Partnership Accounts

A partnership is a business owned by two or more people who share profits and losses. The main accounts kept for partnerships include the Capital Account, which records each partner's initial investment and permanent contributions. The Current Account tracks each partner's share of profits, drawings (money taken out), and interest on capital during the year.

Imagine two friends, Chioma and Tunde, starting a clothing business together in Lagos with ₦500,000 each. Chioma's Capital Account would show her ₦500,000 investment, while her Current Account would record her monthly drawings and profit share. The Drawings Account temporarily holds money partners withdraw, later transferred to their Current Account at year-end.

These accounts help the partnership track what each person owns and owes the business, making it easy to share profits fairly and prepare accurate financial statements.

When a new partner joins an existing partnership, the business structure changes, and this affects how profits, assets, and liabilities are shared. Admission requires calculating goodwill and revaluing assets to reflect current market value. For example, if Ade and Bola's trading partnership admits Chioma as a new partner, they must first agree on how much capital she contributes and what percentage of profits she'll receive.

Similarly, when a partner retires or leaves, the remaining partners must settle their accounts. This involves paying out the retiring partner's share of profits, capital, and any accumulated reserves. The partnership deed determines whether goodwill is paid and how assets are revalued.

Both situations require careful accounting because the profit-sharing ratio changes, affecting each partner's financial position.

When partners decide to revalue their business assets, they're essentially checking if those assets are still worth what the books show. Maybe machinery that cost ₦500,000 five years ago is now worth ₦300,000 due to wear and tear, or land that cost ₦1,000,000 is now worth ₦1,500,000 because the neighbourhood has developed. The difference between the old value and new value becomes a gain or loss that must be shared among partners according to their profit-sharing ratio.

For example, if Chioma and Amara's fashion business revalues their equipment from ₦400,000 to ₦280,000, that ₦120,000 loss gets split between them based on their agreement. This revaluation happens through a revaluation account in the final accounts before preparing the partnership deed.

When two or more people go into business together as partners, they must decide how to share any profits or losses the business makes. This sharing arrangement is usually written in a partnership deed or agreement. Partners can share profits equally, in agreed ratios, or based on their capital contributions.

For example, if Amara and Chioma start a fashion store together with Amara contributing ₦500,000 and Chioma contributing ₦300,000, they might agree to share profits in the ratio 5:3. If the business makes ₦80,000 profit in the first year, Amara gets 5/8 of the profit (₦50,000) while Chioma gets 3/8 (₦30,000). The same principle applies when the business makes a loss—both partners share it according to their agreed ratio.