SUBJECT: ACCOUNTING GRADE 11 CHAPTER: PARTNERSHIPS LESSON: PARTNERSHIPS CONCEPTS LESSON OVERVIEW (KNOWLEDGE AREAS) LESSON. 1. Kinds of partners:

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1 SUBJECT: ACCOUNTING GRADE 11 CHAPTER: PARTNERSHIPS LESSON: PARTNERSHIPS CONCEPTS LESSON OVERVIEW (KNOWLEDGE AREAS) LESSON 1. Introduction 2. Partnership concepts 3. Recording of entries for partnerships Definition of a partnership A partnership is a form of ownership which comes into being as a result of an agreement by at least two, whereby each person contributes money and/or assets and/or a skill to a common business with the purpose of making a profit and sharing it in a predetermined way. According to the South African law, a partnership is not regarded as a legal person. This means that partners are jointly and separately liable and responsible for the assets and liabilities and of the partnership. 1. Kinds of partners: Silent partner contributes capital to the partnership, but is not involved in the management or running of the partnership. They are known to the public. The receive a share in the profit of the partnership. Anonymous partner contributes capital to the partnership, but is not involved in the management or running of the partnership. They are not known to the public. They receive a share in the profit of the partnership. Limited partners contributes capital to the partnership, but is only liable for the partnership to the extent of the capital that he/she has invested in the partnership. They receive a share in the profit of the partnership. 2. The partnership agreement: The stipulations in the partnership agreement are determined by the partners who draw it up. This agreement need not be in writing -- it can be done orally. It is in the best interest of all persons involved that this agreement be in writing in order to avoid unnecessary problems in the future.

2 The partnership agreement should contain the following information: The names and addresses of those persons entering into the partnership, The nature of the business activities, The address from where business will be conducted, The formation date as well as the estimated duration of the partnership, The contributions of each partner, Stipulations with regards to how profits and losses will be appropriated, Stipulations regarding drawings by partners as well as the interest to be charged on these amounts, The rate at which interest on capital will be paid to partners, Stipulations regarding salaries to be earned by partners for work done in the partnership, Procedures for the settling of disputes, Termination procedures. 3. Advantages and disadvantages of a partnership: a) b) c) d) Advantages More capital can be contributed by combining forces. Skills can be combined into one business for the benefit of all. Unnecessary competition can be eliminated/decreased. More opportunity as it is one s own business Disadvantages Partners are jointly and separately liable for the debts of the partnership. Lacks continuity. Partners bind their co-partners by their actions. All partners have equal powers to bind partners into contracts. 4. Ledger accounts that are specific to a partnership: The Ledger accounts of a partnership are similar to that of any other form of ownership that has as its main aim to make a profit. The only real problem lies in the owner s equity accounts and the appropriation of profits and losses. 5. Accounts found in a partnership that are not found in the accounting procedure for a sole trader: Each partner has his/her own capital account Each partner has his/her own drawings account Each partner has his/her own current account Each partner has his/her own salary account Interest on capital Appropriation account 6. Accounting cycle of a partnership: The accounting cycle of a partnership is exactly the same as that of a sole ownership. The only differences exist in the equity accounts. The cycle can be summarized as follows:

3 Transactions take place Source documents are completed and/or retained Source documents are recorded in the When source documents are recorded Subsidiary journals: in the subsidiary journals, the individual Cash receipt journal debtor s and creditor s accounts in the Cash payment journal accounts receivable and accounts Petty cash journal payable ledgers are updated. Debtors journal Debtors allowance journal Creditors journal Creditors allowance journal General journal Subsidiary journals are posted to the general ledger A trial balance is drawn up The above-mentioned steps constitute the monthly cycle and will be done for twelve months of the year. A year-end is run on the last day of the year, when three final accounts are created and closed off. 1. Trading account, closed off against profit and loss. 2. Profit and loss account, closed off against the appropriation account. 3. Appropriation account, closed off against the current accounts of the partners. Exercise 1 The following table compares sole proprietorships with partnerships as different forms of ownership. Complete it by listing all the differences individually. Ownership Capital contribution Control Sole proprietorship Partnership

4 Continuity Liability Taxation Reporting Homework Answer the following questions in your own words: 1. What is meant by a sole proprietorship? 2. What are the main disadvantages of this form of ownership?

5 3. Name four other forms of ownership. Through a partnership many of the obstacles of a sole proprietorship can be overcome. Name a few reasons why it could be beneficial opting for a partnership instead of a sole ownership.