Partnership Accounts 🤝

A partnership exists when two or more individuals come together to run a business with the aim of making a profit. In Zambia, partnerships are governed by the Partnership Act of 1980 which sets out basic rules for partnerships, including:

• All partners are entitled to contribute equally to the firm’s capital. 💰
• Profits and losses must be shared equally unless stated otherwise. 📊
• Partners are not automatically entitled to salaries unless specified in the partnership agreement. 💼

Partnership Deed 📜

When forming a partnership, certain legal formalities must be met. One important document is the Partnership Deed, which outlines the rights and duties of the partners. This document includes:

• The name of the partnership. 🏢
• The amount of capital each partner is required to contribute. 💵
• Salaries of the partners (if applicable). 💸
• Rules on partners' drawings. 📑
• Interest rates (if any). 📈
• The profit and loss sharing ratio. ⚖️

Capital Accounts 💳

When a partnership is established, partners contribute capital in the form of cash or assets. The double-entry bookkeeping for capital contributions is as follows:

• Debit the asset account (for the asset contributed). ➕
• Credit the capital account of each partner separately. ➖

Example: Profit and Loss Appropriation Account 📈

Below is an example of a firm’s profit and loss appropriation account:

Example: Partnership Balance Sheet 📊

Current Accounts 🔄

Current accounts in a partnership deal with ongoing transactions between the partners and the firm. These include:

• Share of profits. 📈
• Interest on capital. 💵
• Drawings. ✏️
• Interest on drawings. 📉
• Partners' salaries. 💼

The accounting entries for these transactions are:

• For salaries, interest on capital, and share of profits: Debit the appropriation account and credit the current accounts of the partners. 💳
• For drawings: Debit the current accounts of the partners and credit the cash book or purchases account. 💰
• For interest on drawings: Debit the current accounts of the partners and credit the income statement (appropriation account). 📊

At the end of the financial year, the balance of the current accounts represents undrawn or overdrawn profits:

• A credit balance indicates amounts that the partners are entitled to withdraw (the firm owes the partners). 💵
• A debit balance indicates that the partners have overdrawn their entitlement (the partners owe the firm). ⚖️

Partnership Balance Sheet 📊

A partnership’s balance sheet is similar to that of a sole trader in terms of assets. However, the capital section differs as it includes separate capital and current accounts for each partner.

Example: Profit and Loss Appropriation Account 📈

Ronald and Simon own a grocery store and their financial year ends on 31st December. Below is the firm’s profit and loss appropriation account for the year ended 31st December 2009:

Exercise 📝

Banda and Bwalya have been in partnership just for one year. They are sharing profits and losses equally and are entitled to 10% on capitals per annum. Banda and Bwalya have K100,000 and K200,000 as capitals, respectively.

• Banda is entitled to a salary of K3,000 and Bwalya K5,000. 💼
• Interest is charged on partners’ drawings. Banda is charged K2,000 and Bwalya K1,500. 💵
• Drawings during the year were Banda K6,000 and Bwalya K5,000. ✏️
• The net profit before the distribution as at 31.12.2009 amounted to K70,000. 💰

Profit and Loss Appropriation Account 📈

Banda, Bwalya, and Nonde are in partnership, trading as Lusaka Furnishers Limited. They share profits and losses in the ratio 2:2:1 respectively. Banda, being a qualified accountant, is given a salary of K90,000 per year. 💼

Current Accounts 🔄