PARTNERSHIP ACCOUNT
FINANCIAL ACCOUNTING 1
AT THE END OF THE LECTURE STUDENT SHOULD KNOW THE FOLLOWING
-CORRECT ACCOUNTING ENTRIES-CHANGES IN THE CONSTITUTION OF PARTNERSHIP
-EXPLAIN CHANGES IN CONSTITUTION OF PARTNERSHIP
-ADMISSION AND RESSIGNTION OF PARTNERSHIP
-VALUATION OF GOODWILL
-AMALGAMATION OF PARTNERSHIP
-DISSOLUTION OF PARTNERSHIP
ADMISSION OF A PARTNER
Treatment of goodwill
On introduction of a new partner the share of the profit and loss taken by each partner must change. There will be constitution of capital and profit sharing ratio.
Accounting entries
-GOODWILL A/C IN THE BOOKS
DR GOODWILL A/C
CR PARTNERS CAPITAL A/C(OLD P&L sharing ratio
CASH TRANSFER
DR BANK A/C
CR CAPITAL ACCOUNT
-GOODWILL IS WRITTEN OFF
A/C ENTRIES
DR.CAPITAL A/C
CR.GOODWILL A/C
ILLUSTRATION 1
OBI and kola are in partnership sharing profit and loss equally. The balance sheet as at 31st dec 2010,
| CAPITAL(NGN) | NET ASSET(NGN) | 350,000.00 | |
| OBI | 150,000.00 | ||
| KOLA | 200,000.00 | ||
| TOTAL | 350,000.00 | 350,000.00 |
It was decided to admit musa to the partnership and he brought in cash 75,000. It was agreed that goodwill was worth 40,000NGN.The profit sharing ratio is obi 2,kola 2;musa 2
Required
Show the capital a/c and the balance sheet after goodwill has been considered
| CAPITAL ACCOUNT | |||||||
| OBI (NGN) | KOLA(NGN) | MUSA(NGN) | OBI (NGN) | KOLA(NGN) | MUSA(NGN) | ||
| BAL C/D | 170,000.00 | 220,000.00 | 75,000.00 | BAL B/D | 150,000.00 | 200,000.00 | |
| BANK | 75,000.00 | ||||||
| share of | |||||||
| goodwill | 20,000.00 | 20,000.00 | |||||
| 170,000.00 | 220,000.00 | 75,000.00 | 170,000.00 | 220,000.00 | 75,000.00 | ||
BALANCE SHEET
| CAPITAL(NGN) | NET ASSET(NGN) | ||
| CAPITAL | NGN | ASSET | NGN |
| OBI | 170,000.00 | GOODWILL | 40,000.00 |
| KOLA | 220,000.00 | NET ASSET | 350,000.00 |
| MUSA | 75,000.00 | CASH | 75,000.00 |
| TOTAL | 465,000.00 | 465,000.00 | |
GOODWILL WRITTEN OFF IN THE BOOK
| CAPITAL ACCOUNT | |||||||
| OBI (NGN) | KOLA(NGN) | MUSA(NGN) | OBI (NGN) | KOLA(NGN) | MUSA(NGN) | ||
| GOODWILL | 13,333.00 | 13,333.00 | 13,333.00 | BAL B/D | 150,000.00 | 200,000.00 | |
| (WRITTEN OFF)=40/3 | BANK | 75,000.00 | |||||
| BAL C/D | 156,667.00 | 206,667.00 | 61,667.00 | share of | |||
| goodwill | 20,000.00 | 20,000.00 | |||||
| 170,000.00 | 220,000.00 | 75,000.00 | 170,000.00 | 220,000.00 | 75,000.00 | ||
BALANCE SHEET
| CAPITAL | NGN | ASSET | NGN |
| OBI | 156,667.00 | ||
| KOLA | 206,667.00 | NET ASSET | 350,000.00 |
| MUSA | 61,666.00 | CASH | 75,000.00 |
| TOTAL | 425,000.00 | 425,000.00 |
REVALUATION OF PARNERSHIP ASSET
ASSET CAN BE REVALUED IN THE FOLLOWING CIRCUMSTANCE
-when a partner dies
-introduction of a new partner
-changes in p & l sharing ratio
-resignation of a partner
OBI ,TAYO AND MUSA are in partnership sharing profit and losses equally. The following is the balance sheet of the business as at 31st Dec 2012
| CAPITAL | NGN | NGN | |||
| OBI | 200,000.00 | PLANT AND MACHINERY | 25,500.00 | ||
| TAYO | 200,000.00 | PREMISES | 320,000.00 | ||
| MUSA | 200,000.00 | 600,000.00 | FURNIT & FITT | 157,000.00 | |
| MOTOR VEHICLE | 70,000.00 | ||||
