CHAPTER SEVEN

PREPARATION OF PARTNERSHIP ACCOUNTS

A partnership is a relationship that subsists/exists between two or more persons carrying on a business
common with a view to making profit.
Reasons for partnership
1) Additional capital incase a sole trader or one person is not able to raise sufficient capital.
2) In case there is need for skills or expertise in certain areas of the business.
3) To involve more persons in the business especially for a family.

Membership
A partnership has minimum membership of two (2) maximum of fifty (50) except for professional firms
(e.g.) lawyers, doctors, accountants etc. whose maximum membership is twenty (20) persons.

Partnership deed
It is the agreement that regulates the partners’ actions in undertaking the partnership business.
This may or may not have been drawn up. Where two or more persons wish to form a partnership,
then it is recommended that they agree on the terms upon which the partnership will be run and the
relationship between each other. This is done in writing and signed off as agreed by all the partners and
therefore it becomes a partnership deed or agreement.

Contents of partnership agreement

1) Name(s) and address(s) of both the firm and the partners
2) Capital to be contributed by each partner
3) The profit sharing ratios that may be expressed as a fraction or as a percentage.
4) Salaries to be paid to any partners who will be involved in the active management of the business
5) Any interest to be charged on drawings made by the partners.
6) Interests to be given to the partners on their capital balances.
7) Procedures to be taken on the retirement or admission of a partner.

The life of a partnership is dependent upon:

The relationship:- if the relationship is not maintained the partnership is dissolved. For example, if there
are four partners A, B, C and D, and one partner dies or retires, the relationship that linked the four is
partly broken. By analogy, if one side of a rectangular structure is removed, it becomes a triangular
structure; a triangle is not a rectangle.

The carrying on of a business: the essence of a partnership is the carrying on of a business in common.
Therefore if one or more partners have lost the legal capacity to carry out business, say, through
bankruptcy or incapacity, the partnership is dissolved.

In that context, a partnership would be dissolved on the following grounds:

(i) The expiration of the term for which the partnership was entered into, if any;
(ii) Upon attaining the objective for which the partnership was formed;
(iii) The death of a partner;
(iv) The bankruptcy of a partner;
(v) Mental incapacity of a partner.

A partnership may be formed by any one of the following three methods:

a) A partnership from the onset of the business
b) By combination of two or more sole proprietorships
c) By conversion from a limited company

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Accounting for partnerships

The interest of the partners in the business is either long term or short-term.
The long-term interest is the capital contributed by each partner and the balance is expected to remain
fixed. It will only change when the partners agree or incase of any changes in the partnership like
admission of or retirement of a partner.
The short-term interest is reflected in form of a current account which is affected by the trading activities
of the partnership (i.e.) the profits or losses and any drawings made by the partners.

In most partnerships, both a capital and a current account are maintained and therefore the capital
account becomes a fixed capital account. When there is no distinction between a capital account and a
current account then any short- term changes are passed through the capital account therefore the capital
account becomes a fluctuating capital account.

Some of the transactions to be passed through the capital account and the current account are shown in
the following formats.

(Assume a firm of 3 partners A, B and C)

CAPITAL ACCOUNT
A B C A B C
£ £ £ £ £ £
Loss or revaluation xx Xx Xx Bal b/d xx xx Xx
Goodwill written off xx Xx Xx Additional capital xx xx Xx
(c/book or asset)
Gains on revaluation xx xx Xx
Bal c/d xx Xx Xx Goodwill xx xx Xx
xx Xx Xx xx xx Xx
Bal b/d xx xx Xx

CURRENT ACCOUNT
A B C A B C
£ £ £ £ £ £
Bal b/d Xx Bal b/d xx xx
Interest on drawings xx Xx Xx Interest on capital xx xx xx
Drawings xx Xx Xx Salaries xx xx xx
Share of profits xx xx xx
Bal c/d xx Xx - Loan interest - xx -
Bal c/d xx
xx Xx Xx xx xx xx
Xx Bal b/d xx xx xx

Format for Final Accounts:

Statement of comprehensive income (Profit and Loss Account)
The profit and loss account is exactly as the one for the sole trader and in addition to the profit and loss
account, a new section called the Appropriation account is included and this account shows how the
partners share the Net Profit for the period. (In addition to other expenses in the profit and loss, an
expense for interest on loan given by one of the partners is included and the credit entry is made on the
partner’s current account.)

