Partnership

Introduction: In a world where collaboration often leads to innovation and success, partnerships are the ultimate driver of progress. Whether business, technology, or personal, partnerships have the potential to expand our capabilities, leverage our diverse strengths, and open doors to opportunities we could never achieve alone. In this blog, we explore the concept of partnership, its different forms, and its accounting. Whether you’re a business leader looking to form a strategic alliance or an individual seeking personal growth through collaboration, it’s important to understand the dynamics of partnerships.

“Explore Partnership Law with our blog, perfect for ACCA F4 Law students. If you’re currently studying under Sir Owais Mirchawala, an expert in Corporate and Business Law, you’re in the right place. We break down partnership legalities in a way that’s easy to understand, giving you a solid edge for your exam prep.”Get more information here

Partnership refers to a type of business where two or more individuals, or even separate businesses agree to work together under a single business to achieve profits. Normally, a maximum limit of 20 partners is permissible but in the case of banks, one can admit only 10.

law of partnership - ACCA F4 CORPORATE AND BUSINESS LAW

Whenever these partnerships are made, stress is put on drafting a Partnership Agreement to avoid possible future disputes, which clearly states the terms of the partnership such as:

  • Names of the partners.
  • Profit and Loss sharing ratio.
  • Amount of capital contributed by each partner.
  • Rate of interest on capital and drawings.
  • Salaries of partners and the maximum limit for drawings

Advantages and Disadvantages Of Forming Partnership

Advantages:

. Partnerships are simple and cheap to set up.

. It is easier to raise capital for the business as each partner will contribute finance.

. Partners may have different skills which work well together and which will enable the business to benefit. Partners also contribute to the pool of knowledge and contracts that a business can use.

. Partners with their area of expertise will make the business more productive. For example, a firm of lawyers could have a partner who specializes in family law and another in business law. This means that the business can have a wider customer base.

. Partnerships can provide for more creative ideas that contribute to good decisions.

. Responsibilities and risks are shared between the partners.

. Any losses are shared between the partners.

Disadvantages:

. One of the main disadvantages of a partnership is that you need to share profits with your partner. This can lead to disagreements, especially if partners feel their contributions are not adequately compensated.

. In general partnerships and other forms of partnership, the partners have unlimited personal liability for the debts and debts of the company. This means your assets could be at risk if your company incurs large amounts of debt or has legal problems.

. As decisions are Jointly made, they take longer.

. All partners are liable for errors made by one of the partners on behalf of the partnership.

. A relationship can face collapse if one of the partners becomes incapacitated, decides to break off the relationship, or dies. Without proper planning, these events can impact business operations and stability.

. Long-term planning can be difficult in partnerships, especially when there is no clear plan for passing ownership or management to the next generation or new partner.

Partnership: Capital & Current Account

In the case of Sole Traders, as far as capital was concerned, there was only one account known as a Capital account. However, in a partnership, two such accounts are kept, one is the Capital account itself and a new account referred to as the Current Account.

Capital Account: This account is the same as the ones in Sole Trader businesses with an increase in capital of the business on the credit side and a decrease or withdrawal of capital on the debit side.

Current Account: This account is specifically kept to record the expenses of each partner as well as income. Income appears on the credit side while expenses appear on the debit side. The debit balance of the current account is a negative balance to be subtracted from Statement of Financial Position while a credit balance is a positive balance and is added. The format for the Current Account is as follows:

recorded when a business purchases another business, in which case the excess amount paid over the value of net assets will be the goodwill acquired.

 

 

Current Account

 

 

 

Talib

Muneeb

 

Talib

Muneeb

Opening Balance

XX

XX

Opening Balance

XX

XX

Drawings

XX

XX

Interest on Capital (1)

XX

XX

Interest on Drawings (5)

X

X

Interest on Loan (2)

X

X

Loss Share

XX

XX

Salaries (3)

X

X

 

 

 

Commission (4)

XX

XX

 

 

 

Profit Share

XXX

XXX

Balance c/d

XX

XX

Balance c/d

XX

XX

 

XXX

XXX

 

XXX

XXX

Balance b/d 

XX

XX

Balance b/d

XX

XX

Interest on Capital: As it is set as a percentage of the amount of capital invested by each partner, it is an income for the partner and it serves as an incentive for partners to invest more so they can receive more interest. It is not shown under Other Income in the Income Statement and only appears in the Current Account.

