Partnership Accounts: An Introduction PDF

chapter 41 Partnership accounts: an introduction Learning objectives After you have studied this chapter, you should be able to: l explain what a partnership is and how it differs from a joint venture l...

chapter 41 Partnership accounts: an introduction Learning objectives After you have studied this chapter, you should be able to: l explain what a partnership is and how it differs from a joint venture l explain the rules relating to the number of partners l distinguish between limited partners and general partners l describe the main features of a partnership agreement l explain what will happen if no agreement exists on how to share profits or losses l draw up the the ledger accounts and financial statements for a partnership Introduction In this chapter, you’ll learn about the nature of partnerships and the regulations governing them. You’ll learn that there are two types of partner, limited and gen- eral, and about the difference between them, and about the difference between those that are limited partnerships and those that are not. Finally, you’ll learn how to prepare partnership ledger accounts and how to prepare partnership financial statements. 41.1 The need for partnerships So far we have mainly considered businesses owned by only one person. We’ve also looked at joint ventures, which are temporary projects involving two or more parties where they work together to make a profit and then disband the venture. When a more permanent possibility exists, two or more people may form themselves into a partnership. This is a long-term commit- ment to operate in business together. The people who own a partnership are called partners. They do not have to be based or work in the same place, though most do. However, they main- tain one set of accounting records and share the profits and losses. Activity 41.1 From your general knowledge, can you think of any well-known partnerships where the partners are located, not just in different cities, but in different countries? What line of business are they in? There are various reasons for multiple ownership of a business. 515 Part 6 l Partnership accounts and company accounts Activity 41.2 Think about this for a minute and then write down as many reasons as you can for people wanting to form a partnership. In addition to the reasons suggested in the answer, there is also the fact that many business ventures carry financial risk should they fail. By forming a partenership, the level of risk is reduced. Firstly, any loss can be shared by all the partners and, secondly, by involving more than one person’s expertise, the chances of failure are reduced. There are two types of multiple ownership: partnerships and limited companies. This chapter deals only with partnerships. Limited companies will be the subject of Chapter 45. 41.2 Nature of a partnership A partnership has the following characteristics: 1 It is formed to make profits. 2 It must obey the law as given in the Partnership Act 1890. If there is a limited partner (as described in Section 41.3 below), it must also comply with the Limited Partnership Act of 1907. 3 Normally there can be a minimum of two partners and a maximum of twenty partners. Exceptions are banks, where there cannot be more than ten partners; and there is no maxi- mum for firms of accountants, solicitors, stock exchange members, surveyors, auctioneers, valuers, estate agents, land agents, estate managers, or insurance brokers. 4 Each partner (except for limited partners described below) must pay their share of any debts that the partnership could not pay. If necessary, they could be forced to sell all their private possessions to pay their share of the debts. This can be said to be unlimited liability. 5 Partners who are not limited partners are known as general partners. 41.3 Limited partnerships Limited partnerships are partnerships containing one or more limited partners. Limited partner- ships must be registered with the Registrar of Companies. Limited partners are not liable for the debts as in Section 41.2 (4) above. Limited partners have the following characteristics and restrictions on their role in the partnership: 1 Their liability for the debts of the partnership is limited to the capital they have put in. They can lose that capital, but they cannot be asked for any more money to pay the debts unless they contravene the regulations relating to their involvement in the partnership (see 2 and 3 below). 2 They are not allowed to take out or receive back any part of their contribution to the partner- ship during its lifetime. 3 They are not allowed to take part in the management of the partnership or to have the power to make the partnership take a decision. If they do, they become liable for all the debts and obligations of the partnership up to the amount taken out or received back or incurred while taking part in the management of the partnership. 4 All the partners cannot be limited partners, so there must be at least one general partner with unlimited liability. 516  Chapter 41 l Partnership accounts: an introduction Activity 41.3 What advantages do you think there might be to general partners in having a limited partner? 41.4 Partnership agreements Agreements in writing are not necessary. However, it is better if a written agreement is drawn up by a lawyer or an accountant. Where there is a proper written agreement there will be fewer problems between partners. A written agreement means less confusion about what has been agreed. 41.5 Contents of partnership agreements The written agreement can contain as much, or as little, as the partners want. The law does not say what it must contain. The usual accounting contents are: 1 The capital to be contributed by each partner. 2 The ratio in which profits (or losses) are to be shared. 3 The rate of interest, if any, to be paid on capital before the profits are shared. 4 The rate of interest, if any, to be charged on partners’ drawings. 5 Salaries to be paid to partners. 6 Arrangements for the admission of new partners. 7 Procedures to be carried out when a partner retires or dies. Activity 41.4 Some partnerships don’t bother drawing up a partnership agreement. How do the partners in those partnerships know what rights and responsibiities they have? Points 1 to 5 in the list above are considered below. Points 6 and 7 will be taken up in later chapters. 1 Capital contributions Partners need not contribute equal amounts of capital. What matters is how much capital each partner agrees to contribute. It is not unusual for partners to increase the amount of capital they have invested in the partnership. 