| CURRENT A/C | 572,500.00 | ||||
| OBI | 15,000.00 | CURRENT ASSET | |||
| TAYO | 20,000.00 | STOCK | 14,000.00 | ||
| MUSA | 17,000.00 | 52,000.00 | DEBTORS | 26,000.00 | |
| CREDITOR | 53,000.00 | BANK | 100,000.00 | 140,000.00 | |
| ACCRUALS | 7,500.00 | ||||
| 712,500.00 | 712,500.00 | ||||
-On 31st dec 2012 ,Edu was admitted into the partnership
-profit and losses would be shared equally
-Edu shall bring 145,000NGN as capital
-Goodwill is valued at 35,000
– The following asset were revalued
NGN
PREMISES 300,0000
FURNITURE AND FITT 152,000
Motor vehicle 63,000
Plant and machinery 45,000
Stock 16,000
You are required
- Prepare revaluation account
- Capital account
- Balance sheet after admission of Edu
Solution
B)CAPITAL ACCOUNT
| CAPITAL ACCOUNT | |||||||||
| OBI (NGN) | KOLA(NGN) | MUSA(NGN) | EDU | OBI (NGN) | KOLA(NGN) | MUSA(NGN) | EDU | ||
| BAL B/D | 200,000.00 | 200,000.00 | 200,000.00 | ||||||
| BAL B/D | 15,000.00 | 20,000.00 | 17,000.00 | ||||||
| 145,000 | |||||||||
| BAL C/D | 222,000.00 | 227,000.00 | 224,000.00 | 145,000 | share of | ||||
| PROFIT | 7,000.00 | 7,000.00 | 7,000.00 | ||||||
| 222,000.00 | 227,000.00 | 224,000.00 | 145,000 | 222,000.00 | 227,000.00 | 224,000.00 | 145,000 | ||
- REVALUATION ACCOUNT
| REVALUATION ACCOUNT | ||||
| NGN=DR | NGN=CR | |||
| DECREASE IN ASSET | INCREASE IN ASSET | |||
| PREMISES | 20,000 | GOODWILL | 35,000.00 | |
| FIXTURE & FITTINGS | 5,000.00 | PLANT & M | 19,500.00 | |
| MOTOR VAN | 7,000.00 | STOCK | 2,000.00 | |
| PROV FOR BAD DEBT | 3,500.00 | |||
| SHARE OF PROFIT=21/3 | 7,000.00 | |||
| SHARE OF PROFIT=21/3 | 7,000.00 | |||
| SHARE OF PROFIT=21/3 | 7,000.00 | |||
| 56,500 | 56,500.00 |
C)
BALANCE SHEET
| BALANCE SHEET | ||||||
| CAPITAL | NGN | NGN | ||||
| OBI | 222,000.00 | PLANT AND MACHINERY | 45,000.00 | |||
| TAYO | 227,000.00 | PREMISES | 300,000.00 | |||
| MUSA | 224,000.00 | FURNIT & FITT | 152,000.00 | |||
| EDU | 145,000.00 | 818,000.00 | ||||
| MOTOR VEHICLE | 63,000.00 | |||||
| 560,000.00 | ||||||
| CURRENT ASSET | ||||||
| STOCK | 16,000.00 | |||||
| DEBTORS | 26-3.5 | 22,500.00 | ||||
| CREDITOR | 53,000.00 | BANK | =100+145 | 245,000.00 | 283,500.00 | |
| ACCRUALS | 7,500.00 | GOODWILL | 35,000.00 | |||
| 878,500.00 | 878,500.00 | |||||
DISOLUTION OF PARTNERSHIP
REASON FOR DISOLUTION OF PARTNERSHIP.
-RETIREMENT OF PARTNERSHIP
-ADMISSION OF A NEW PARTNERSHIP
-INSANITY OF A PARTNER
-DEATH OF A PARTNER
-BANKRUPTCY OF A PARTNER
-NON- PERFORMANCE OF THE BUSINESS
-EXPIRATION OF THE TIME GIVEN
-ILLEGALITY OF A BUSINESS
ILLUSTRATION 3
OBI AND TAYO are in partnership sharing profit and loss equally. The following is the balance sheet as at 31st dec 2019 when it was dissolved
| NGN | NGN | ||
| CAPITAL | EQUIPMENT | 150,000.00 | |
| OBI | 100,000.00 | MOTOR VEHICLE | 10,000.00 |
| TAYO | 100,000.00 | STOCK | 10,000.00 |
| CREDITOR | 5,000.00 | BANK | 17,000.00 |
| LOAN | 55,000.00 | DEBTOR | 70,000.00 |
| GOODWILL | 3,000.00 | ||
| TOTAL | 260,000.00 | 260,000.00 |
The asset were realised 5% less their book value except bank,goodwill and debtor and expenses on realisation amounted to 1000NGN.