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The format for the Appropriation account is as follows:

£ £
Net Profit for the year xx
Add: Interest on drawings.
A xx
B xx
C xx xx
xx
Less: Interest on capital.
A xx
B xx
C xx (xx)
xx
Less: Salaries
A xx
B xx
C xx (xx)
xx
Balance of profit to be shared in percentage ratio
A (ratio) xx
B (ratio) xx
C (ratio) xx (xx)

Statement of financial position (Balance sheet)

The balance sheet also the same as that for a sole trader but the interest of each partner in the business
should be shown separately and any loan given by a partner to the firm is also shown separately in the
non-current liability section therefore, the format will be as follows.

£ £ £
Net assets. xx
Capital: A xx
B xx
C xx
xx
Current account A xx
B xx
C (debit balance). (xx) xx
xx
Non-current liabilities
10% loan – B xx
10% loan – bank xx xx
xx

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ILLUSTRATION ONE
Read the following and answer the questions below.

A and B own a grocery shop. Their first financial year ended on 31 December 2002.
The following balances were taken from the books on that date:

Capital: A- £60,000; B - £48,000.

Partnership salaries: A - £9,000; B - £6,000.
Drawings: A - £12,000; B - £13,400.

The firm’s net profit for the year was £32,840.

Interest on capital is to be allowed at 10% per year.
Profits and losses are to be shared equally.

Required
From the information above prepare the firm’s appropriation account and the partners’ current accounts.

Solution
A and B
Statement of comprehensive income for the year ended 31 Dec 2002
£ £
Net Profit for the year 32,840

Less: Interest on capital

A 6000
B 4800 (10,800)
22,040
Less: Salaries
A 9000
B 6000 (15,000)
Balance of profit to be shared in Profit Share Ratio 7,040
A ½ 3520
B ½ 3520 (7,040)

CURRENT ACCOUNT
A B A B
£ £ £ £
Drawings 12,860 13,400 Interest on capital 6,000 4,800
Salaries 9,000 6,000
Bal c/d 5,660 920 Profit shared. 3,520 3,520
18,520 14,320 18,520 14,320
Bal b/d 5,660 920

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ILLUSTRATION TWO
Draw up a profit and loss appropriation account for the year ended 31 December 19X7 and statement of
financial position extracts (balance sheet extracts) at the date, from the following:

i. Net profits £30,350

ii. Interest to be charged on capitals: W £2,000; P £1,500; H £900
iii. Interest to be charged on drawings; W £240; P £180; H £130
iv. Salaries to be credited: P £2,000; H £3,500.
v. Profits to be shared: W 50%; P 30%; H20%.
vi. Current accounts: balances b/f W £1,860; P £946; H £717
vii. Capital accounts: balances b/f W £40,000; P £30,000; H £18,000
viii. Drawings: W £9,200; P £7,100; H £6,900.

SOLUTION
W, P and H
Statement of comprehensive income for the year ended 31 December 2002
£ £
Net profit for the year 30,350
Add: Interest on drawings
W 240
P 180
H 130 550
30,900
Less: Interest on capital
W 2,000
P 1,500
H 900 (4,400)
26,500
Less: Salaries
P 2,000
H 3,500 (5,500)
Balance of profit to be shared 21,000
W 50% 10,500
P 30% 6,300
H 20% 4,200 (21,000)

Current Account
W P H W P H
£ £ £ £ £ £
Interest on draw 240 180 130 Bal b/d 1,860 946 717
Drawings 9,200 7,100 6,900 Interest on capital 2,000 1,500 900
Bal c/d Salaries 2,000 3,500
Share of profits 10,000 6,300 4,200
Bal c/d 4,920 3,466 2,287
14,360 10,746 9,317 14,360 10,746 9,317

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 W, P and H
Statement of financial position Balance sheet (extract) as at 31 Dec 2002
£ £ £
Net Assets xx
Capital W 40,000
P 30,000
H 18,000
88,000
Current Accounts
W 4,920
P 3,466
H 2,287 10,673
98,673

ILLUSTRATION THREE
The following list of balances as at 30 September 19X9 has been extracted from the books of Brick and
Stone, trading partnership, sharing the balance of profits and losses in the proportions 3:2 respectively.

