(204)-BASIC PRINCIPLES FOR DISSOLUTION OF PARENERSHIPS

Basic Principles for Dissolution of Partnerships

Upon the dissolution of a partnership, the partnership act provides that the assets of the firm, including the sums contributed by the partners to make up losses or deficiencies of capital, must be applied in the following manner and order:

1. In paying the debts and liabilities of the firm to persons who are not partners therein.
2. In paying to each partner rateable what is due from the firm to him for advances as distinguished from capital.
3. In paying to each partner the amount due to him in respect of his capital and current account balances.

In the absence of agreement to the contrary, the partnership act provides that the following shall be grounds for the dissolution of a partnership:

1. The expiration of the term for which the partnership was entered into, if a fixed term was agreed upon.
2. The termination of the advantage or undertaking, when a single adventure or undertaking was the purpose of the partnership.
3. When one partner gives notice to the others of his intention to dissolve the firm.
4. The death of a partner.
5. The bankruptcy of a partner.
6. The happening of an event which causes the partnership to become illegal.
7. When a partner allows his share of the partnership to be charged for his separate debt.

(203)-GOODWILL IN PARTNERSHIP ACCOUNTS

Goodwill in Partnership Accounts

From the accountants’ viewpoint, goodwill, in the sense of attracting custom, has little significance unless it has a saleable value. To the accountant, therefore, goodwill may be said to be that elements arising from the reputation, connection or other advantages possessed by a business which enables it to earn grater profits than the return normally to be expected on the capital represented by the net tangible assets employed in the business. In considering the return normally to be expected, regard must be had to the nature of business, the risks involved, fair management remuneration and any other relevant circumstances.

The goodwill possessed by a firm may be due, inter Alia, to the following:

• The location of the business premises.
• The nature of the firms’ products or the reputation of its service.
• The possession of favorable contracts, complete or partial monopoly.
• The personal reputation of the partners.
• The possession of efficient and contented employees.
• The possession of trade marks, partners or well known business name.
• The continuance of advertising campaigns.
• The maintenance of the quality of the firms’ product, and development of the business with changing conditions.
• Freedom from legislative restrictions.

Although a firm may possess goodwill, it is not customary to raise an accountant for it in the books expected to the extent that cash or other assets of the firm have been used to pay for it. It follows, therefore, that when goodwill exists and is unrecorded in the books, the capitals of the partners of the firm are under stated to the extent of the value of their respective share of the goodwill.

Even though a goodwill account may at some time have been raised in the books, the goodwill account would not be adjusted to give effect to every variation in its value, and in most cases, therefore, the partners’ capitals are at all times understated or overstated in the books to some extent by their shares of the unrecorded appreciation or depreciation in the value of goodwill.
As the amount by which goodwill is undervalued or overvalued in the books is a profit or loss to be shared by the partners in their agreed profit sharing ratio, any alteration in the proportions in which profits and losses are shared, without first making an adjustment on the book value of goodwill, will result in an advantage to one or more partners and a disadvantage to others.

(202)-PARTNERS' ACCOUNTS AND ALLOCATION OF PROFITS

Partners’ Accounts and Allocation of Profits

Capital and current accounts

The partnership agreement provides for a fixed amount of capital to be contributed by each partner, it is preferable for the amounts therefore to be credited to the respective partners’ capital accounts, and for partners’ drawings, salaries, interests on capital and shares of profits to be dealt with the current account.

This enables a clear distinction to be made in the accounts between fixed capital and not drawn profits.

Partners’ loan accounts

Where a partner makes an advance to the firm as distinct from capital, the amount therefore should be credited to a separate loan account and not to the partners’ capital account.
Interest on a partners’ advance or loan at the agreed rate or, in absence of agreement, at 5% per annul should be credited to his current account and debited to profit and loss account as an expense of the business in arriving at net profit.

Allocation of partnership profits

The formula for allocation of partnership profits between the partners will usually be set out in the partnership agreement. The formula may take account of some or all of the following adjustments:

• Interest on capital
• Interest on drawings
• Partners’’ salaries
• Profit-sharing ratios

Interest on capital

By making notional charge against profits for this expense at a fair commercial rate on the capital employed in a business, it can be seen whether the balance of profit remaining is sufficient to satisfy the continuance of the firm with unlimited liability, since the interest charged may be regarded as approximately the income the partners would have derived from the interest of their capital in securities involving little or no risk. Apart from this, however, where there are two or more partners with unequal capitals, the effect of charging interest on capital is to adjust the rights of the partners as between themselves as regards capital, giving each a reasonable return on his capital before dividing the balance of profit in the agreed proportions.

Interest on drawings

Where that is charged, it is usually calculated at a fixed rate per annul from the date of each drawing to the date the accounts are closed and taken account of in the statement of allocation of net profit in a similar way to interest on capital.

Partners’ salaries

In the absence of agreement no partner is entitled before arriving at the amount of divisible profits to remuneration for his services to the firm.