CREDITOR PAID 4,000NGN
PREPARE THE NECESSARY ACCOUNT
| REALISATION ACCOUNT | |||||
| BOOK VALUE | NGN | REALISED | NGN | ||
| EQUIPMENT | 150,000.00 | EQUIPMENT | 142,500.00 | ||
| MOTOR VEHICLE | 10000 | MOTOR VEHICLE | 9,500.00 | ||
| STOCK | 10000 | STOCK | 9,500.00 | ||
| GOODWILL | 3000 | GOODWILL | 2,850.00 | ||
| REALISA EXP | 1000 | DISC CREDTOR | 500 | ||
| SHARE OF LOSS | |||||
| OBI | 4575 | ||||
| TAYO | 4575 | 9,150.00 | |||
| 174,000.00 | 174,000.00 | ||||
| BANK ACCOUNT | |||||
| NGN | NGN | ||||
| BAL B/F | 17,000.00 | ||||
| EQUIPMENT | 142500 | DISC REC | 500 | ||
| MOTOR VEHICLE | 9500 | DISSOLUTION COST | 1000 | ||
| STOCK | 9500 | CREDITOR | 4500 | ||
| GOODWILL | 2850 | LOAN | 55000 | ||
| CAPITAL | |||||
| DEBTOR | 70000 | OBI | 95,425 | ||
| TAYO | 95,425 | ||||
| 251,350.00 | 251850 | ||||
| SHARE CAPITAL | OBI | TAYO | |||
| SHARE OF LOSS | 4575 | 4575 | BAL B/F | 100,000 | 100,000 |
| BANK | 95,425 | 95,425 | |||
| 100000 | 100000 | 100,000 | 100,000 | ||
AMALGAMATION
AMALGAMATION OF PARTNERSHIP.
This is the coming together of two or more partnership together.
Procedures.
1.ARRANGE THE ASSET AND LIABILITIES OF THE FIRST SOLE TRADER INORDER TO CALCULATE THE CAPITAL.
2.ARRANGE THE ASSET AND LIABILITIES OF THE SECOND SOLE TRADER IN ORDER TO DETERMINE HIS CAPITAL
3.PREPARE THE COMBINED BALANCE SHEET
ILLUSTRATION
OBI AND TAYO have been friend and they both agreed to amalgamate their sole trading business and form a partnership with effect from 3ist December 2019. The balance sheet is as follows
| OBI’S BALANCE SHEET | ||||
| CAPITAL | 130,000 | FIXTURE | 100,000 | |
| CREDITOR | 47000 | STOCK | 60,000 | |
| DEBTORS | 21000 | |||
| BANK | 31000 | |||
| 177,000 | 177,000.00 | |||
| TAYO’S BALANCE SHEET | ||||
| CAPITAL | 120,000 | LAND AND BUILDING | 60,000 | |
| CREDITOR | 62000 | FIXTURE | 15,000 | |
| STOCK | 18000 | |||
| DEBTOR | 29000 | |||
| BANK | 60000 | |||
| 182,000 | 182,000 |
a..OBI to be credited with goodwill of 21,000NGN.
b.Tayo land and building to be valued 80,000NGN
C.Obi’s fixture to be valued at 20,000NGN, DEBTORS 19,000NGN, STOCK 23,000
b.all other asset is taken over as per balance sheet
SOLUTION
| OBI’S BALANCE SHEET | |||
| CAPITAL | 70,000 | FIXTURE | 20,000 |
| CREDITOR | 47000 | STOCK | 26,000 |
| DEBTORS | 19000 | ||
| BANK | 31000 | ||
| GOODWILL | 21000 | ||
| 177,000 | 117,000.00 | ||
| TAYO’S BALANCE SHEET | |||
| CAPITAL | 145,000 | LAND AND BUILDING | 80,000 |
| CREDITOR | 62000 | FIXTURE | 20,000 |
| STOCK | 18000 | ||
| DEBTOR | 29000 | ||
| BANK | 60000 | ||
| 207,000 | 207,000 | ||
| BALANCE SHEET | |||
| NGN | NGN | ||
| CAPITAL | 215,000 | LAND AND BUILDING | 80,000 |
| CREDITOR | 109000 | FIXTURE | 40,000 |
| STOCK | 44,000 | ||
| DEBTOR | 48000 | ||
| BANK | 91000 | ||
| GOODWILL | 21000 | ||
| 324,000 | 324,000 | ||
GOODWILL CALCULATION/ESTIMATION
Goodwill is benefit accruing to a firm due to goodname, connection,position a reputation,connection,position and reputation.
APPROACH TO VALUATION
- SUPERPROFIT APPROACH
- PURCHASE OF AVERAGE PROFIT.
- PURCHASE OF ANNUAL GROSS PROFIT.
A.SUPER PROFIT
ILLUSTRATION
2019=50,000NGN
2018=30,000NGN
2017=10,000NGN
NORMAL PROFIT=25,000
WHAT IS GOODWILL
(50,000+30,000+10000)/3=30,000
30,000-25,000=5,000
SUPER PROFIT =5,000*3=15,000
B.PURCHASE OF 2 YEARS AVERAGE PROFIT
=(50,000+30,000+10000)/3=30,000
30,000*2=60,000
C.PURCHASE OF 2 YEARS GROSS ANNUAL INCOME
ILLUSTRATION.
IF GROSS ANNUAL INCOME IS =20,000
GOODWILL= 20,000*2=40,000NGN
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