Interest on Loan: This refers to the interest the business pays on the loan that is provided by the partner. Although an expense of the business appears in the Expenses section of the Income Statement, it is an income for the partners and thus, appears on the credit side. A 5% Interest on Loan is charged if no percentage is set in the agreement.

Salaries: Some partners usually work in their businesses rather than just investing. Therefore, they are sometimes entitled to a certain salary for their services, in addition to receiving the profits of the partnership.

Commission: This is a bonus provided to partners usually when they bring in more clients than the others or for showing great progress in the partnership.

Interest on Drawings: It is set as a percentage of the Drawings of each partner, it is an additional expense for each partner and is charged to discourage partners     from drawing excessively from the partnership  

Goodwill
: It is most likely referred to as the value of a  business that exceeds the value of its recorded net assets.  This occurs when two sole traders agree to join businesses together, also known as Amalgamation. It is an Intangible Non-Current Asset of the business as it has no physical appearance and stays in the business for more than one accounting period. It might be 

It is most likely written off and not shown in the Statement of Financial position due to the following two concepts which it defies:

  • Money Measurement Concept: Goodwill does not have a fixed or accurate monetary value as it is not physically countable.
  • Prudence Concept: Goodwill is an estimated figure and since assets tend to avoid being overstated, it violates this concept.

If you are interested in knowing more about Goodwillclick here 

Partnership: Appropriation Account

The appropriation account is the extension of the Profit/Loss account, also known as the Income Statement when the business whose Income Statement is being drafted is a partnership business. Just as the name suggests, this account’s purpose is to appropriate, or divide, the net profit amongst the partners. 

Business partnerships are regulated by a very old law known as The Partnership Act 1890. While the act does not regulate LLPs (limited liability partnerships) or limited partnerships, it is the basis of law for what are known as simple partnerships.Read more 

Conclusion:

There are three types of partnerships: general partnerships, joint ventures, and limited partnerships. In a general partnership, the partners share management and profits equally. A joint venture is the same as a general partnership except that the partnership exists only for a specific period or for a specific project.

A limited partnership consists of partners who play an active role in the management and partners who only invest money and play a very limited role in the management. These limited partners are passive investors in nature and their liability is limited to their initial investment. Limited partnerships have more formal requirements than the other two types of partnerships.

Frequently Asked Question – (FAQ’s)

Q1. What is a partnership?
A partnership is an association of two or more people who act as co-owners and share interests. Financial contributions (capital investments in the business) or services can be made in exchange for a profit share.

Q2. Do partnership agreements need to be in writing?
A partnership is a one-time business relationship that does not require a written agreement. However, it is always a good idea to have such documentation available. Partners split profits equally without a written agreement, so even though you may feel like you’re doing all the work, your partner still gets half of the profits. It always makes sense to address important topics related to your company in writing.

Q3. How do partnerships terminate?
In the absence of a written agreement, a partnership ends when one partner expressly declares his or her intention to leave the partnership. If you do not want to end your partnership immediately, you can enter into a written agreement that outlines the process for dissolving your partnership. For example, it may be possible to dissolve the partnership if some event occurs or to create a mechanism that allows the partnership to continue if the remaining partners agree.

Q4. What are the different types of partnerships?
There are three types of partnerships: general partnerships, joint ventures, and limited partnerships. In a general partnership, the partners share management and profits equally. A joint venture is the same as a general partnership except that the partnership exists only for a specific period or for a specific project.

A limited partnership consists of partners who play an active role in the management and partners who only invest money and play a very limited role in the management. These limited partners are passive investors in nature and their liability is limited to their initial investment. Limited partnerships have more formal requirements than the other two types of partnerships.

Written by Talib Naqvi student of Mirchawala’s Hub Of Accountancy 

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