Where the agreement provides for the payment of salaries to partners, it should be appreciated that such payments, although designated salaries are, like above expenses, merely in the nature of preferential shares of the divisible profit. The amounts such salaries should therefore be taken into account in the statement of allocation of net profit.

(201)-PARTNERSHIP ACCOUNTS

Partnership Accounts

Introduction

Partnership is defined by the partnership act as “the relation which subsists between persons carrying on a business in common with a view of profit”. The participation in profits is not, however, of itself alone conclusive evidence of the existence of a partnership, since the relationship rests upon mutual intention.

As the essence of partnership is mutual agreement, it is describable for the partners to come to some understanding before entering into partnership as to the conditions upon which the business is to be carried on, and as to their respective rights and powers.

Even though a formal agreement is made, this does not preclude subsequent variation where changing circumstances demand it; such variation can always be effected with the consent of all the partners, which may be evidenced by an amending agreement, or inferred from a course of dealing.

Clauses relating to accounting matters in partnership agreement

The general provisions affecting questions of accounts that could be contained in all partnership agreements, apart from any special circumstances, are as follows:

• As to capital; whether each partner should contribute a fixed amount or otherwise.
• As to the division of profits and losses between the partners, including capital profits and losses.
• Whether the capitals are to be fixed, drawings and profits being adjusted on current accounts, or whether they are to be adjusted on the capital accounts.
• Whether interest on capital or on drawings, or both, is to be allowed or charged before arriving at the profits divisible in the agreed proportions, and if so, at what rate.
• Whether current accounts are to bear interest, and if so, at what rate.
• "Whether partners" drawings are to be limited in amount.
• Whether partners are to be allowed remuneration for their services before arriving at divisible profits, and if so, the amounts thereof.
• Those proper accounts shall be prepared at least once a year so that these shall be audited.
• Those accounts when duly signed shall be binding on the partners, but shall be capable of being reopened within a specific period on an error being discovered.
• The method by which the value of goodwill shall be determined in the event of the retirement or death of any of the partners.
• The method of determining the amount due to a decreased partner and the manner in which the liability to his personal representatives is to be settled, for example, by the lump sum payment within a specific period, by installments of certain proportions, and the rate interested to be allowed on outstanding balances.
• In the event of there being any partnership insurance policies, the method of treating the premiums thereon and the division of the policy money.

(200)-INCOME AND EXPENDITURE ACCOUNTS

Income and Expenditure Accounts

An income and expenditure account is the profit and loss account of a non-trading concern. It contains only revenue items, being debited with all expenditure, and credited with all income of a period, weather or not it has actually being paid or received within that period. The final balance of and income and expenditure account represents the excess of income over expenditure, or the excess of expenditure over income, as the case may be, for then period. This balance is similar to the net profit or loss of a trading concern.

Receipts and payments accounts and income and expenditure accounts are used commonly by such non-trading concerns as social clubs, societies for the purpose presenting their financial position to their members. A receipts and payments account is no substitute for an income and expenditure account as the letter is prepared on an accruals basis.

Contrast with receipts and payments accounts

The main differences between the two accounts are:

Receipts and payments cash transactions only, indicates capital payments, balance represents cash in hand, bank balance, or bank overdraft. Income and expenditure includes accruals and prepayments, excludes capital receipts and capital payments, balance represents surplus/deficiency of income over expenditure for a given period.

Basis of preparation

In order to prepare an income and expenditure account Receipts and payments accounts, post all revenue items appearing in the Receipts and payments accounts to the opposite sides of the income and expenditure account, and make adjustments for accruals and prepayments at the beginning and the end of the period.

Such items as subscriptions, entrance fees, income from investments like that. Which have been received in cash and debited to the receipts and payments account, must be credited to the income and expenditure account, whilst expenditure such as rent, wages, repairs like that appearing on the credit side of the receipts and payments account must be debited to the income and expenditure account. Capital items appearing in the receipts and payments account will be posted to the debit or credit, as the case may be, of the relevant asset or liability accounts, and will not affect the income and expenditure account.

The balance sheet of a non-trading concern is prepared in the usual way, and contains particulars of all the assets and liabilities at the date as at which it is made up. The excess of the assets over the liabilities is similar to the capital of a trader, but is usually called the accumulated fund, or generally fund since it is normally made up of the excess of income over expenditure which has been accumulated within the concern.

Separate accounts should be kept for funds raised for special purposes, for example building appeal funds and election funds.

Two problems on the solutions of which accountants are divided are:

1. Should club entrance fees be credited in the income and expenditure account or be shown on the balance sheet of the club as an addition to the accumulated fund? Provided entrance fees are consistently treated, either method is correct; although it can be argued that revenue might be destroyed if there were a large number of entrance fees in any one period, the benefit of which is to be spread over a number of accounting periods.
2. Should club subscriptions in arrears be shown as debtors at the balance sheet date? A large number of club subscriptions in arrears are never received and the balance sheet could be destroyed by a fictitious asset of debtors should club subscriptions in arrears be included on the balance sheet and never received. In practice, subscriptions in arrears are often excluded from the balance sheet on prudence grounds.