Brick and Stone

Trial Balance As At 30 September 19x9
Debit Credit
£ £
Printing and stationery and postage 3,500
Sales 322,100
Stock (1 October 19X8) 23,000
Purchases 208,200
Rent and rates 10,300
Heat and light 8,700
Staff salaries 36,100
Telephone charges 2,900
Motor vehicle running expenses 5,620
Discounts allowable 950
Discounts receivable 370
Sales returns 2,100
Purchases returns 6,100
Carriage inwards 1,700
Carriage outwards 2,400
Fixtures and fittings at cost 26,000
Provision for depreciation 11,200
Motor vehicles at cost 46,000
Provision for depreciation 25,000
Provision for doubtful debts 300
Drawings: Brick 24,000
Stone 11,000
Current accounts:
Brick 3,600
Stone 2,400
Capital accounts:
Brick 33,000
Stone 17,000
Debtors 9,300
Creditors 8,400
Balance at bank 7,700
429,470 429,470

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Additional information
1. £10,000 is to be transferred from Brick’s capital account to a newly opened Brick Loan Account on 1
July 19X9.
2. Interest at 10 per cent per annum on the loan is to be credited to Brick.
3. Stone is to be credited with a salary at the rate of £12,000 per annum from 1 April 19X9.
4. Stock in hand at 30 September 19X9 has been valued at cost at £32,000.
5. Telephone charges accrued due at 30 September 19X9 amounted to £400 and rent of £600 prepaid at
that date.
6. During the year ended 30 September 19X9 Stone has taken goods costing £1,000 for his own use.
7. Depreciation is to be provided at the following annual rates on the straight line basis:
Fixtures and fittings 10%
Motor vehicles 20%

Required:
(a) Prepare a trading and profit loss account for the year ended 30 September 19X9.
(b) Prepare a balance sheet as at 30 September 19X9 which should include summaries of the
partners’ capital and current accounts for the year ended on that date.

Note: In both (a) and (b) vertical forms of presentation should be used.

SOLUTION

Brick and Stone

Trading and Profit Loss Account For the Year Ended 30 September 19x9
£ £ £
Sales 322,100
Less: Sales returns (2,100)
320,000
less cost of sales
Opening Stock 23,000
Purchases (adjustment) 207,200
Add: Carriage inwards 1,700
208,900
Less: Purchases returns (6,100) 202,800
225,800
Less: Closing Stock (32,000) (193,800)
Gross profit 126,200
Discount receivable 370
Less: Expenses
Telephone charges (adjustment)) 3,300
Printing and stationery and postage 3,500
Rent and rages (adjustment) 9,700
Heat and light 8,700
Staff salaries 36,100
Motor vehicle running expense 5,620
Discount allowable 950
Carriage outwards 2,400
Depreciation on fixtures and fittings 2,600
Depreciation on motor vehicles 9,200
Interest on loan (adjustment) 250 (82,320)
Net profit 44,250
Less: Salaries Stone (adjustment) (6,000)
Balance of profit to be shared 38,250
Brick 35 22,950
Stone 25 15,300 (38,250

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 Brick and Stone
Balance sheet as at 30 September 19X9
Non-current Asset £ £ £
Fixtures and fittings 26,000 (13,800) 12,200
Motor vehicles 46,000 (34,200) 11,800
72,000 48,000 24,000
Current Asset
Stock 32,000
Debtors 9,300
Less: Provision (300) 9,000
Payments 600
Cash at bank 7,700 49,300
TOTAL ASSETS 73,300

Financed by:
Capital
Brick (adjustment) 23,000
Stone 17,000
Current:
Brick adjustment 2,800
Stone 11,700 14,500
54,500
Current Liabilities

Creditors 8,400
Accruals 400 8,800

Non-Current Liabilities
10% loan – Brick 10,000
73,300

Current Account
Brick Stone Brick Stone
£ £ £ £
Drawings 24,000 12,000 Bal b/d 3,600 2,400
(adj)
Interest on loan 250
Bal c/d 2,800 11,700 Salaries. 6,000
Share profits 22,950 15,300
26,800 26,800 26,800 23,700

ILLUSTRATION FOUR
Atieno, Babu and Chesire have been trading in partnership sharing profits/losses in the ration of 5:3:2
respectively. On 1 April 2000 they admitted their manager, Dagana as a partner and the profit sharing
ratio was changed to 4:3:2:1 FOR Atieno, Babu, Chesire and Dagana respectively.

