Financial Accounting · Lesson 9

Partnership formation, appropriation, admission, retirement and dissolution

JAMBWAECNECO

What the syllabus asks

JAMB: Topic 15 Partnership accounts (formation, deed, appropriation, current and capital accounts, admission, goodwill, retirement, dissolution, conversion to a company)

WAEC: Partnership accounts: appropriation, current and capital accounts; admission of a partner, goodwill, revaluation; dissolution (excluding Garner v Murray and piecemeal realisation)

NECO: Partnership accounts: appropriation, current and capital accounts; admission of a partner, goodwill, revaluation; dissolution (excluding Garner v Murray and piecemeal realisation)

What you will learn

Explain the nature, advantages and disadvantages of partnerships.
State the contents of a deed and the default rules.
Prepare appropriation, current and capital accounts.
Value goodwill and record it on admission and retirement.
Prepare a revaluation account.
Prepare realisation, bank and capital accounts on dissolution, and outline conversion to a company.

Key points

Partnership: 2–20 persons in business for profit (CAMA 2020 s.19 limit, with exemptions).
Deed covers capital, ratio, interest, salaries, drawings, admission and dissolution.
Default: equal sharing, no interest on capital or drawings, no salaries, 5% on partners’ loans.
Appropriation: NP + interest on drawings − interest on capital − salaries = residual, shared in ratio.
Fixed capitals: recurring items go to current accounts.
Interest on partner’s loan is an expense, not an appropriation.
Goodwill: average profit × years’ purchase, super-profit, or agreed value.
Revaluation and old goodwill go to old partners in old ratio; written off in new ratio.
Dissolution: realisation account; profit or loss shared in ratio; bank pays creditors, loans, then capitals.
Conversion to a company: purchase consideration settled in shares distributed to partners.

Start here: Nature and formation of a partnership

Ade, a pharmacist, and Bola, an experienced manager, decide to open a pharmacy and medical-supplies store in Lagos. Ade has professional skill but limited money; Bola has capital and business experience. Together they can do what neither could alone. They form a partnership.

A partnership is the relationship that exists between persons carrying on a business in common with a view to profit. In Nigeria, partnerships are governed by state partnership laws (largely based on the English Partnership Act 1890) and by the Companies and Allied Matters Act (CAMA) 2020. Section 19 of CAMA 2020 forbids an association or partnership of more than 20 persons from carrying on business for profit unless it is registered as a company; partnerships of legal practitioners and of accountants, and registered co-operative societies, are exempt. CAMA 2020 also introduced limited liability partnerships (LLPs) and limited partnerships.

Advantages

More capital than a sole trader.
Shared skills, workload and decision-making.
Losses are shared.
Easy to form; few legal formalities.
Privacy: accounts need not be published.

Disadvantages

Unlimited liability in an ordinary partnership: each general partner can be personally liable for all the firm’s debts.
Disagreements can paralyse the business.
Lack of continuity: death, retirement or bankruptcy of a partner may end the partnership.
Each partner is an agent of the firm and can bind the others.
Limited capital compared with a company; shares cannot be sold freely.

Types of partner: active (general), sleeping (dormant) — contributes capital but does not manage, nominal — lends name only, limited — liability limited to capital, only in a limited partnership, and minor partners admitted to benefits.

Continue this lesson in the free app →

Practice questions

1. A partnership deed is

a written agreement setting out the partners’ rights and duties
the certificate of incorporation
the partners’ bank statement
the profit and loss account

Show answer

A: a written agreement setting out the partners’ rights and duties
It covers profit sharing, capital, salaries and interest.

2. A partner who contributes capital but takes no part in management is a

general partner
nominal partner
limited company
sleeping (dormant) partner

Show answer

D: sleeping (dormant) partner
A dormant partner still shares profit.

3. Under fluctuating capitals, drawings are debited to the

appropriation account
loan account
capital account
current account

Show answer

C: capital account
There is no separate current account.

4. Net profit ₦1 500 000; interest on capital 10% on A ₦2 000 000 and B ₦1 000 000; B’s salary ₦300 000. Residual profit:

₦1 800 000
₦900 000
₦1 200 000
₦1 300 000

Show answer

B: ₦900 000
₦1 500 000 − ₦200 000 − ₦100 000 − ₦300 000 = ₦900 000.

5. If the residual profit above is shared A 3/5 : B 2/5, A’s share is:

₦540 000
₦360 000
₦450 000
₦900 000

Show answer

A: ₦540 000
3/5 × ₦900 000 = ₦540 000.

Key words

Partnership: Relationship between persons carrying on a business in common with a view to profit.
Partnership deed: A written agreement setting out the terms of a partnership.
Appropriation account: An account showing how net profit is shared among partners.
Interest on capital: A return to partners on capital invested; an appropriation of profit.
Interest on drawings: A charge on partners for withdrawing money; added back to profit for sharing.
Partner’s salary: An agreed payment to a partner for work done; an appropriation, not an expense.
Current account: An account recording a partner’s share of profit, interest, salary and drawings when capitals are fixed.
Fixed capital: Capital account balances that remain unchanged unless capital is added or withdrawn.
Goodwill: The excess of the value of a business as a whole over the fair value of its separable net assets.
Revaluation account: An account recording changes in asset and liability values on a change of partnership.
Realisation account: An account used on dissolution to record sale of assets and find profit or loss.
Dissolution: The ending of a partnership.

Learn Partnership formation, appropriation, admission, retirement and dissolution step by step, free.
The Cara's Tips app teaches every topic from the very basics, with quick checks, worked examples and exam practice. It works offline.
Open this lesson in the free app Download for Android