C hapter 4: Partnership accounts

Contents of chapter
This chapter examines how partnerships come into being and introduces the laws that govern them. The
adjustments needed to bring out a fair division of profits among partners are also discussed. Finally, the prepara-
tion of a partnership’s final accounts is described.

Notes for teachers

There are a very large number of partnerships. Some types of businesses cannot be incorporated as
1
limited companies (e.g. solicitors and doctors). Many partnerships are formed by family members.

You should only enter into a partnership with someone you trust. This is because all partners are
2
personally liable for the debts of the partnership. This means all partners will have to bear the loss
incurred from the poor decision of an irresponsible partner.

There are fewer conflicts among the partners when a written agreement has been made by all the
3
partners.

The Hong Kong Partnership Ordinance will be applied when there is no partnership agreement — either
4
verbal or written.

39
 Answers to MCQs and exercises
4.1 B 4.2 C 4.3 A 4.4 A 4.5 B

4.6
Lam and Kwan
Profit and Loss Appropriation Account for the year ended 31 March 20X6
$ $ $
Net profit 26,250
Less Interest on capital:
Lam 2,000
Kwan 4,000 6,000
Salary : Lam 5,250 11,250
15,000
Balance of profit shared:
1
Lam ( ) 7,500
2
1
Kwan ( ) 7,500 15,000
2

Lam and Kwan

Balance Sheet as at 31 March 20X6 (extracts)
Capital: $ $ $
Lam 20,000
Kwan 40,000
60,000
Current: Lam Kwan
Balances as at 1 April 20X5 4,500 5,400
Add Interest on capital 2,000 4,000
Salary 5,250 —
Share of profit 7,500 7,500
19,250 16,900 36,150
96,150

4.7X
Wing, Poon and Ho
Profit and Loss Appropriation Account for the year ended 31 December 20X7
$ $ $
Net profit 30,350
Add Interest on drawings:
Wing 240
Poon 180
Ho 130 550
30,900
Less Interest on capitals:
Wing ($40,000 × 5%) 2,000
Poon ($30,000 × 5%) 1,500
Ho ($18,000 × 5%) 900 4,400
Salaries:
Poon 2,000
Ho 3,500 5,500 9,900
21,000
Balance of profit shared:
Wing (50%) 10,500
Poon (30%) 6,300
Ho (20%) 4,200 21,000

40
 Wing, Poon and Ho
Balance Sheet as at 31 December 20X7 (extracts)
$ $ $ $
Capitals: Wing 40,000
Poon 30,000
Ho 18,000 88,000
Current Accounts:
Wing Poon Ho
Balances 1.1.20X7 1,860 946 717
Add Share of profits 10,500 6,300 4,200
Salaries — 2,000 3,500
Interest on capital 2,000 1,500 900
14,360 10,746 9,317
Less Drawings 9,200 7,100 6,900
Interest on drawings 240 180 130
4,920 3,466 2,287 10,673
98,673

4.8
Sun, Wai and Mei
Profit and Loss Appropriation Account for the year ended 31 December 20X6
$ $ $
Net profit 25,200
Less Salaries: Wai 3,000
Mei 1,000 4,000
Interest on capital:
Sun ($6,000 × 10%) 600
Wai ($4,000 × 10%) 400
Mei ($2,000 × 10%) 200 1,200 5,200
20,000
Balance of profit shared:
2
Sun ( ) 8,000
5
2
Wai ( ) 8,000
5
1
Mei ( ) 4,000 20,000
5

Balance Sheet as at 31 December 20X6 (extracts)

Capital: $ $ $ $
Sun 6,000
Wai 4,000
Mei 2,000 12,000

Current:
Sun Wai Mei
Balances as at 1.1.20X6 4,800 2,400 3,600
Add Interest on capital 600 400 200
Salary — 3,000 1,000
Share of profit 8,000 8,000 4,000
13,400 13,800 8,800 36,000
48,000

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 4.9
(a) Kin, Lo and Wong
Profit and Loss Appropriation Account for the year ended 31 December 20X6
$ $ $
Net profit 50,400
Add Interest on drawings:
1 9 1 3
Kin ($8,000 × 2 × 10% × 12 + $8,000 × 2
× 10% × 12 ) 400
1 9 1 3 )
Lo ($7,200 × × 10% × + $7,200 × × 10% × 360
2 12 2 12
1 9 1 3
Wong ($4,800 × 2
× 10% × 12
+ $4,800 × 2
× 10% × 12
) 240 1,000
51,400
Less Salary: Lo 2,000
Interest on capital:
Kin ($30,000 × 10%) 3,000
Lo ($28,000 × 10%) 2,800
Wong ($16,000 × 10%) 1,600 7,400 9,400
42,000
Balance of profit shared:
3
Kin ( ) 21,000
6
2
Lo ( ) 14,000
6
1
Wong ( ) 7,000 42,000
6

