ACT 3121 Intermediate Financial Accounting 1 G2

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ACT 3121 Intermediate Financial Accounting 1G-2

• Lecture 1 (12th Nov)
• 1 hr

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Introduction to Partnership

• Contents
• Definition
• Origins
• General principle
• Number of partners
• Partnership Agreement Partnership Act 1961
• Advantages Disadvantages

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Definition (PA 1961)

• the relationship, which subsists (exists) between
  persons carrying on a business in common with a
  view of profit

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Origins

• 2 or more persons decide to create a business
• One with a business needs someone to help him,
  who is a position to introduce additional capital
• 2 persons, each with separate business, decide to
  amalgamate (merge)

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General principle

• Unlimited liability
• - should the assets of the firm be insufficient
  to meet the claims of its creditors, each partner
  will be personally responsible for ensuring that
  these claims will be met

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Number of partners

• Can range from 2 to 20
• Some professional bodies may have more than 20
  accountants and solicitors

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Partnership Agreement

• Name and nature of the business
• The term of partnership
• The amount of capital contributed by each partner
• Profit sharing ratio
• Charge interest on drawings?
• Provision for the preparation and audit of FS
• The way the business should be run
• Provision for admission of new partners or
  withdrawal by death or otherwise, of partners

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1. Capital to be contributed

• Depends on willingness and ability
• Note the right of partners on the business
  depends on the amount of capital contributed

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2. Profit sharing ratio

• determine how much each partner will get from the
  balance of profit
• usually determine by the total of capital
  contributed
• others skills and efforts

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3. Interest on capital

• equitable when capital contributed by partners
  differs
• encourage partner to contribute as much as they
  could
• basic should be equal to the return that they
  might receive if invested elsewhere
• charge against net profit before distributed to
  partners

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4. Interest on drawings

• Drawings amounts taken out of the business by
  partners either in cash or goods
• to avoid cash withdrawal unnecessarily
• partner benefits unjustifiably at the expense of
  his fellow partners
• note cash is necessary to expand and do
  business
• calculated from the date of the drawings to the
  end of the accounting period and added to profit
  before charging to interest and salary

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5. Salary

• to compensate for time and expertise contributed
  to the business by partners
• agreed by all partners

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Partnership Act 1961

• In the absence of Partnership Agreement, Section
  26 of Partnership Act 1961
• Profits and losses shared EQUALLY 26(a)
• NO interest on capital 26(d)
• NO interest on drawings 26(b)
• NO salary 26(f)
• If partner contribute some money IN EXCESS of
  capital agreed to be contributed, he is entitled
  to 8 interest per annum 26(c)

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Advantages and Disadvantages

• Advantages
• More capital
• Easier expansion
• Division of labour
• Creative ideas
• Shared losses

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Advantages and Disadvantages

• Disadvantages
• Unlimited liability
• Need for discussion
• Disagreement
• Difficulties on dissolution and admitting new
  partners
• Shared profits
• Inability to increase capital without changing
  the control of the business

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Next Lecture 14th November

• Contents
• Discussion and examples for profit sharing ratio,
  interest on capital, interest on drawings
• Fixed capital vs. Fluctuating capital a/c
• Partners loan a/c
• Balance sheet
• More examples