FINANCE

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      75,000.00BAL 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)
CAPITALNGNASSET NGN
OBI  170,000.00GOODWILL      40,000.00
KOLA  220,000.00NET ASSET    350,000.00
MUSA    75,000.00CASH      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      13,333.00BAL B/D        150,000.00   200,000.00
(WRITTEN OFF)=40/3BANK      75,000.00
BAL C/D    156,667.00         206,667.00      61,667.00share 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

CAPITALNGNASSET NGN
OBI    156,667.00
KOLA    206,667.00NET ASSET    350,000.00
MUSA       61,666.00CASH      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

  1. Prepare revaluation account
  2. Capital account
  3. 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       145,000share 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
  1. REVALUATION ACCOUNT
  REVALUATION ACCOUNT  
  NGN=DR NGN=CR
DECREASE IN  ASSET   INCREASE IN ASSET
PREMISES 20,000GOODWILL   35,000.00
FIXTURE & FITTINGS         5,000.00PLANT & M   19,500.00
MOTOR VAN         7,000.00STOCK     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
CAPITALEQUIPMENT    150,000.00
OBI    100,000.00MOTOR VEHICLE      10,000.00
TAYO    100,000.00STOCK      10,000.00
CREDITOR         5,000.00BANK      17,000.00
LOAN       55,000.00DEBTOR      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 NGNREALISEDNGN
EQUIPMENT     150,000.00EQUIPMENT       142,500.00
MOTOR VEHICLE 10000MOTOR VEHICLE            9,500.00
STOCK 10000STOCK            9,500.00
GOODWILL 3000GOODWILL            2,850.00
REALISA EXP 1000DISC CREDTOR500
    
   SHARE OF LOSS 
   OBI4575 
   TAYO4575            9,150.00
      174,000.00        174,000.00
     
  BANK ACCOUNT   
  NGN  NGN
BAL B/F        17,000.00   
EQUIPMENT 142500DISC REC 500
MOTOR VEHICLE 9500DISSOLUTION COST 1000
STOCK 9500CREDITOR 4500
GOODWILL 2850LOAN 55000
   CAPITAL  
DEBTOR 70000OBI 95,425
   TAYO 95,425
      
      251,350.00  251850
SHARE CAPITALOBITAYO
SHARE OF LOSS45754575BAL B/F100,000100,000
BANK95,42595,425
 100000100000 100,000100,000
 

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  
CAPITAL130,000FIXTURE100,000
CREDITOR47000STOCK60,000
  DEBTORS21000
  BANK31000
    
 177,000              177,000.00
 TAYO’S BALANCE   SHEET  
CAPITAL120,000LAND AND BUILDING60,000
CREDITOR62000FIXTURE15,000
  STOCK18000
  DEBTOR29000
  BANK60000
 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  
CAPITAL70,000FIXTURE20,000
CREDITOR47000STOCK26,000
  DEBTORS19000
  BANK31000
  GOODWILL21000
 177,000              117,000.00
 TAYO’S BALANCE   SHEET  
CAPITAL145,000LAND AND BUILDING80,000
CREDITOR62000FIXTURE20,000
  STOCK18000
  DEBTOR29000
 BANK60000
 207,000 207,000
BALANCE SHEET
   NGN  NGN
CAPITAL215,000LAND AND BUILDING80,000
CREDITOR109000FIXTURE40,000
  STOCK44,000
  DEBTOR48000
  BANK91000
  GOODWILL21000
 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

  1. SUPERPROFIT  APPROACH
  2. PURCHASE OF AVERAGE PROFIT.
  3. 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

We disclaim all liability arising from reliance in this article