Formation of Partnership is establishment of business between two or more persons, who agree to combine their capital and abilities. Separate accounts of capital are opened to record the investment of each partner. The partner can invest in the firm in any of the following three ways.

  • Partners invested Cash
  • Partners invested Non-Cash Assets
  • Partner invested their Personal Business

 

(1) Cash Invested by Partners

When partners are invested cash in a partnership business. In this case, cash account is debited and individual partner’s capital account is credited.

 

Example # 1:

On May 1st, 2019, Sameed and Saud agreed to form a partnership business, for this venture Sameed invested Rs. 140,000 and Saud contributed Rs. 110,000.

 Required: Pass General Journal Entries and prepare Balance Sheet.

 

Solution:

formation of partnership

formation of partnership firm

 

(2) Non-Cash Assets Invested by Partners

When partners are invested assets other cash in a partnership business, like machinery, furniture etc. In this case, asset account is debited and individual partner’s capital account is credited.

 

Example # 2:

On 1st June 2019, Salman and Said agreed to form a partnership venture. For this Salman contributed Rs. 50,000 in cash, machinery worth Rs. 25,000 and Furniture Rs. 15,000. Mr. Said invested cash Rs. 30,000, Land Rs. 130,000 and a computer worth Rs. 10,000.

 Required: Pass General Journal Entries and prepare Balance Sheet. 

 

Solution:

formation of a partnership firm

partnerships accounts

 

(c) Partner invested their Personal Business

In the few cases, partnership is established by the combination of two or more personal businesses of similar nature and form a new business partnership. This is done to avoid the competition and also to strengthen the financial position of the business. In this case the assets of the existing business are debited in the partnership books and liabilities are credited. Difference between assets and liabilities are recorded in partners’ capital account.

Example # 3:

On 1st July 2019, Amna and Eman carrying on separate business of similar nature, agreed to merge their businesses and form a new partnership business. Following are individual businesses balance sheets:

partnerships accounting

partnership distributions

Required: Pass General Journal Entries and prepare Balance Sheet.

 

Solution:

partnership accounting examples

partnership accounting exam questions

References

Mukharji, A., & Hanif, M. (2003). Financial Accounting (Vol. 1). New Delhi: Tata McGraw-Hill Publishing Co.

Narayanswami, R. (2008). Financial Accounting: A Managerial Perspective. (3rd, Ed.) New Delhi: Prentice Hall of India.

Ramchandran, N., & Kakani, R. K. (2007). Financial Accounting for Management. (2nd, Ed.) New Delhi: Tata McGraw Hill.

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