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1 Partnership. Tutor: Marie O’Callaghan . Partnerships. Professionals such as doctors , lawyers ,dentists, vets, accountants are not allowed to form companies.

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1 partnership

1 Partnership

Tutor: Marie O’Callaghan

partnerships
Partnerships
  • Professionals such as doctors, lawyers ,dentists, vets, accountants are not allowed to form companies.
  • There are advantages to partnerships over forming a company from the point of view of tax, accounting and disclosure requirements.
  • Partnerships do not go through a registration process to form.
  • Partnership is not a separate legal identity = partners have unlimited liability, unlike directors or shareholders in companies.
  • The downside is that each partner is liable for the losses of his co-partner in carrying on the partnership business, even where the other partner has defrauded clients of the business.
partnership act 1890 amended 1907
Partnership Act 1890 - Amended 1907
  • Partnership Act 1890 defines a partnership and essentially states that where 2 or more people carry on business with a common view of profit, then a partnership exists.
  • A written partnership agreement is not necessary.
  • The act applies where no partnership agreement is in place.
the main provisions
The Main Provisions
  • P&L must be shared equally
  • No interest paid on capital
  • No remuneration
  • Differences settled by majority
  • Change of business requires consent of all
  • No right to expella partner
  • No right to retire
  • All Partners have the right:
    • Take part
    • Prevent entry of another partner
    • Examine the books
    • Receive interest 5%PA on loans/advances ex capital
    • Dissolve the partnership
  • does not prevent a former partner from competing after leaving
  • Partnership dissolves automatically on
    • death of partner
    • bankruptcy of partner
    • Illegal activity of partnership
written agreement
Written Agreement

Written partnership agreement is crucial to set out:

  • Function of the partnership
  • Capital each partner will invest
  • The profit sharing ratio
  • The role of each partner
  • Drawings – remuneration
  • Expulsion
  • New partners
  • non compete agreement
  • Dissolution
  • etc.

Written Partnership agreement overrides the terms of the act

partnership

Partnership

Accounting

capital a c
Capital A/C
  • Records the original monies invested
  • Usually remains fixed unless
    • More capital introduced
    • Non-current assets re-valued
    • Goodwill crystallised and recognised
  • Credit balance
    • Credit the giving: partners giving capital to the business
slide9

1 ABC Opening credit balances2 B introduces additional capital3 C withdraws capital4 ABC Capital upward adjustment for recognition of goodwill and positive re-valuation of assets

current a c
Current A/C
  • Short term element of each partners capital
  • Record for each partner
    • Share of profit/loss
    • Drawings
    • Interest on loans given to partnership
    • Interest on credit capital
  • Corresponding entry in appropriation
partner a
Partner A

Debit

Credit

Interest on Credit balance – interest on investment held in the current account

Interest on Capital – interest earned on original investment

Loan Interest – interest due (not yet paid) for a loan given to the partnership

Share Profits – divide of profit

  • Drawings – withdraw from cash instead of salary
  • Interest on drawings – charge for overdraw
partner b
Partner B

Debit

Credit

Salary – reward for taking extra responsibility or work

  • Interest on Debit balance – money take out of the partnership/loan from business – interest charged
partner c
Partner C

Debit

Credit

Capital – partner introduced more capital to the business.

appropriation a c
Appropriation A/C
  • In a partnership, the profits earned are due to the various partners in their profit sharing ration and are apportioned to them in the appropriation section on the Statement of Comprehensive Income
  • 3 Sections
    • Distributable income (Profit for year)
    • Balance of Net Profit
    • Share of Profit (as per PSR)
statement of financial position
Statement of Financial Position
  • Equity Section
    • List of the closing balances from the partners capital and current accounts.