2 Profit (or loss) sharing ratios Partners can agree to share profits/losses in any ratio or any way that they may wish. However, it is often thought by students that profits should be shared in the same ratio as that in which capital is contributed. For example, suppose the capitals were Allen £40,000 and Beet £20,000. Some would assume that the partners would share the profits in the ratio of two-thirds to one- third, even though the work to be done by each partner is similar. The division of the first few years’ profits on such a basis might be: 517 Part 6 l Partnership accounts and company accounts Years 1 2 3 4 5 Total £ £ £ £ £ £ Net profits 36,000 48,000 60,000 60,000 72,000 276,000 Shared: Allen 2/3 24,000 32,000 40,000 40,000 48,000 184,000 Beet 1/3 12,000 16,000 20,000 20,000 24,000 92,000 Overall, Allen would receive £184,000, i.e. £92,000 more than Beet. As the duties of the part- ners are the same, in order to treat each partner fairly, the difference between the two shares of profit should be adequate to compensate Allen for putting extra capital into the firm. It should not be excessive. It is obvious that £92,000 extra profits is excessive, as Allen only put in an extra £20,000 as capital. Consider too the position of capital ratio sharing of profits if one partner puts in £99,000 and the other puts in £1,000 as capital. To overcome the difficulty of compensating fairly for the investment of extra capital, the con- cept of interest on capital was devised. 3 Interest on capital If the work to be done by each partner is of equal value but the capital contributed is unequal, it is reasonable to pay interest on the partners’ capitals out of partnership profits. This interest is treated as a deduction prior to the calculation of profits and their distribution among the part- ners according to the profit sharing ratio. The rate of interest is a matter of agreement between the partners, but it should equal the return which they would have received if they had invested the capital elsewhere. Taking Allen and Beet’s firm again, but sharing the profits equally after charging 5 per cent per annum interest on capital, the division of profits would become: Years 1 2 3 4 5 Total £ £ £ £ £ £ Net profit 36,000 48,000 60,000 60,000 72,000 276,000 Interest on capitals Allen 2,000 2,000 2,000 2,000 2,000 = 10,000 Beet 1,000 1,000 1,000 1,000 1,000 = 5,000 Remainder shared: Allen 1/2 16,500 22,500 28,500 28,500 34,500 = 130,500 Beet 1/2 16,500 22,500 28,500 28,500 34,500 = 130,500 Summary Allen Beet £ £ Interest on capital 10,000 5,000 Balance of profits 130,500 130,500 140,500 135,500 Allen has thus received £5,000 more than Beet, this being adequate return (in the partners’ estima- tion) for having invested an extra £20,000 in the firm for five years. 4 Interest on drawings It is obviously in the best interests of the firm if cash is withdrawn from the firm by the partners in accordance with the two basic principles of: (a) as little as possible, and (b) as late as possible. 518  Chapter 41 l Partnership accounts: an introduction The more cash that is left in the firm the more expansion can be financed, the greater the economies of having ample cash to take advantage of bargains and of not missing cash discounts because cash is not available and so on. To deter the partners from taking out cash unnecessarily the concept can be used of charging the partners interest on each withdrawal, calculated from the date of withdrawal to the end of the financial year. The amount charged to them helps to swell the profits divisible between the partners. The rate of interest should be sufficient to achieve this without being too harsh. Suppose that Allen and Beet have decided to charge interest on drawings at 5 per cent per annum, and that their year end was 31 December. The following drawings are made: Allen Drawings Interest £ £ 1 January 2,000 £2,000 × 5% × 12 months = 100 1 March 4,800 £4,800 × 5% × 10 months = 200 1 May 2,400 £2,400 × 5% × 8 months = 80 1 July 4,800 £4,800 × 5% × 6 months = 120 1 October 1,600 £1,600 × 5% × 3 months = 20 Interest charged to Allen = 520 Beet Drawings Interest £ £ 1 January 1,200 £1,200 × 5% × 12 months = 60 1 August 9,600 £9,600 × 5% × 5 months = 200 1 December 4,800 £4,800 × 5% × 1 month = 20 Interest charged to Beet = 280 5 Partnership salaries One partner may have more responsibility or tasks than the others. As a reward for this, rather than change the profit and loss sharing ratio, the partner may have a partnership salary which is deducted before sharing the balance of profits. 6 Performance-related payments to partners Partners may agree that commission or performance-related bonuses be payable to some or all the partners linked to their individual performance. As with salaries, these would be deducted before sharing the balance of profits. 41.6 An example of the distribution of profits Taylor and Clarke have been in partnership for one year sharing profits and losses in the ratio of Taylor 3/5, Clarke 2/5. They are entitled to 5 per cent per annum interest on capitals, Taylor having £20,000 capital and Clarke £60,000. Clarke is to have a salary of £15,000. They charge interest on drawings, Taylor being charged £500 and Clarke £1,000. The net profit, before any distributions to the partners, amounted to £50,000 for the year ended 31 December 20X7. 519 Part 6 l Partnership accounts and company accounts £ £ £ Net profit 50,000 Add Charged for interest on drawings: Taylor 500 Clarke 1,000 1,500 51,500 Less Salary: Clarke 15,000 Interest on capital: Taylor 1,000 Clarke 3,000 4,000 (19,000) Balance of profits 32,500 Shared: Taylor 3/5 19,500 Clarke 2/5 13,000 32,500 The £50,000 net profits have therefore been shared: Taylor Clarke £ £ Balance of profits 19,500 13,000 Interest on capital 1,000 3,000 Salary – 15,000 20,500 31,000 Less Interest on drawings ( 500) ( 1,000) 20,000 30,000 1 2 3 £50,000 41.7 The financial statements If the sales, stock and expenses of a partnership were exactly the same as that of a sole trader, then the trading and profit and loss account would be identical with that as prepared for the sole trader. However, a partnership would have an extra section shown under the profit and loss account. This section is called the profit and loss appropriation account, and it is in this account that the distribution of profits is shown. The heading to the trading and profit and loss account for a partnership does not normally include the words ‘appropriation account’. It is purely an accounting custom not to include it in the heading. (Sometimes examiners ask for it to be included in the heading, in which case, you need to do so!) The profit and loss appropriation account of Taylor and Clarke from the details given would be: 520  Chapter 41 l Partnership accounts: an introduction Taylor and Clarke Trading and Profit and Loss Account for the year ending 31 December 20X7 (Trading Account – same as for sole trader) (Profit and Loss Account – same as for sole trader) Profit and Loss Appropriation Account £ £ £ Net profit (from the Profit and Loss Account) 50,000 Interest on drawings: Taylor 500 Clarke 1,000 1,500 51,500 Less: Salary: Clarke 4,000 Interest on capitals Taylor 1,000 Clarke 3,000 15,000 (19,000) 32,500 Balance of profits shared: Taylor 3/5 19,500 Clarke 2/5 13,000 32,500 41.8 Fixed and fluctuating capital accounts There are two choices open to partnerships: fixed capital accounts plus current accounts, and fluctuating capital accounts. 