(b) Kin, Lo and Wong

Balance Sheet as at 31 December 20X6 (extracts)
Capital: $ $ $ $
Kin 30,000
Lo 28,000
Wong 16,000 74,000
Current:
Kin Lo Wong
Balances as at 1.1.20X6 750 1,340 220
Add Salary — 2,000 —
Interest on capital 3,000 2,800 1,600
Share of profit 21,000 14,000 7,000
24,750 20,140 8,820
Less Drawings 8,000 7,200 4,800
Interest on drawings 400 360 240
16,350 12,580 3,780 32,710
106,710

42
4.10X
(a) K Wong and L Shen
Profit and Loss and Appropriation Account for the year ended 31 December 20X5
$ $ $
Gross profit 56,000
Less Expenses
Wages and salaries ($18,560 – $6,000) 12,560
Rent and rates 4,440
Interest on loan from T Chan 2,000 19,000
Net profit 37,000
Add Interest on drawings: Wong ($6,000 × 10%) 600
Shen ($9,000 × 10%) 900 1,500
38,500
Less Appropriations:
Interest on capitals: Wong 4,000
Shen 6,000 10,000
Salary: Shen 6,000 16,000
22,500

2
Balance of profits shared: Wong ( ) 15,000
3
1
Shen ( ) 7,500 22,500
3

(b) Current
Wong Shen Wong Shen
$ $ $ $
Balance b/f 500 — Balance b/f — 3,700
Interest on drawings 600 900 Share of profits 15,000 7,500
Balances c/f 13,900 10,300
15,000 11,200 15,000 11,200

Note: It implies that the given current account balances as at 31 December 20X5 have already included the interest on
capital, drawings and salary to Shen.

(c) Credit balances on current accounts signify that the profits are still available to a partner to draw out of the
business. Debit balances show the amount by which drawings have exceeded profits.

43
 4.11
Sang and Yau
Trading and Profit and Loss Account for the year ended 30 June 20X5
$ $
Sales 254,520
Less Cost of sales:
Opening stock 18,000
Add Purchases 184,980
202,980
Less Closing stock 19,000 183,980
Gross profit 70,540
Less Expenses:
Wages and salaries ($32,700 + $500) 33,200
Rent, rates and insurance ($3,550 – $250) 3,300
Electricity 980
Stationery and printing 420
Motor expenses 3,480
General office expenses 1,700
Depreciation — Van ($16,000 × 20%) 3,200
— Office equipment ($5,600 × 10%) 560 46,840
Net profit 23,700
Less Interest on capital
Sang ($50,000 × 10%) 5,000
Yau ($20,000 × 10%) 2,000 7,000
16,700
Balance of profit shared:
3
Sang ( ) 10,020
5
Yau ( 2 ) 6,680 16,700
5

Sang and Yau

Balance Sheet as at 30 June 20X5
Cost Accumulated Net book
depreciation value
Fixed Assets $ $ $
Premises 28,000 — 28,000
Office equipment 8,400 3,360 (W1) 5,040
Motor vans 16,000 8,200 (W2) 7,800
52,400 11,560 40,840

Current Assets
Stock 19,000
Debtors 28,000
Prepayments 250
Cash at bank 7,250 54,500

Less Current Liabilities

Creditors 15,200
Accruals 500 15,700
Net current assets 38,800
79,640

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 Financed by:
Capital Accounts Sang Yau Total
$ $ $
Balance b/f 50,000 20,000 70,000
Current Account
Balance as at 1.7.20X4 640 300
Add Share of profit 10,020 6,680
Interest on capital 5,000 2,000
15,660 8,980
Less Drawings 10,000 5,000
5,660 3,980 9,640
79,640
(W1) Provision for depreciation on office equipment:
$8,400 – $5,600 + $560 = $3,360
(W2) Provision for depreciation on motor vans:
$16,000 – $11,000 + $3,200 = $8,200

