Bukky and Shola as at 31 December 2010.
See also
THE FINAL ACCOUNTS OF LIMITED LIABILITY COMPANIES
DISSOLUTION OF PARTNERSHIP