The partners valued the goodwill at Sh.510,000. Dagana paid Sh.200,000 as capital and his share of
goodwill, which should be based on capital contributions.

The partners do not wish to retain the goodwill account after admission of Dagana. The admission of
Dagana has not been fully recorded other than the cash receipt of Sh.376,500.

The following is the trial balance of the partnership as at 31 March 2001:

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 Sh. Sh.
Capital accounts – Atieno 700,000
- Babu 600,000
- Chesire 400,000
Current accounts- Atieno 350,000
- Babu 325,000
- Chesire 195,000
Drawings- Atieno 250,000
- Babu 260,000
- Chesire 250,000
- Dagana 175,000
Land and buildings at cost 2,000,000
Furniture and fittings at cost 500,000
Provision for depreciation of furniture and fittings 150,000
Motor vehicles 860,000
Provision for depreciation on motor vehicles 480,000
Trade debtors and creditors 365,000 823,500
Dagana account 376,500
Purchases and sales 3,380,000 5,975,000
Stock 1 April 2000 465,000
Salaries and wages 295,000
Rates 137,000
Telephone and postage 116,000
Vehicles running expenses 396,000
Insurance and subscriptions 162,000
General expenses 72,000
Bank charges and interest 124,000
Bad debts 48,000
Returns inwards and outwards 61,000 75,000
Cash in hand 24,000
Cash in bank 490,000 ________
10,450,000 10,450,000

Additional information
1) Depreciation on furniture and fittings and motor vehicles is at 10% and 20% on reducing balance
respectively.
2) The closing stocks were valued at Sh.560,000.
3) Accrued salaries and wages and telephone bills amounted to Sh.24,000 and Sh.14,000 repectively.
4) Prepaid subscriptions and rates amounted to Sh.5,000 and Sh.25,000 respectively.
5) The partners decided that Dagana should be given a monthly salary of Sh.20,000 for the whole year
from 1 April 2000 to 31 March 2001.
6) Dagana took goods for own use at cost amounting to Sh.185,000. No entry has been made in the
books.
7) The old partners shared the cash paid by Dagana for part of his goodwill.

Required:
a) Trading, profit and loss account for the year ended 31 March 2001. (10 marks)
b) Partners capital accounts. (2 marks)
c) Partners current accounts. (3 marks)
d) Balance sheet as at 31 March 2001. (5 marks)

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ILLUSTRATION FIVE
Mack and Spencer are in partnership sharing profits and losses equally. The following is the trial balance
as at 30 June 2003.
Dr. Cr.
£ £
Buildings (cost £750,000) 500,000
Fixtures at cost 110,000
Provision for depreciation: Fixtures 33,000
Debtors 162,430
Creditors 111,500
Cash at bank 6,770
Stock at 30 June 2002 419,790
Sales 1,236,500
Purchases 854,160
Carriage outwards 12,880
Discount allowed 1,150
Loan interest: King 40,000
Office expenses 24,160
Salaries and wages 189,170
Bad debts 5,030
Provision for bad debts 4,000
Loan from J King 400,000
Capitals: Mack 350,000
Spencer 290,500
Current accounts: Mack 13,060
Spencer 2,890
Drawings: Mack 64,000
Spencer 56,500
2,446,040 2,446,040

Additional information
a) Stock, 30 June 2003, £563,400
b) Expenses to be accrued: Office Expenses £960; Wages £2,000
c) Depreciate fixtures 10 per cent on reducing balance basis, buildings £10,000
d) Reduce provision for bad debts to £3,200.
e) Partnership salary: £8,000 to Mack. Not yet entered
f) Interest on drawings: Mack£1,800; Spencer £1,200.
g) Interest on capital account balances at 10 per cent.

