A partnership is basically a long term commitment to work together in business. Partners share one set of accounting records and share the profit and loss. There are two types of partnerships:
- Limited
- General
Benefits of partnerships:
- Share of every partner to be invested is reduced.
- Partners share experience
- The burden on each partner is reduced as the workload is distributed.
- Should a business fail, the level of risk is reduced.
Nature of partnership
There should be more than one person to form a partnership.
All the persons involved must agree to share profit and loss.
The number of partners cannot be less than 2 or greater than 20. If it’s a banking business then the maximum number of partners is 10.
The persons who have entered a partnership are individually called partners and collectively called a firm.
LIMITED PARTNERSHIPS
Limited partnerships must be registered with the registrar of the companies.
Characteristics of a limited partnership include:
- Their liability for debt is restricted to the capital they have invested.
- They cannot withdraw their money during the lifetime of the partnership.
- Limited partners are not allowed to take part in management.
- All the partners cannot be limited; at least one should be general.
General partnership
- Partners share liabilities equally, that is they have unlimited liabilities.
- General partners have the authority to take part in management of the business
- General partners can withdraw their money during the lifetime of partnership.
Interest on capital:
If work done by each partner is the same but capital invested is different, then interest on capital is granted which is deducted before profit and loss is calculated. Interest on capital is deducted from net profit in the P/L appropriation account.
Interest on drawings:
To deter the partners from taking out cash unnecessarily, interest on drawings is charged. Interest on drawings is added to net profit of the company.
Partnership salary:
One partner may have a bigger responsibility than other partners but both the partners may have the same amount of capital invested. Instead of altering the sharing ratio, a partnership salary may be awarded. Partnership salary is deducted before balance of profit and loss account is calculated. Salary is deducted from the net profit.
CURRENT ACCOUNT
Each partner’s current account is maintained to show his/her financial status. the balance of the current account at the end of each financial year will then represent the undrawn or withdrawn profits. A credit balance would mean undrawn profit and a debit balance would mean withdrawn profit. Debit balance shows that the partner withdrew in excess of the profit he was entitled to. The format of this account is as follows:
| Current account | |
| Drawings:
Interest on drawings:
|
Share of profit :
Partnership salary: Interest on capital:
|
| TOTAL | TOTAL |