1 Fixed capital accounts plus current accounts The capital account for each partner remains year by year at the figure of capital put into the firm by the partners. The profits, interest on capital and the salaries to which the partner may be entitled are then credited to a separate current account for the partner, and the drawings and the interest on drawings are debited to it. The balance of the current account at the end of each financial year will then represent the amount of undrawn (or withdrawn) profits. A credit bal- ance will be undrawn profits, while a debit balance will be drawings in excess of the profits to which the partner was entitled. For Taylor and Clarke, capital and current accounts, assuming drawings of £15,000 for Taylor and £26,000 for Clarke will be: Taylor – Capital 20X7 £ Jan 1 Bank 20,000 Clarke – Capital 20X7 £ Jan 1 Bank 60,000 521 Part 6 l Partnership accounts and company accounts Taylor – Current Account 20X7 £ 20X7 £ Dec 31 Cash: Drawings 15,000 Dec 31 Profit and loss == 31 Profit and loss appropriation account: appropriation account: Interest on capital 1,000 Interest on drawings 500 Share of profits 19,500 == 31 Balance c/d 5,000 20,500 20,500 20X8 Jan 1 Balance b/d 5,000 Clarke – Current Account 20X7 £ 20X7 £ Dec 31 Cash: Drawings 26,000 Dec 31 Profit and loss == 31 Profit and loss appropriation account: appropriation account: Salary 15,000 Interest on drawings 1,000 Interest on capital 3,000 == 31 Balance c/d 4,000 Share of profits 13,000 31,000 31,000 20X8 Jan 1 Balance b/d 4,000 Notice that the salary of Clarke was not paid to him, it was merely credited to his current account. If instead it was paid in addition to his drawings, the £15,000 cash paid would have been debited to the current account, changing the £4,000 credit balance into a £11,000 debit balance. Note also that the drawings have been posted to the current accounts at the end of the year. The amounts withdrawn which add up to these amounts were initially recorded in the Cash Book. Only the totals for the year are posted to the current account, rather than each individual withdrawal. Examiners often ask for the capital accounts and current accounts to be shown in columnar form. For Taylor and Clarke, these would appear as follows: Capital Accounts Taylor Clarke Taylor Clarke £ £ 20X7 £ £ Jan 1 Bank 20,000 60,000 Current Accounts Taylor Clarke Taylor Clarke 20X7 £ £ 20X7 £ £ Dec 31 Cash: Drawings 15,000 26,000 Dec 31 Salary 19,500 15,000 == 31 Interest on drawings 500 1,000 == 31 Interest on capital 1,000 3,000 == 31 Balances c/d 5,000 4,000 == 31 Share of profits 13,000 20,500 31,000 20,500 31,000 20X8 Jan 1 Balances b/d 5,000 4,000 2 Fluctuating capital accounts The distribution of profits would be credited to the capital account, and the drawings and inter- est on drawings debited. Therefore the balance on the capital account will change each year, i.e. it will fluctuate. 522  Chapter 41 l Partnership accounts: an introduction If fluctuating capital accounts had been kept for Taylor and Clarke they would have appeared: Taylor – Capital 20X7 £ 20X7 £ Dec 31 Cash: Drawings 15,000 Jan 1 Bank 20,000 == 31 Profit and loss Dec 31 Profit and loss appropriation account: appropriation account: Interest on drawings 500 Interest on capital 1,000 == 31 Balance c/d 25,000 Share of profits 19,500 40,500 40,500 20X8 Jan 1 Balance b/d 25,000 Clarke – Capital 20X7 £ 20X7 £ Dec 31 Cash: Drawings 26,000 Jan 1 Bank 60,000 == 31 Profit and loss Dec 31 Profit and loss appropriation account: appropriation account: Interest on Salary 15,000 drawings 1,000 Interest on capital 3,000 == 31 Balance c/d 64,000 Share of profit 13,000 91,000 91,000 20X8 Jan 1 Balance b/d 64,000 Fixed capital accounts preferred The keeping of fixed capital accounts plus current accounts is considered preferable to fluctuat- ing capital accounts. When partners are taking out greater amounts than the share of the profits that they are entitled to, this is shown up by a debit balance on the current account and so acts as a warning. 41.9 Where no partnership agreement exists As mentioned in the answer to Activity 41.4, where no partnership agreement exists, express or implied, Section 24 of the Partnership Act 1890 governs the situation. The accounting content of this section states: (a) Profits and losses are to be shared equally. (b) There is to be no interest allowed on capital. (c) No interest is to be charged on drawings. (d) Salaries are not allowed. (e) Partners who put a sum of money into a partnership in excess of the capital they have agreed to subscribe are entitled to interest at the rate of 5 per cent per annum on such an advance. Section 24 applies where there is no agreement. There may be an agreement not by a partnership deed but in a letter, or it may be implied by conduct, for instance when a partner signs a balance sheet which shows profits shared in some other ratio than equally. Where a dispute arises as to whether an agreement exists or not, and this cannot be resolved by the partners, only the courts are competent to decide. 523 Part 6 l Partnership accounts and company accounts 41.10 The balance sheet For the partnership, the capital part of the balance sheet will appear: Balance Sheet as at 31 December 20X7 (extract) £ £ Capital accounts Taylor 20,000 Clarke 60,000 80,000 Current accounts Taylor Clarke £ £ £ £ Salary – 15,000 Interest on capital 1,000 3,000 Share of profits 19,500 13,000 20,500 31,000 Less Drawings 15,000 26,000 Interest on drawings 500 1,000 (15,500) (27,000) 5,000 4,000 9,000 If one of the current accounts had finished in debit, for instance if the current account of Clarke had finished up as £400 debit, the figure of £400 would appear in brackets and the balances would appear net in the totals column: Taylor Clarke £ £ £ Closing balance 5,000 (400) 4,600 If the net figure turned out to be a debit figure then this would be deducted from the total of the capital accounts. Learning outcomes You should now have learnt: 1 That there is no limited liability in partnerships except for ‘limited partners’. 2 That limited partners cannot withdraw any of the capital they invested in the partnership or take part in the management of the partnership. 3 That apart from some professions, if more than twenty owners of an organisation are needed, a limited company would need to be formed, not a partnership. 4 That the contents of a partnership agreement will override anything written in this chapter. Partners can agree to anything they want to, in as much or as little detail as they wish. 5 That if there is no partnership agreement, then the provisions of the Partnership Act 1890 (details shown in section 41.9) will apply. 6 That partners can agree to show their capital accounts using either the fixed capital or fluctuating capital methods. 7 How to prepare the ledger accounts and financial statements of partnerships. 524  Chapter 41 l Partnership accounts: an introduction Answers to activities 41.1 The best example is accounting partnerships. Some of them have offices all over the world. 