Required:
Prepare a trading and profit and loss appropriation account for the year ended 30 June 2003 and a balance
sheet as at that date.

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SOLUTION
Mack and Spencer
Trading and Profit Loss Account for the year ended 30 June 2003
£ £ £
Sales 1,236,500
Less cost of sales
Opening Stock 419,790
Add: Purchases 854,160
1273,950
Less: Closing Stock (563,400) 710,550
Gross Profit 525,950
Reduction in provision for bad debts (400-300) 800
526,750
Less Expenses
10 )
Depreciation: Fixtures & Fittings (110,000-33,000 x 100 7,700
Buildings 10,000
Carriage outwards 12,880
Discount allowed 1,150
Office expenses (24160 + 960) 25,120
Loan interest 40,000
Salaries and wages (18,9170 + 2000) 191,170
Bad debts 5,030 (293050)
Net Profit for the period 233,700
Add: Interest on drawings:
Mack 1,800
Spencer 1,200 3,000
236,700
Less: Salaries – Mack (8,000)
228,700
Less: interest on capital
Mack 35,000
Spencer 29,500 (64,500)
164,200
Balance of profits
Mack ½ 82,100
Spencer ½ 82,100 164,200

Mack – Current Account

£ £
Drawings 64,000 balance b/d 13,060
Interest on drawings 1,800 salary 8,000
Interest on capital 35,000
Profit 82,100
bal c/d 72,360
138,160 138,160

Spencer – Current Account

£ £
Drawings 56,500 bal b/d 2980
Interest on drawings 1200 Interest on capital 29,500
Profit 82,100
Bal c/d 56,880
114,580 114,580

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 Mack and Spencer
Balance Sheet as at 30 June 2003
£ £ £
Non-Current Assets Cost Depreciation NBV
Buildings 750,000 (260,000) 490,000
Fixtures 110,000 (40,700) 69,300
860,000 (300,700) 559,300

Current Assets
Stock 563,400
Debtors (162,430 – 3,200) 159,230
Cash at bank 6,770
729,400
Current Liabilities
Creditors 111,500
Accruals (2000 + 960) 2,960 (114,460) 614,940
1,174,240

Capital Accounts: Mack 350,000

Spencer 290,500 640,500
Current Accounts: Mack 72,360
Spencer 56,880 129,240

Loan from J. King 400,000

1,174,240

ILLUSTRATION SIX
Amis, Lodge and Pym were in partnership sharing profits and losses in the ratio 5:3:2. The following trial
balance has been extracted from their books of accounts as at 31 March 19-8:
£ £
Bank interest received
Capital accounts (as at 1 April 19-7):
Amis 80,000
Lodge 15,000
Pym 5,000
Carriage inwards 4,000
Carriage outwards 12,000
Cash at bank 4,900
Current accounts:
Amis 1,000
Lodge 500
Pym 400
Discount allowed 10,000
Discount received 4,530
Drawings:
Amis 25,000
Lodge 22,000
Pym 15,000
Motor vehicles: 80,000
Accumulated depreciation (at 1 April 19-7) 20,000
Office expenses 30,400
Plant and machinery:
At cost 100,000
Accumulated depreciation (at 1 April 19-7) 36,000

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 Provision for bad and doubtful debts
(at 1 April 19-7) 420
Purchases 225,000
Rent, rates, heat and light 8,800
Sales 404,500
Stock (at 1 April 19-7) 30,000
Trade creditors 16,500
Trade debtors 14,300

£583,300 £583,300
Additional information:
1. Stock at 31 arch 19-8 was valued at £35,000.
2. Depreciation on the fixed assets is to be charged as follows:
a. Motor vehicles – 25% on the reduced balance
b. Plant and machinery – 25% on the original cost.
There were no purchases or sales of fixed assets during the year to 31 March 19-8.
3. The provision for bad and doubtful debts is to be maintained at a level equivalent to 5% of the
total trade debtors as at 31 March 19-8.
4. An office expense of £405 was owing at 31 March 19-8, and some rent amounting to £1,5000
had been paid in advance as at that date. These items had not been included in the list of
balances shown in the trial balance.
5. Interest on drawings and on the debit balance on each partner’s current account is to be charged
as follows:
£
Amis 1,000
Lodge 900
Pym 720
6. According to the partnership agreement, Pym is allowed a salary of £13,000 per annum. This
amount was owing to Pym for the year to 31 March 19-8, and needs to be accounted for.
7. The partnership agreement also allows each partner interest on his capital account at a rate of
10% per annum. There were no movements on the respective partners’ capital accounts during
the year to 31 March 19-8, and the interest had not been credited to them as at that date.

