Partnership Accounts/Accounting - What do we account for? What’s the difference?

Partnership - a form of Business Organisation

Partnership is a form of business organisation. A business and its ownership are independent entities. The idea that the actual business and the form of organisation that is owning it are different would help you in creating an understanding on the difference in accounting for partnership firms and other forms of business organizations.

The same business may be owned by a

sole proprietor,
partnership firm,
co-operative society,
company or any other form of business organisation.

Ascertaining the profit or loss is a task related to the business. The process of profit ascertainment (final accounting) for a business would be more or less the same whatever may be the form of business organisation that is owning the business.

What's different?

How the profit made is dealt with in distributing it among ownership is an idea related to the form of business organisation. The way the profits made by an organisation are shared is what is different from organisation to organisation.

The have an understanding on the difference in accounting where the same business is conducted by two different forms of business organisations, let us consider an example of a business being conducted by a sole proprietor "Mr. Nordyan" and another case of the same business being run by a partnership firm "M/S Mani and Murthy" who share the profits of the firm between them in the ratio 1 : 2.

Final Accounting - Business Owned by a Sole Proprietor

Final Accounting

Trial Balance of M/s M/s Wearall Textiles as on 31^st March 20_6
Particulars	L/F	Amount (Dr)	Amount (Cr)
Capital Opening Stock Closing Stock Purchases Rent Paid Sales Wages Commission Received Assets Debtors Creditors	– – – – – – – – – –	15,000 25,000 1,50,000 25,000 50,000 1,51,000 45,000	1,00,000 3,20,000 3,000 38,000
Total		4,61,000	4,61,000

Trading and Profit and Loss a/c
DrCr
Particulars	Amount	Amount	Particulars	Amount	Amount
To Opening Stock To Purchases To Wages To Gross Profit		15,000 1,50,000 50,000 1,30,000	By Sales By Closing Stock		3,20,000 25,000
		3,45,000			3,45,000
To Rent To Net Profit		25,000 1,08,000	By Gross Profit By Commission Received		1,30,000 3,000
		1,33,000			1,33,000

Capital a/c
DrCr
Particulars	Amount	Amount	Particulars	Amount	Amount
To Balance c/d		2,08,000	By Balance b/d By Net Profit		1,00,000 1,08,000
		2,08,000			2,08,000
			By Balance b/d		2,08,000

Recording Gross Profit and Net Profit

Shouldn't the posting relating to gross profit and net profit read 'To P & L a/c' and 'To Capital a/c' respectively. How is it that it shows 'To Gross Profit' and 'To Net Profit'

In accounting, to create a better understanding of the transaction, we assume the presence of intermediary ledger accounts whose purpose is nothing but to provide clarity for the posting.

The basic purpose of accounting is derivation of information. The more information we need, the more accounting heads we have to create.

We assume that the balance in Trading account is transferred to the Gross Profit account or Gross Loss account as the case may be and from there to the Profit and Loss account.

Journal
Particulars
Trading a/c To Gross Profit a/c	Dr
Gross Profit a/c To Profit and Loss a/c	Dr

Similarly, we assume that the balance in Profit and Loss account is transferred to the Net Profit account or Net Loss account as the case may be and from there to the Capital account.

Journal
Particulars
Profit and Loss a/c To Net Profit a/c	Dr
Net Profit a/c To Capital a/c	Dr

Final Accounting - Business Owned by the Partnership Firm

Assuming all other data to be the same and the capital of 1,00,000 is owned by the two partners Mani and Murthy as 30,000 and 70,000 respectively.

Trial Balance of M/s M/s Wearall Textiles as on 31^st March 20_6
Particulars	L/F	Amount (Dr)	Amount (Cr)
Mani's Capital Murthy's Capital Opening Stock Closing Stock Purchases Rent Paid Sales Wages Commission Received Assets Debtors Creditors	– – – – – – – – – – –	15,000 25,000 1,50,000 25,000 50,000 1,51,000 45,000	70,000 30,000 3,20,000 3,000 38,000
Total		4,61,000	4,61,000

The Trading and profit and loss account would be the same ⇒ Net Profit = 1,08,000.

Trading and Profit and Loss a/c
DrCr
Particulars	Amount	Particulars	Amount
To Opening Stock To Purchases To Wages To Gross Profit	15,000 1,50,000 50,000 1,30,000	By Sales By Closing Stock	3,20,000 25,000
	3,45,000		3,45,000
To Rent To Net Profit c/d	25,000 1,08,000	By Gross Profit By Commission Received	1,30,000 3,000
	1,33,000		1,33,000
To Share of Net Profit Mani Murty	36,000 72,000	By Net Profit b/d	1,08,000
	1,08,000		1,08,000

Distribution of profits among Partners

Partners profit sharing ratio

⇒ Mani : Murthy	=	1 : 2
	=	$\frac{1}{3} : \frac{2}{3}$

Partners share of profits = Firms profit × Profit sharing proportion

Mani's Share	:	$2, 81, 100 \times \frac{1}{3}$	=	36,000
Murthy's Share	:	$2, 81, 100 \times \frac{1}{3}$	=	72,000
				1,08,000

Partners Capital a/c's
DrCr
Particulars	Mani	Murthy	Particulars	Mani	Murthy
To Balance c/d	1,06,000	1,02,000	By Balance b/d	70,000	30,000
			By Share of Net Profit	36,000	72,000
	1,06,000	1,02,000		1,06,000	1,02,000
			By Balance b/d	1,06,000	1,02,000

The difference that we can notice is that the profit of 1,08,000 instead of getting into the account representing a single owner (capital account) is distributed among all the owners into their respective capital accounts.

Is that all the difference?

Surely, not

If this is the only difference, then we have completed learning Partnership accounting.

This example is given to make us understand that Capital and its related aspects differ for each form of business organisation. Therefore, learning about accounting for partnership firms involves learning about the various aspects related to Capital.

Author : The Edifier

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