41.2 Your answer could have included some of the following: l The capital required is more than one person can provide. l The experience or ability required to manage the business cannot be found in one person alone. l Many people want to share management instead of doing everything on their own. l Very often the partners will be members of the same family. 41.3 Limited partners contribute capital. They may also contribute expertise. Either of these is a benefit to the general partners – they have to contribute less capital and they can rely on the additional expertise when appropriate without needing to seek assistance from people outside the partner- ship. Also, because limited partners cannot be involved in the management of the partnership, general partners can take decisions without consulting a limited partner, thus saving time and effort when, in many instances, the limited partner will be busy doing other things that have nothing to do with the partnership business. 41.4 The Partnership Act 1890 imposes a standard partnership agreement upon partnerships that do not draw up a partnership agreement. See Section 41.9. Review questions 41.1 Black, Brown and Cook are partners. They share profits and losses in the ratios of 2/9, 1/3 and 4 /9 respectively. For the year ended 31 July 20X2, their capital accounts remained fixed at the following amounts: £ Black 60,000 Brown 40,000 Cook 20,000 They have agreed to give each other 6 per cent interest per annum on their capital accounts. In addition to the above, partnership salaries of £30,000 for Brown and £18,000 for Cook are to be charged. The net profit of the partnership, before taking any of the above into account was £111,000. You are required to draw up the appropriation account of the partnership for the year ended 31 July 20X2. 41.2A Gray, Wilkes and Booth are partners. They share profits and losses in the ratios of 3/8, 3/8 1 and /4 respectively. For the year ended 31 December 20X3 their capital accounts remained fixed at the following amounts: £ Gray 50,000 Wilkes 40,000 Booth 30,000 They have agreed to give each other 5 per cent interest per annum on their capital accounts. In addition to the above, partnership salaries of £32,000 for Wilkes and £14,000 for Booth are to be charged. The net profit of the partnership before taking any of the above into account was £84,800. Required: Draw up the appropriation account of the partnership for the year ended 31 December 20X3. 41.3 I Skip and U Jump sell toys. Their individual investments in the business on 1 January 20X4 were: Skip £80,000, Jump £40,000. For the year to 31 December 20X4, the net profit was £30,000 and the partners’ drawings were: Skip £8,000, Jump £9,000. ‘ 525  Part 6 l Partnership accounts and company accounts ‘ For 20X4 (their first year), the partners agreed to share profits and losses equally, but they decided that from 1 January 20X5: (i) The partners should be entitled to annual salaries of: Skip £10,000; Jump £14,000. (ii ) Interest should be allowed on capital at 7% per annum. (iii) The profit remaining should be shared equally (as should losses) Drawings Net trading profit Skip Jump before dealing with partners’ items £ £ £ 20X5 38,000 13,000 17,000 20X6 29,000 12,000 20,000 Required: Prepare the profit and loss appropriation accounts and the partners’ current accounts for the three years. 41.4 Draw up a profit and loss appropriation account for the year ended 31 March 20X8 and bal- ance sheet extracts at that date, from the following: (i) Net profits £111,100. (ii ) Interest to be charged on capitals: Blair £3,000; Short £2,000; Steel £1,500. (iii) Interest to be charged on drawings: Blair £400; Short £300; Steel £200. (iv) Salaries to be credited: Short £20,000; Steel £25,000. (v) Profits to be shared: Blair 70%; Short 20%; Steel 10%. (vi) Current accounts: balances b/d Blair £18,600; Short 3 £9,460; Steel £8,200. (vii) Capital accounts: balances b/d Blair £100,000; Short £50,000; Howe £25,000. (viii) Drawings: Blair £39,000; Short £27,100; Steel £16,800. 41.5A Draw up a profit and loss appropriation account for Cole, Knox and Lamb for the year ended 31 December 20X5, and a balance sheet extract at that date, from the following: (i) Net profits £184,800. (ii ) Interest to be charged on capitals: Cole £3,600; Knox £2,700; Lamb £2,100. (iii) Interest to be charged on drawings: Cole £1,200; Knox £960; Lamb £500. (iv) Salaries to be credited: Knox £22,000; Lamb £28,000. (v) Profits to be shared: Cole 55%; Knox 25%; Lamb 20%. (vi) Current accounts: Cole £18,000; Knox £8,000; Lamb £6,000. (vii ) Capital accounts: Cole £60,000; Knox £45,000; Lamb £35,000. (viii) Drawings: Cole £27,000; Knox £23,000; Lamb £17,000. 41.6A Penrose and Wilcox are in partnership, sharing profits and losses in the ratio 3 : 2. The fol- lowing information was taken from their books for the year ended 31 December 20X9, before the completion of their profit and loss appropriation account. £ Current accounts (1 January 20X9) Penrose 640 (Dr) Wilcox 330 (Cr) Drawings Penrose 3,000 Wilcox 2,000 Net trading profit 6,810 Interest on capital Penrose 540 Wilcox 720 Salary Penrose 2,000 Interest on drawings Penrose 270 Wilcox 180 526  Chapter 41 l Partnership accounts: an introduction (a) Prepare, for the year ended 31 December 20X9: (i) the profit and loss appropriation account of Penrose and Wilcox; (ii ) the current accounts in the ledger for Penrose and Wilcox. (b) Why in many partnerships are current accounts prepared as well as capital accounts? (c) At 1 January 20X9 Penrose had a debit balance in his current account. What does this mean? (d ) In partnership accounts what is the purpose of preparing: (i) a profit and loss account? (ii ) a profit and loss appropriation account? (e) In partnership accounts why is: (i) interest allowed on capital? (ii ) interest charged on drawings? (Northern Examinations and Assessment Board: GCSE) 41.7A A and B are in partnership sharing profits and losses 3:2. Under the terms of the partner- ship agreement, the partners are entitled to interest on capital at 5 per cent per annum and B is entitled to a salary of £4,500. Interest is charged on drawings at 5 per cent per annum and the amounts of interest are given below. No interest is charged or allowed on current accounts. The partners’ capitals at 1 July 20X6 were: A £30,000 and B £10,000. The net trading profit of the firm, before dealing with partners’ interest or B’s salary for the year ended 30 June 20X7 was £25,800. Interest on drawings for the year amounted to A £400, B £300. At 1 July 20X6, there was a credit balance of £1,280 on B’s current account, while A’s current account balance was a debit of £500. Drawings for the year to 30 June 20X7 amounted to £12,000 for A and £15,000 for B. Required: Prepare, for the year to 30 June 20X7: (a) The firm’s profit and loss appropriation account. (b) The partners’ current accounts. 