Required:
a) Prepare the Partners trading, profit and loss account for the year ended 31 March 19-8
b) The partners current accounts and a balance sheet as at 31 March 19-8

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ILLUSTRATION SEVEN

Okech and Wanjala are in a partnership business that sells hardware. They share profits and losses equally
after allowing for an annual salary of Sh.600,000 to Okech. Interest is allowed on capital at 10% per
annum. Their bookkeeper has produced the following list of balances as at 30 June 2004:

Sh’000
Capital accounts: Okech 1,080
Wanjala 1,200
10% loan accounts: Wanjala 600
10% debentures from bank 720
Drawings : Okech 780
Wanjala 660
Sales 13,572
Returns inwards 360
Closing inventory 2,040
Cost of sales 8,400
Sales ledger control account 3,600
Purchase ledger control account 3,000
Operating expense 3,132
Non-current asset 4,440
Provision for depreciation 2,160
Bank overdraft 360

You ascertain that the bookkeeper is not sure whether the above balances are correct and on further
investigation you discover the following:
1. The sales ledger control account does not agree with the list of balances from the ledger due to:
 The sales return day book has been under cast by Sh.14,000 while a contra entry with
the creditors ledger for Sh.24,000 has been omitted from the control account.
 An invoice for Sh.240,000 was incorrectly entered in the sales day book as Sh.24,000.

2. Wanjala had paid some business expenses amounting to Sh.60,000 from his personal bank
account while Okech had taken goods costing Sh.120,000 for his own use. No entries have been
made for these items.

3. A fully depreciated motor vehicle which cost Sh.600,000 was sold during the year for Sh.120,000.
The entry for the proceeds was only posted in the bank account.

4. The bookkeeper had understated the bank overdraft by Sh.240,000.

Required:
(a) A trial balance and a suspense account showing how the difference is accounted for.

(b) Trading, Profit and loss account for the year ended 30 June 2004.
(c) Balance sheet as at 30 June 2004.

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ILLUSTRATION EIGHT
Omondi and Maina trade as partners in a brick manufacturing firm sharing profits and losses in the ration
of 3:2 after charging their annual salaries of Shs. 2,500,000 each.

The trial balance extracted from their records as at 31 October 2005 were as follows:

Sh. ‘000’ Sh. ‘000’

Capital accounts: Omondi 28,000
Maina 23,400
Current accounts: Omondi 3,000
Maina 3,400
Cash from Ombati 3,400
Life assurance policy 8,000
Sales 248,000
Purchases 192,000
Wages 20,000
Salaries 10,000
General expenses 9,000
Plant and machinery 24,000
Motor vehicles 9,400
Accounts receivable 18,000
Accounts payable 10,200
Inventory as at 1 November 2004 16,000
Provision for doubtful debts 1,400
Balance at bank – current account 1,600
Balance at bank – savings account 12,800 _
320,000 320,000
Additional Information:
1. On 1 March 2005, the partners agreed to admit Ombati into the partnership on the following terms:
 Ombati to pay sh.3,400,000 as his capital contribution.
 Ombati to be entitled to a salary of Sh.2,000,00 per annum and a share of 10% of the profits.
Omondi and Maina were to continue sharing profits in their old ratios, but guaranteed that Ombati’s
share of profits after salaries would not fall below Sh.1,200,000 per year.
Goodwill was agreed at Sh.2,100,000 but was not to be retained in the books.
2. The life assurance policy was surrendered on 1 December 2004 for Sh.9,500,000 and the proceeds
paid directly to Omondi and Maina in their profit sharing ratio. The necessary entries in the current
accounts were not made to account for this transaction.
3. The details of the savings bank account were as follows:
Sh. ‘000’
Paid in by Ombati as per agreement 3,400
Receipts from general cash account 9,400
12,800
4. The actual balance on the bank savings account as at 31 October 2005 amounted to Sh.400,000. The
difference was due to drawings by Omondi Sh.3,400,000. Maina Sh.3,000,000, Ombati Sh.1,200,000
and tax amounting to Sh.4,800,000 paid on behalf of the partners (Omondi Sh.2,400,000, Maina
Sh.2,000,000 and Ombati Sh.400,000).
5. Inventory as at 31 October 2005 was valued at Sh.19,000,000.
6. Depreciation is to be provided on plant and machinery at 10% per annum and on motor vehicles at
20% per annum.
7. Provision for doubtful debts should be maintained at 5% of the balance in the debtors ledger.