4.12X
Mok, Wai and Kwan
Trading and Profit and Loss Account for the year ended 30 September 20X1
$ $ $
Sales 210,500
Less Returns inwards 6,800 203,700
Less Cost of goods sold:
Opening stock 42,850
Add Purchases 137,190
Carriage inwards 1,500 138,690
181,540
Less Closing stock 51,060 130,480
Gross profit 73,220
Less Expenses:
Salaries and wages 18,296
Discounts allowed 110
Rent and rates ($2,565 – $120) 2,445
Electricity and water 5,250
Postage ($2,450 – $190) 2,260
Motor expenses 3,940
Bad debts 1,234
Provision for bad debts 70
General expenses 945
Depreciation: Vans 2,500
Office equipment 1,680 4,180 38,730
Net profit 34,490
Add Interest on drawings: Mok 170
Wai 110
Kwan 120 400
34,890
Less Salaries: Wai 1,200
Kwan 700 1,900
Interest on capitals: Mok 3,000
Wai 1,600
Kwan 1,200 5,800 7,700
27,190
5
Balance of profit shared: Mok ( 10 ) 13,595
Wai ( 3 ) 8,157
10
Kwan ( 2 ) 5,438 27,190
10

45
 Mok, Wai and Kwan
Balance Sheet as at 30 September 20X1
Cost Accumulated Net book
depreciation value
Fixed Assets $ $ $
Office equipment 8,400 4,380 4,020
Vans 12,500 6,700 5,800
20,900 11,080 9,820
Current Assets
Stock 51,060
Debtors 31,928
Less Provision for bad debts 870 31,058
Prepayments ($120 + $190) 310
Bank 666
83,094
Less Current Liabilities
Creditors 24,356
Net current assets 58,738
68,558
Financed by:
Capitals: Mok 30,000
Wai 16,000
Kwan 12,000 58,000

Current Accounts: Mok Wai Kwan

$ $ $
Balances as at 1.10.20X0 1,390 (153) 2,074
Add Salaries — 1,200 700
Interest on capitals 3,000 1,600 1,200
Share of profit 13,595 8,157 5,438
17,985 10,804 9,412
Less Drawings 12,610 8,417 6,216
Interest on drawings 170 110 120
5,205 2,277 3,076 10,558
68,558

46
4.13X
(a) K Yau and T Ping
Trading and Profit and Loss Account for the year ended 30 June 20X5
$ $ $
Sales 375,200
Less Returns inwards 1,200 374,000
Less Cost of goods sold:
Opening stock 34,740
Add Purchases ($246,800 – $600) 246,200
Carriage inwards 1,650
282,590
Less Closing stock 42,800 239,790
Gross profit 134,210
Add Discounts received 3,000
137,210
Less Expenses:
Salaries ($22,600 – $2,000) 20,600
General expenses 3,100
Rent and rates 5,860
Carriage outwards ($3,080 – $1,650) 1,430
Bad debts 200
Provision for bad debts (W1) 1,320
Loss on scrapped machine (W2) 400
Depreciation: Machinery (W2) 19,120
Office equipment [($80,000 – $24,000) × 15%] 8,400 60,430
Net profit 76,780
Less Salary: Yau 2,000
Interest on capital: Yau ($30,000 × 5%) 1,500
Ping ($42,000 × 5%) 2,100 3,600 5,600
71,180
3
Balance of profit shared: Yau ( ) 42,708
5
Ping ( 2 ) 28,472 71,180
5

(b) K Yau and T Ping

Balance Sheet as at 30 June 20X5
Cost Accumulated Net book
depreciation value
Fixed Assets $ $ $
Machinery 154,400 (W2) 77,920 (W2) 76,480
Office equipment 80,000 32,400 47,600
234,400 110,320 124,080
Current Assets
Stock 42,800
Debtors ($27,000 – $200) 26,800
Less Provision for bad debts ($520 + $800) 1,320 25,480
Cash at bank 6,400
Cash in hand 2,200
76,880
Less Current Liabilities
Creditors 36,000
Net current assets 40,880
164,960

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 Financed by:
Capitals: Yau 30,000
Ping 42,000 72,000

Current Accounts: Yau Ping

Balances b/f 16,480 12,300
Add Salary 2,000 —
Interest on capital 1,500 2,100
Share of profit 42,708 28,472
62,688 42,872
Less Drawings (W3) 10,000 2,600
52,688 40,272 92,960
164,960
W1: Debtors $27,000 – Bad debts $200 – K Tan $800 = $26,000
Provision for bad debts $26,000 × 2% + K Tan $800 = $1,320

W2:
Machinery
$ $
Balance b/f 156,000 Machinery disposal 1,600
Balance c/f 154,400
156,000 156,000

Provision for Depreciation: Machinery

$ $
Machinery disposal 1,200 Balance b/f 60,000
Balance c/f 77,920 Profit and loss 19,120
79,120 79,120

Machinery Disposal
$ $
Machinery 1,600 Provision for depreciation: Machinery 1,200
Profit and loss 400
1,600 1,600

Depreciation on machinery: [($156,000 – $1,600) – ($60,000 – $1,200)] × 20% = $19,120

Note that machine scrapped has been taken out of depreciation calculation.