41.8 Bee, Cee and Dee have been holding preliminary discussions with a view to forming a part- nership to buy and sell antiques. The position has now been reached where the prospective partners have agreed the basic arrangements under which the partnership will operate. Bee will contribute £40,000 as capital, and up to £10,000 as a long-term loan to the partnership, if needed. He has extensive other business interests and will not therefore be taking an active part in the running of the business. Cee is unable to bring in more than £2,000 as capital initially, but, because he has an expert knowledge of the antique trade, will act as the manager of the business on a full-time basis. Dee is willing to contribute £10,000 as capital. He will also assist in running the business as the need arises. In particular, he is prepared to attend auctions anywhere within the United Kingdom in order to acquire trading stock which he will transport back to the firm’s premises in his van. On occasions he may also help Cee to restore the articles prior to sale to the public. At the meeting, the three prospective partners intend to decide upon the financial arrange- ments for sharing out the profits (or losses) made by the firm, and have approached you for advice. You are required to prepare a set of explanatory notes, under suitable headings, of the considera- tions which the prospective partners should take into account in arriving at their decisions at the next meeting. (Association of Chartered Certified Accountants) ‘ 527  Part 6 l Partnership accounts and company accounts ‘ 41.9 Frame and French are in partnership sharing profits and losses in the ratio 3/5 : 2/5, respec- tively. The following is their trial balance as at 30 September 20X5. Dr Cr £ £ Buildings (cost £210,000) 160,000 Fixtures at cost 8,200 Provision for depreciation: Fixtures 4,200 Debtors 61,400 Creditors 26,590 Cash at bank 6,130 Stock at 30 September 20X4 62,740 Sales 363,111 Purchases 210,000 Carriage outwards 3,410 Discounts allowed 620 Loan interest: P Prince 3,900 Office expenses 4,760 Salaries and wages 57,809 Bad debts 1,632 Provision for doubtful debts 1,400 Loan from P Prince 65,000 Capitals: Frame 100,000 French 75,000 Current accounts: Frame 4,100 French 1,200 Drawings: Frame 31,800 French 28,200 640,601 640,601 Required: Prepare a trading and profit and loss appropriation account for the year ended 30 June 20X9, and a balance sheet as at that date. (a) Stock, 30 June 20X9, £74,210. (b) Expenses to be accrued: Office Expenses £215; Wages £720. (c) Depreciate fixtures 15 per cent on reducing balance basis, buildings £5,000. (d) Reduce provision for doubtful debts to £1,250. (e) Partnership salary: £30,000 to Frame. Not yet entered. (f ) Interest on drawings: Frame £900; French £600. (g) Interest on capital account balances at 5 per cent. 528  Chapter 41 l Partnership accounts: an introduction 41.10A Scot and Joplin are in partnership. They share profits in the ratio: Scot 70 per cent; Joplin 30 per cent. The following trial balance was extracted as at 31 December 20X7. Dr Cr £ £ Office equipment at cost 9,200 Motor vehicles at cost 21,400 Provision for depreciation at 31.12.20X6: Motor vehicles 12,800 Office equipment 3,600 Stock at 31 December 20X6 38,410 Debtors and creditors 41,940 32,216 Cash at bank 2,118 Cash in hand 317 Sales 180,400 Purchases 136,680 Salaries 27,400 Office expenses 2,130 Discounts allowed 312 Current accounts at 31.12.20X6 Scot 7,382 Joplin 7,009 Capital accounts: Scot 50,000 Joplin 20,000 Drawings: Scot 17,500 Joplin 16,000 313,407 313,407 Required: Draw up a set of final accounts for the year ended 31 December 20X7 for the partnership. The fol- lowing notes are applicable at 31 December 20X7. (a) Stock 31 December 20X7 £41,312. (b) Office expenses owing £240. (c) Provide for depreciation: motor 25 per cent of cost, office equipment 20 per cent of cost. (d) Charge interest on capitals at 5 per cent. (e) Charge interest on drawings: Scot £300; Joplin £200. ‘ 529  Part 6 l Partnership accounts and company accounts ‘ 41.11 Sage and Onion are trading in partnership, sharing profits and losses and equally. Interest at 5% per annum is allowed or charged on both the capital account and the current account bal- ances at the beginning of the year. Interest is charged on drawings at 5% per annum. The partners are entitled to annual salaries of: Sage £12,000; Onion £8,000. Required: From the information given below, prepare the partnership profit and loss account for the year ended 31 December 20X1, and the balance sheet as at that date. Sage and Onion Trial Balance as at 31 December 20X1 Dr Cr £ £ Capital accounts: Sage 100,000 Onion 50,000 Current accounts: Sage 2,000 Onion 600 Cash drawings for the year: Sage 15,000 Onion 10,000 Freehold premises at cost 50,000 Stock at 1 January 20X1 75,000 Fixtures and fittings at cost 15,000 Purchases and purchase returns 380,000 12,000 Bank 31,600 Sales and sales returns 6,000 508,000 Trade debtors and trade creditors 52,400 33,300 Carriage inwards 21,500 Carriage outwards 3,000 Staff salaries 42,000 VAT 8,700 Office expenses 7,500 Provision for doubtful debts 2,000 Advertising 5,000 Discounts received 1,000 Discounts allowed 1,200 Bad debts 1,400 Rent and business rates 2,800 Accumulated provision for depreciation of fixtures and fittings 3,000 720,000 720,000 At 31 December 20X1: (a) Stock on hand was valued at £68,000. (b) Purchase invoices amounting to £3,000 for goods included in the stock valuation at (a) above had not been recorded. (c) Staff salaries owing £900. (d ) Business rates paid in advance £200. (e) Provision for doubtful debts to be increased to £2,400. (f ) Goods withdrawn by partners for private use had not been recorded and were valued at: Sage £500, Onion £630. No interest is to be charged on these amounts. (g) Provision is to be made for depreciation of fixtures and fittings at 10% on cost. (h) Interest on drawings for the year is to be charged: Sage £360, Onion £280. 530  Chapter 41 l Partnership accounts: an introduction 41.12A Bush, Home and Wilson share profits and losses in the ratios 4:1:3 respectively. Their trial balance as at 30 April 20X4 was as follows: Dr Cr £ £ Sales 334,618 Returns inwards 10,200 Purchases 196,239 Carriage inwards 3,100 Stock 30 April 20X3 68,127 Discounts allowed 190 Salaries and wages 54,117 Bad debts 1,620 Provision for doubtful debts 30 April 20X3 950 General expenses 1,017 Business rates 2,900 Postage 845 Computers at cost 8,400 Office equipment at cost 5,700 Provisions for depreciation at 30 April 20X3: Computers 3,600 Office equipment 2,900 Creditors 36,480 Debtors 51,320 Cash at bank 5,214 Drawings: Bush 39,000 Home 16,000 Wilson 28,000 Current accounts: Bush 5,940 Home 2,117 Wilson 9,618 Capital accounts: Bush 60,000 Home 10,000 Wilson 30,000 494,106 494,106 Draw up a set of financial statements for the year ended 30 April 20X4. The following notes are relevant at 30 April 20X4: (i) Stock 30 April 20X4, £74,223. (ii ) Business rates in advance £200; Stock of postage stamps £68. (iii) Increase provision for doubtful debts to £1,400. (iv) Salaries: Home £18,000; Wilson £14,000. Not yet recorded. (v) Interest on Drawings: Bush £300; Home £200; Wilson £240. (vi ) Interest on Capitals at 8 per cent. (vii ) Depreciate Computers £2,800; Office equipment £1,100. ‘ 531  Part 6 l Partnership accounts and company accounts ‘ 41.13 Reid and Benson are in partnership as lecturers and tutors. Interest is to be allowed on capital and on the opening balances on the current accounts at a rate of 5% per annum and Reid is to be given a salary of £18,000 per annum. Interest is to be charged on drawings at 5% per annum (see notes below) and the profits and losses are to be shared Reid 60% and Benson 40%. The following trial balance was extracted from the books of the partnership at 31 December 20X3. £ £ Capital account – Benson 50,000 Capital account – Reid 75,000 Current account – Benson 4,000 Current account – Reid 5,000 Drawings – Reid 17,000 Drawings – Benson 20,000 Sales – goods and services 541,750 Purchases of textbooks for distribution 291,830 Returns inwards and outwards 800 330 Carriage inwards 3,150 Staff salaries 141,150 Rent 2,500 Insurance – general 1,000 Insurance – public indemnity 1,500 Compensation paid due to Benson error 10,000 General expenses 9,500 Bad debts written off 1,150 Fixtures and fittings – cost 74,000 Fixtures and fittings – depreciation 12,000 Debtors and creditors 137,500 23,400 Cash 400 Total 711,480 711,480 l A provision for doubtful debts is to be carried forward of £1,500. l Insurances paid in advance at 31 December 20X2 were General £50; Professional Indemnity £100. l Fixtures and fittings are to be depreciated at 10% on cost. l Interest on drawings are: Benson £550, Reid £1,050. l Stock of books at 31 December 20X2 was £1,500. Required: Prepare a profit and loss account together with an appropriation account at 31 December 20X3 together with a balance sheet as at that date. You can find a range of additional self-test questions, as well as material to help you with your studies, on the website that accompanies this book at www.pearsoned.co.uk/wood 532 chapter 43 Revaluation of partnership assets Learning objectives After you have studied this chapter, you should be able to: l explain why there may be a need for revaluation of assets in a partnership l calculate the amount of asset revaluation gain or loss attributable to each partner l make the necessary entries to the ledger accounts when assets are revalued Introduction In this chapter, you’ll learn about the events that make it necessary to revalue the assets of a partnership. You’ll learn the journal entries required to record asset revaluations in the ledger accounts of the partnership and how to apportion gains and losses on revaluation between the partners. 43.1 Need for revaluation When a business is sold, and the sale price of the assets differs from their book values, there will be a profit or loss on the sale. This profit or loss will be shared between the partners in their profit and loss sharing ratios. This sharing of profits and losses on changing asset values doesn’t just need to be done when a partnership is sold. It should also be done whenever any of the following happens: l a new partner is admitted; l a partner leaves the firm; l the partners change profit and loss sharing ratios. As no sale has taken place in any of these circumstances, the assets will have to be revalued to reflect what they are worth at the date when the change occurs, in order for the gains and losses to be identified. Activity 43.1 Why do the assets need to be revalued in these cases? The business has not been sold. (Hint: there is no legal requirement to do so; and consider this question in the light of what you learnt in the last chapter about goodwill when new partners are admitted.) Once the assets have been revalued, you need to record the changes and gains and losses in the ledger accounts of the partnership. 548  Chapter 43 l Revaluation of partnership assets 43.2 Profit or loss on revaluation If the revaluation shows no difference in asset values, no further action is needed. This will not happen very often, especially if assets include buildings. These are normally shown at cost less accumulated depreciation, but this is very rarely the actual value of buildings after they have been owned for a few years. £ If: New total valuation of assets 90,000 Is more than: Old total valuation of assets (60,000) The result is: Gain on revaluation 30,000 £ If: New total valuation of assets 40,000 Is less than: Old total valuation of assets (50,000) The result is: Loss on revaluation (10,000) 43.3 Accounting for revaluation Revaluation account is opened The first thing you do upon revaluing partnership assets is to open a revaluation account and make the appropriate entries: 1 For each asset showing a gain on revaluation: Debit asset account with gain. Credit revaluation account. 2 For each asset showing a loss on revaluation: Debit revaluation account. Credit asset account with loss. 3 If there is an increase in total valuation of assets: Debit profit to revaluation account. Credit old partners’ capital accounts in old profit and loss sharing ratios.* 4 If there is a fall in total valuations of assets: Debit old partners’ capital accounts in old profit and loss sharing ratios.* Credit loss to revaluation account. *If current accounts are kept for the partners, the entries should be made in their current accounts. Activity 43.2 When you were looking at goodwill in the last chapter, you were interested in the difference between the amount received and the value of net assets. Why do we consider only the assets when there is a change in partners or a change in the profit sharing ratio? 549 Part 6 l Partnership accounts and company accounts Exhibit 43.1 Following is the balance sheet as at 31 December 20X5 of W and Y, who shared profits and losses in the ratios: W two-thirds; Y one-third. From 1 January 20X6 the profit and loss sharing ratio is to be altered to W one-half; Y one-half. Balance Sheet as at 31 December 20X5 £ £ Premises (at cost) 65,000 Equipment (at cost less depreciation) 15,000 80,000 Stock 20,000 Debtors 12,000 Bank 8,000 40,000 120,000 Capitals: W 70,000 Y 50,000 120,000 The assets were revalued on 1 January 20X6 to be: Premises £90,000; Equipment £11,000. Other assets values were unchanged. Accounts to show the assets at revalued amounts show: Revaluation £ £ £ Assets reduced in value: Assets increased in value: Equipment 4,000 Premises 25,000 Gain on revaluation carried to Capital accounts: W two-thirds 14,000 Y one-third 7,000 21,000 25,000 25,000 Premises £ £ Balance b/d 65,000 Balance c/d 90,000 Revaluation: Increase 25,000 90,000 90,000 Balance b/d 90,000 Equipment £ £ Balance b/d 15,000 Revaluation: Reduction 4,000 Balance c/d 11,000 15,000 15,000 Balance b/d 11,000 550  Chapter 43 l Revaluation of partnership assets Capital: W £ £ Balance c/d 84,000 Balance b/d 70,000 Revaluation: Share of gain 14,000 84,000 84,000 Balance b/d 84,000 Capital: Y £ £ Balance c/d 57,000 Balance b/d 50,000 Revaluation: Share of gain 7,000 57,000 57,000 Balance b/d 57,000 43.4 Revaluation of goodwill This chapter deals with the revaluation of all assets other than goodwill. The revaluation of goodwill has already been dealt with in Chapter 42. Learning outcomes You should now have learnt: 1 How to make the entries arising from revaluations of partnership assets. 