Required:
a) Trading, profit and loss and appropriation accounts for the year ended 31 October 2005.
(12 marks)
b) Partners’ current accounts. (4 marks)
c) Partners’ capital accounts. (4 marks)

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SOLUTION
Omondi, Maina and Ombati
Trading, Profit and Loss and Appropriation A/C
For the year ended 31/10/05
Shs. ‘000’ Shs. ‘000’
Sales 248,000
Cost of sales
Opening inventory 16,000
Purchases 192,000
208,000
Less: Closing inventory (19,000) 189,000
59,000
All decrease in provision for doubtful debts W1 500
59,500
Expenses
Wages 20,000
Salaries 10,000
General expenses 9,000
Depreciation: Plant and machinery 2,400
Motor vehicles 1,880 43,280
Net Profit 16,220

4 months to 28/2/05 8 months to 31/10/05 Total 12 months

Shs. ‘000’ Shs. ‘000’ Shs. ‘000’ Shs. ‘000’ Shs. ‘000’ Shs. ‘000’
Net profit 5,407 10,813 16,220
Less:
Salaries: Omondi 833 1,667 2,500
Maina 833 1,667 2,500
Ombati - (1,666) 1,333 (4,667) 1,333 (6,333)
3,741 6,146 9,867

Share of profits W2
Omondi 2,245 3,208 5,453
Maina 1,496 2,138 3,634
Ombati - (3,741) 800 (6,146) 800 (9,867)

Workings:
Provision for bad debts
5% x 18,000 = 900
less provision b/f (1,400)
Decrease in provision (500)

Share of profit from February 2005 to October 2005

Share of profit from February 2005 to October 2005

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 Shs. ‘000’
Ombati’s share 10% x 6,146 615
Ombati’s guarantee 1,200,000 x 8 months
12 months 800

Ombati will therefore receive the guaranteed amount 800,000

Omondi 3/5 x 6,146 – 800 3,208
Maina 2/5 x 6,146 – 800 2,138

Current Accounts
Omondi Maina Ombati Omondi Maina Ombati
Shs. Shs. Shs. ‘000’ Shs. ‘000’ Shs. Shs.
‘000’ ‘000’ ‘000’ ‘000’
Balance b/d 3,000 3,400 -
Proceeds of Share of profit on life
policy (drawn) 5,700 3,800 - policy 900 600 -
Drawings 3,400 3,000 1,200 Salaries 2,500 2,500 1,333
Tax 2,400 2,000 400 Share of profit 5,453 3,634 800
Balance c/f 353 1,334 533
11,853 10,134 2,133 11,853 10,134 2,133

Capital Accounts
Omondi Maina Ombati Omondi Maina Ombati
Shs. Shs. Shs. ‘000’ Shs. ‘000’ Shs. ‘000’ Shs. ‘000’
‘000’ ‘000’
Goodwill W2 1,134 756 210 Balance b/f 28,000 23,400 -
Cash paid 3,400
Goodwill 1,260 840 -

Balance c/d 28,126 23,484 3,190

29,260 24,240 3,400 29,260 24,240 3,400

OR

Capital Accounts
Omondi Maina Ombati Omondi Maina Ombati
Shs. Shs. Shs. ‘000’ Shs. Shs. ‘000’ Shs. ‘000’
‘000’ ‘000’ ‘000’
Balance b/f 28,000 23,400 -
Goodwill Cash paid 3,400
adjustment 210 Goodwill 126 84 -
Adjustment
Bal c/f 28,126 23,484 3,190
28,126 23,484 3,400 29,160 23,484 3,400

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