(199)-INCOMPLETE RECORDS

Incomplete Records

Incomplete records are intended to signify any accounting records which fall short of complete double entry. There are varying degrees of incompleteness and the procedure to be adopted in order to prepare final accounts must depend upon the nature of the records and data available.
Approach to be adopted

In order to prepare a profit and loss account and a balance sheet, the following procedure is recorded:

Step 1

Construct a statement of the financial position at the beginning of the year. This requires assets and liabilities to be determined.

The values of any fixed assets can be obtained from such details as the trader is able to supply of their cost and the dates upon which they were acquired, provision for depreciation from the date of acquisition to the commencement of the current period being deducted. The trader must provide an estimate of the value of his stock and estimated asset values posted to the debit side. The total of the book debts should be debited to a total debtors account, and the total of the liabilities credited to a total creditors account. The excess of the aggregate of the assets over the liabilities may be taken to represent the amount of traders’ capital at the commencement of the period and should be credited to his capital account.

Step 2

A carefully analysis should be made of the bank statement, and a cash summary prepared. For this purpose, analysis columns should be prepared for each of the principle headings of receipts and payments.

Step 3

Ascertain the amounts of any cash taking which have not been paid into the bank, but have been used by the trader for the payment of business expenses, goods purchased for cash and personal expenses. An estimate should also be obtained of the value of any stock which may have been withdrawn by the trader for his own personal use or for that of his family.

Step 4

On completion of the above analysis, posting will be made as follows:

1. Cash takings to the credit of total debtors account
2. Income from investments to the credit of income from investment account
3. Proceeds of sale assets to the credit of the appropriate asset accounts
4. Other items to the credit of the relevant accounts

If a profit or loss on the sale assets is disclosed, this should be transferred either to profit and loss account or to the proprietors’ capital account.

Step 5

The amount of any cash taking used for business or private purposes should be noted, the appropriate account debited and total debtors account credited.

Step 6

This involves calculating year end adjustments and balances.

A schedule should be compiled of the book debts outstanding, the total of which should be carried down in the total debtors account. The balance of this account will now represent the total sales for the period and should be transferred to the trading account.

Similarly, a schedule should be made of liabilities outstanding to trade and other creditors. The total should be carried down in the total creditors account. The balance of this account will now represent the total purchases for the period and should be transferred to the debit of trading account.

Accruals and prepayments will be carried down as closing balances in the relevant expenses accounts.

Step 7

The whole of the transactions will now be recorded in total in double entry form and it will be possible to extract a trading and profit and loss account and balance sheet in the usual way.

(198)-FIXED ASSETS AND DATABASES

Fixed Assets and Databases

An organization, especially a large one, may possess a large quantity of fixed assets. Before computerization these would have been kept in a manual fixed asset register. A database enables this fixed asset register to be stored in an electronic form. A database file for fixed assets might contain most or all of the following categories of information.

• Code number to give the asset a unique identification in the database
• Type of asset. For example motor car, leasehold premises, for published accounts purposes
• More detailed description of the asset. For example serial number, car registration number, make
• Physical location of the asset. For example address
• Organization location of the asset. For example accounts department
• Person responsible for the asset. For example in the case of a company owned car, the person who use it
• Organization cost of the asset
• Date of purchase
• Depreciation rate and method applied to the asset
• Accumulated depreciation to date
• Net book value of the asset
• Estimated residual value
• Date when the physical existence of the asset was last verified
• Supplier

Obviously, the details kept about the asset would depend on the type of asset it is.
Any kind of computerized fixed asset register record will improve efficiency in accounting for fixed assets because of the ease and speed with which any necessary calculations can be made. Most obvious is the calculation of the depreciation provision which can be an extremely onerous task if it is done monthly and there are frequent acquisitions and disposals and many different depreciation rates in use.

The particular advantage of using a database for the fixed asset function is its flexibility in generating reports for different purposes. Aside from basic cost and net book value information a database with fields such as those listed above in the record of each asset could compile reports analyzing assets according to location say, or by manufacturer. This information could be used to help compare the performance of different divisions, perhaps, or to assess the useful life of assets supplied by different manufactures. There may be as many more possibilities as there are permutations of individual pieces of data.

Using spread sheets

A spreadsheet is essentially an electronic piece of paper divided into rows and columns with a built in pencil, eraser and calculator. It provides an easy way of performing numerical calculations.

The intersection of each column and row of a spreadsheet is referred to as a cell. A cell can contain text, numbers of formulate. Use of a formula means that the cell which contains the formula will display the results of a calculation based on data in other cells. If the numbers in those other cells change, the result displayed in formula cell will also change accordingly. With this facility, a spreadsheet is used to create financial models.