2 That when a new partner joins a firm, or a partner retires or dies, the partnership assets should be revalued. 3 That revaluation of assets should also occur when there is a change in the profit and loss sharing ratios of partners. 4 That profits on revaluation of assets are credited to the old partners’ capital accounts in the old profit and loss sharing ratios. 5 That losses on revaluation of assets are debited to the old partners’ capital accounts in the old profit and loss sharing ratios. 6 That the asset accounts also show the revalued amounts. Losses will have been credited to them and profits debited. Answers to activities 43.1 When partners join or partners leave a partnership, there is, in effect, a new partnership. You learnt in the last chapter about goodwill that, when a new partner is admitted, the existing part- ners generally seek to ensure that they retain their share of the goodwill that has built up to that date. It should be fairly obvious, therefore, that the existing partners will also want to maintain the true value of their share of the business at that date in their capital accounts, rather than some historically-based figure. If this were not done, new partners admitted would benefit from increases in value before they joined the firm, without having to pay anything for them. Similarly, if the value of assets had 551 Part 6 l Partnership accounts and company accounts fallen before they had joined the firm, and no revaluation took place, they would share that loss of value without any adjustment being made for it. Partners who leave or change their profit and loss sharing ratios would also be affected if there were no payments or allowances for such gains or losses. 43.2 In this case, you are only concerned about whether the assets are stated at their true values. You assume that the liabilities are correctly stated and ignore them because they are already included in the calculation of capital. In other words, when considering goodwill, you are comparing the amount received with the total of the partners’ account balances, i.e. the net worth of the busi- ness (assets less liabilities). In this case, you are only concerned in the first instance with what the true value is of part of the other side of the accounting equation, assets, and not with the true value of the net worth. When you make the entries in the ledger accounts, you effectively bring in the liabilities and calculate a new net worth, which is reflected in the new balances on the part- ners’ account balances. The overall effect is the same, only you don’t need to calculate net worth to know whether there has been a gain or loss on revaluation of the assets. You do need to do that in order to calculate goodwill. Review questions 43.1 Pitt, Lamb and Soul Balance Sheet as at 31 December 20X5 £ Buildings (at cost) 80,000 Motor vehicles (at cost less depreciation) 16,500 Office fittings (at cost less depreciation) 1,800 98,300 Stock 6,100 Debtors 7,400 Bank 800 14,300 112,600 £ Capitals: Pitt 60,000 Lamb 30,000 Soul 22,600 112,600 The above partners have always shared profits and losses in the ratio: Pitt 4: Lamb 2: Soul 1. From 1 January the assets were to be revalued as the profit sharing ratios are to be altered soon. The following assets are to be revalued to the figures shown: Buildings £106,000; Motor vehicles £13,000; Stock £4,894; Office fittings £1,450. Required: (a) You are required to show all the ledger accounts necessary to record the revaluation. (b) Draw up a balance sheet as at 1 January 20X6. 43.2A Fitch and Wall have been in partnership for many years sharing profits and losses in the ratio 5 : 3 respectively. The following was their balance sheet as at 31 December 20X2. 552  Chapter 43 l Revaluation of partnership assets £ £ Goodwill 12,400 Plant and machinery 16,320 Stock 6,420 Debtors 4,100 Cash at bank 626 11,146 Sundry creditors ( 5,928) 5,218 33,938 Capital: Fitch 19,461 Wall 14,477 33,938 On 1 January 20X3, they decided to admit Home as a partner on the condition that she contributed £12,000 as her capital but that the plant and machinery and stock should be revalued at £16,800 and £6,100 respectively, the other assets excepting goodwill, remaining at their book values. The goodwill was agreed to be valueless. You are required to show: (a) The ledger entries dealing with the above in the following accounts: (i ) Goodwill account, (ii ) Revaluation accounts, (iii) Capital accounts; (b) The balance sheet of the partnership immediately after the admission of Home. 43.3 Alan, Bob and Charles are in partnership sharing profits and losses in the ratio 3:2:1 respec- tively. The balance sheet for the partnership as at 30 June 20X6 is as follows: Fixed assets £ £ £ Premises 90,000 Plant 37,000 Vehicles 15,000 Fixtures 2,000 144,000 Current assets Stock 62,379 Debtors 34,980 Cash 760 98,119 Current liabilities Creditors 19,036 Bank overdraft 4,200 (23,236) 74,883 218,883 Loan – Charles ( 28,000) 190,883 Capital Alan 85,000 Bob 65,000 Charles 35,000 185,000 Current account Alan 3,714 Bob ( 2,509) Charles 4,678 5,883 190,883 ‘ 553  Part 6 l Partnership accounts and company accounts ‘ Charles decides to retire from the business on 30 June 20X6, and Don is admitted as a partner on that date. The following matters are agreed: (a) Certain assets were revalued: Premises £120,000; Plant £35,000; Stock £54,179. (b) Provision is to be made for doubtful debts in the sum of £3,000. (c) Goodwill is to be recorded in the books on the day Charles retires in the sum of £42,000. The partners in the new firm do not wish to maintain a goodwill account so that amount is to be written back against the new partners’ capital accounts. (d) Alan and Bob are to share profits in the same ratio as before, and Don is to have the same share of profits as Bob. (e) Charles is to take his car at its book value of £3,900 in part payment, and the balance of all he is owed by the firm in cash except £20,000 which he is willing to leave as a loan account. (f ) The partners in the new firm are to start on an equal footing so far as capital and current accounts are concerned. Don is to contribute cash to bring his capital and current accounts to the same amount as the original partner from the old firm who has the lower investment in the business. The original partner in the old firm who has the higher investment will draw out cash so that his capital and current account balances equal those of his new partners. Required: (a) Account for the above transactions, including goodwill and retiring partners’ accounts. (b) Draft a balance sheet for the partnership of Alan, Bob and Don as at 30 June 20X6. (Association of Accounting Technicians) 43.4A The balance sheet of A Barnes and C Darwin at 31 March, 20X8 is as follows: £ £ £ Fixed assets Building 51,000 Fittings 29,000 80,000 Current assets Stock 16,000 Debtors 5,000 21,000 Less: Current liabilities Bank 3,000 Creditors 8,000 (11,000) 10,000 90,000 Represented by: Capital accounts Barnes 60,000 Darwin 30,000 90,000 The partners share profits and losses: Barnes three-fifths and Darwin two-fifths. At the date of the above balance sheet, it was agreed to admit E Fox who was to bring cash of £25,000 into the firm as capital. The new profit and loss ratio would be Barnes, one half; Darwin, one-third; and Fox, one-sixth. 