Final Accounts for a Partnership (M5)

When two or more individuals engage in an enterprise as co-owners, the organization is known as a partnership. This form of organization is popular among personal service enterprises, as well as in the legal and public accounting professions.

The partnership agreement may specify that partners should be compensated for services they provide to the partnership and for capital invested by partners.

A Partnership has been defined in Law (The Partnership Act 1890) as “The relation which subsists between persons carrying on a business in common with a view of making a profit”. For example, one partner contributed more of the assets, and works full-time in the partnership, while the other partner contributed a smaller amount of assets and does not provide as much services to the partnership.

Compensation for services is provided in the form of salary allowance. Compensation for capital is provided in the form of interest allowance. Amount of compensation is added to the capital account of the partner.