W3: Yau’s drawings $8,000 + Salary paid $2,000 = $10,000

Ping’s drawings $2,000 + Goods for own use $600 = $2,600

48
4.14
(a) C Chow and T Sen
Trading and Profit and Loss Account for the year ended 30 June 20X4
$ $ $
Sales ($123,650 + $880) 124,530
Less Cost of goods sold:
Opening stock 41,979
Add Purchases 85,416
127,395
Less Closing stock 56,340 71,055
Gross profit 53,475
Add Reduction in provision for bad debts ($400 – $320) 80
53,555
Less Salaries and wages ($18,917 + $200) 19,117
Office expenses ($2,416 + $96 + $500) 3,012
Carriage outwards ($1,288 – $100) 1,188
Discounts allowed 115
Bad debts 503
Loan interest 4,000
Depreciation: Fixtures ($11,000 – $3,300) × 10% 770
Buildings ($50,000 × 2%) 1,000 1,770 29,705
Net profit 23,850
Add Interest on drawings: Chow 180
Sen 120 300
24,150
Less Interest on capitals: Chow 3,500
Sen ($2,800 + $150) 2,950 6,450
Salary : Chow 800 7,250
16,900
1
Balance of profit shared: Chow ( ) 8,450
2
1
Sen ( ) 8,450 16,900
2

C Chow and T Sen

Balance Sheet as at 30 June 20X4
Cost Accumulated Net book
depreciation value
Fixed Assets $ $ $
Buildings 50,000 1,000 49,000
Fixtures 11,000 4,070 6,930
61,000 5,070 55,930
Current Assets
Stock 56,340
Debtors ($16,243 – $1,020) 15,223
Less Provision for bad debts 320 14,903
Bank 677
71,920
Less Current Liabilities
Creditors 11,150
Expenses owing ($96 + $200) 296 11,446
Net current assets 60,474
116,404
Less Long-term Liabilities
Loan from J Tan 40,000
76,404

49
 Financed by:
Capitals: Chow 35,000
Sen 28,000 63,000

Current Accounts Chow Sen

Balance as at 1.7.20X3 1,306 298
Add Interest on capital 3,500 2,950
Salary 800 —
Balance of profit 8,450 8,450
14,056 11,698
Less Drawings 6,400 5,650
Interest on drawings 180 120
7,476 5,928 13,404
76,404

(b) Suspense
$ $
Sales (i) 880 Balance b/f 1,500
Carriage outwards (ii) 100 Office expenses (iii) 500
Debtors (iv) 1,020
2,000 2,000

4.15X
(a) Mr Ma and Mr Ng
Trading and Profit and Loss Account for the year ended 31 December 20X0
$ $ $
Sales 384,975
Less Sales returns 720
384,255
Less Cost of goods sold:
Opening stock 49,940
Add Purchases 263,260
Add Carriage inwards 4,280
267,540
Less Purchases returns 560 266,980
316,920
Less Closing stock 51,000 265,920
Gross profit 118,335
Less Operating expenses:
Depreciation:
Office equipment ($53,000 × 20%) 10,600
Motor vehicles ($38,400 × 20%) 7,680
Carriage outwards ($10,240 – $4,280) 5,960
Salaries and wages ($8,000 + $700) 8,700
Rent ($7,500 – $200) 7,300
Provision for bad debts 45 40,285
Net profit 78,050
Appropriation
Interest on capital: Mr Ma ($25,000 × 10%) 2,500
Mr Ng ($25,000 × 10%) 2,500 5,000
Mr Ma’s salaries 12,000
61,050
3
Share of balance: Mr Ma ($61,050 × 5 ) 36,630
Mr Ng ($61,050 × 2 ) 24,420
5
61,050

50
(b) Mr Ma and Mr Ng
Balance Sheet as at 31 December 20X0
Fixed Assets $ $ $
Office equipment, at cost 53,000
Less Provision for depreciation ($15,900 + $10,600) 26,500 26,500

Motor vehicles 38,400

Less Provision for depreciation ($7,680 + $7,680) 15,360 23,040
49,540

Current Assets
Stock 51,000
Debtors 41,920
Less Provision for bad debts ($320 + $45) 365 41,555
Prepayment 200
Cash at bank and in hand 2,400
95,155

Less Current Liabilities

Creditors 32,550
Accruals 700 33,250
Net current assets 61,905
111,445

Financed by:
Ma Ng
Capital Account 25,000 25,000 50,000

Current Account
Balance as at 1 January 20X0 4,137 (3,742)
Add Salaries 12,000 —
Interest on capital 2,500 2,500
Share of balance 36,630 24,420
55,267 23,178
Less Drawings 10,000 7,000
45,267 16,178 61,445
111,445

51