554  Chapter 43 l Revaluation of partnership assets Barnes and Darwin agreed the following revaluation amounts prior to the admission of Fox. Any goodwill arising is to remain in the ledger. £ Buildings 55,000 Fittings 27,000 Stock 15,500 Debtors 4,800 Goodwill 12,000 Accrued expenses (previously omitted) 300 Required: (a) Prepare the journal entries to record the above. (b) Prepare the balance sheet of the new firm. (c) Show by journal entry how the necessary adjustment would be made if the partners agreed that goodwill should not remain in the ledger. 43.5 At 31 December 20X7, the balance sheet of A, B, and C who are equal partners, was as follows: £ £ Fixed assets Freehold premises 16,000 Machinery and tools 15,100 Investment, at cost 4,000 35,100 Current assets Stock 16,000 Debtors 12,800 Bank 12,100 40,900 Less: Current liabilities Creditors (14,000) 26,900 62,000 Represented by: Capital accounts A 20,000 B 17,000 C 25,000 62,000 A retired at that date. In order to determine the amount due to him the following revaluations were made: Freehold premises £18,000; machinery and tools £16,000; investments £5,100. The value of the goodwill was agreed at £8,000. It was arranged that A should take over the investments in part payment of the amount due to him, the balance to be settled in cash. B and C would increase their capitals by paying in £10,000 and £6,000 respectively. These changes were all carried out. Required: (a) Prepare the revaluation account, bank account and capital accounts. (b) Prepare the opening balance sheet of B and C. 555 chapter 44 Partnership dissolution Learning objectives After you have studied this chapter, you should be able to: l explain what happens upon dissolution of a partnership l record the entries relating to the dissolution of a partnership l explain the differences between recording a partnership dissolution and making the entries when one partner leaves a partnership l explain the Partnership Act 1890 rules relating to partnership dissolution l explain the Garner v Murray rule Introduction In this chapter, you’ll learn how to calculate and record the necessary entries when a partnership is dissolved. You’ll learn that the process is laid down in the Partnership Act 1890 and what to do under the Garner v Murray rule when partners are unable to pay the amount they owe the partnership. Finally, you’ll learn how to deal with a situation where the partnership assets are being disposed of over a long period of time. 44.1 Need for dissolution You will recall from Chapter 40 that joint ventures are often short-term and that when the pro- ject they were formed to do has ended, the joint venture is terminated. You learnt in Chapter 41 that partnerships are long-term ventures that are formed with a long-term commitment on the part of the partners to operate in business together. In Chapter 42, you learnt that new partners are admitted from time to time; and, in Chapter 43, you learnt that partners can also leave part- nerships. So partnerships really are not as permanent as they may at first appear. Activity 44.1 Can you think of any partnership you know of where a partner left? How do you think the change in the partnership was treated in the ledgers? In fact, as far as the UK tax authorities are concerned, every time a partner joins or leaves a partnership, a new partnership is brought into existence. Intuitively, this does make sense. Partnerships exist because of the desire to merge the skills, resources and expertise of the part- ners. Imagine a pop group whose lead singer leaves. The replacement is never quite the same. As 556  Chapter 44 l Partnership dissolution another example, if two people are in a partnership running a restaurant and the one that does the cooking leaves, the replacement isn’t going to want to prepare exactly the same meals. Partnerships do change when a partner leaves. And they do change when a new partner joins. However, for accounting purposes, we only consider partnerships as changing sufficiently to merit treating them as ceasing to exist when the partners go their separate ways. When they do, this is known as partnership dissolution – the partnership has been dissolved. Reasons for dissolution include the following: (a) The partnership is no longer profitable, and there is no longer any reason to carry on trading. (b) The partners cannot agree between themselves how to operate the partnership. They there- fore decide to finish the partnership. (c) Factors such as ill-health or old age may bring about the close of the partnership. Activity 44.2 What is the difference between these events and partners simply leaving a partnership? For example, if there are three partners in a dental practice and two leave, why can’t the third continue the business with new partners? 44.2 What happens upon dissolution Upon dissolution the partnership firm stops trading or operating. Then, in accordance with the Partnership Act 1890: (a) the assets are disposed of; (b) the liabilities of the firm are paid to everyone other than partners; (c) the partners are repaid their advances and current balances – advances are the amounts they have put in above and beyond the capital; (d) the partners are paid the final amounts due to them on their capital accounts. Any profit or loss on dissolution would be shared by all the partners in their profit and loss sharing ratios. Profits would increase capitals repayable to partners. Losses would reduce the capitals repayable. If a partner’s final balance on his capital and current accounts is in deficit, he will have to pay that amount into the partnership bank account. 44.3 Disposal of assets The assets do not have to be sold to external parties. Quite often one or more existing partners will take assets at values agreed by all the partners. In such a case the partner may not pay in cash for such assets; instead they will be charged to his capital account. 44.4 Accounting for partnership dissolution The main account around which the dissolution entries are made is known as the realisation account. It is this account in which it is calculated whether the realisation of the assets is at a profit or at a loss. Exhibit 44.1 shows the simplest of partnership dissolutions. We will then look at a more difficult example in Exhibit 44.2. 557 Part 6 l Partnership accounts and company accounts Exhibit 44.1 The last balance sheet of X and Y, who share profits X two-thirds : Y one-third is shown below. On this date they are to dissolve the partnership. Balance Sheet at 31 December 20X9 £ £ Fixed assets Buildings 100,000 Motor vehicle 12,000