ACCOUNTING FOR CHANGES IN PARTNERSHIP

1.0 INTRODUCTION

A partnership business is expected to be a going concern, meaning that it should not be expected to liquidate in any foreseeable future. As it grows and prospers, it would experiences a lot of changes in its ownership, structure, financial position, etc. Adjustment has to be made in the accounts of a partnership business when more person(s) is/are to be admitted as partners or when some partner(s) died or decided to retire from the partnership. The Unit would address accounting treatments of the changes that are bound to occur as a partnership business grows or decline for whatever reason. Issues bordering on admission, resignation/ retirement, death and conversion are to be subjected to accounting treatments in a partnership business.

2.0 OBJECTIVES

At the end of this unit, you should be able to:

1. appreciate the accounting treatment on admission of a new partner 
2. understand the accounting treatment on the retirement or death of a partner 
3. appreciate reasons why a partnership could be dissolved and the accounting treatment 
4. appreciate the logic in the Gerner Vs Murray decided court case. 

3.0 MAIN CONTENT 

3.1 Changes in Partnership

3.1.1 Admission of New Partner

When it comes to admission into a partnership business, the incoming partner has to accept the conditions(s) set by the existing partners apart from any other arrangement provided by the partnership deeds as regards admission of new partner. The assets of the business are to be revalued in line with current values and the gain or loss that may arise is to be shared by the existing partners in accordance with their profit and loss sharing ratio before the admission. The share of the gain or loss is to be recorded in the current account of each partner, thereby closing the revaluation account.

SELF ASSESSMENT EXERCISE 1

1. What is the process of admitting a new partner? 
2. How is revaluation account closed on admission of a new partner? 

3.2 Retirement or Death of a Partner 

As for death or retirement of a partner, the partnership deeds or partnership Act 1890’s provisions are to be observed in addition to other conditions that might be set by the retiring partner or the trustee of the deceased partner’s assets and accepted by the surviving partners. Again, revaluation has to be made of the assets of the business at the time of retirement or death of a partner so as to determine the closing capital of the retiring partner which is to be treated as agreed: Pay the partner or retain the amount as loan to the business. 

After the changes on admission or death/retirement, the partnership is expected to continue as strong as possible, with the existing partners agreeing on the sharing formula of profit and loss, treatment of capital accounts, current accounts and drawings accounts, issue of partners’ salaries for the general/active partners, etc. The financial position of the

business, through the balance sheet, is to highlight the revaluation made to assets, the composition of capital contribution and many other charges caused by the admission or retirement/death of partner(s).

SELF ASSESSMENT EXERCISE 2

1. What are the accounting entries on retirement of a partner? 
2. Differentiate between the accounting treatments of retirement and death of partners, if any. 

3.3 Dissolution of Partnership

A partnership business can be dissolved at the instance of the partners, their creditors or when it is to be converted to a company.

Due to disagreement among the partners, by majority will, the partnership can be dissolved. Due to the insolvency of the business, which might be originated by some partners, the creditors may appeal for the dissolution of the partnership so that they can recover their money. When partners agree to convert the business to a company business, private or public, the partnership has to be dissolved, in the first instance, and the process of conversion followed.

Realization account has to be created in which all the assets account with the exception of cash or bank balance, are to be closed. The value realized on the assets are to be debited in the cash or bank account and all the liabilities settled from it or direct form the realization account, as the case might be. The partners’ capital and current accounts are to be settled from the cashbook, which will automatically close itself. At the end of the process of dissolution, all the accounts of the business are to be closed down.

Where conversion is to be made to company business, the capital accounts of the partners are to be closed by debiting them with the equivalent value of the issued share capital of the new company.

SELF ASSESSMENT EXERCISE 3

1.  Briefly discuss three reasons why a partnership business would be dissolved. 
2.  How is conversion of partnership to company business concluded?

 3.4 Gerner Vs Murray Decided Case 

Sometimes, on dissolution of partnership concern, a partner may not be able to recover his/her deficiency/insolvency. It was ruled in the Gerner V. Murray case, a British court decision that any deficiency of an

insolvent partner on dissolution of a partnership business shall be borne by the solvent partners in accordance with the ratio of their last agreed capital before the dissolution. This ruling is widely accepted and is being applied in Britain and other Commonwealth countries, like Nigeria.

4.0 CONCLUSION

In the course of the survival and growth of a partnership business, a lot of changes are bound to take place resulting from the internal and external influences. These changes have to be subjected to appropriate accounting treatments for accountability and transparency to be ensured. Admission of new partners normally brings about expansion or diversification to a partnership; retirement or death of a partner usually weakens the capital base of a partnership; and conversion of a partnership to a company business usually reflects growth and development in the operations of the business and the economy as a whole. This Unit is an attempt at introducing all these issues and their accounting treatments to the students.

5.0 SUMMARY

This Unit has discussed the major issues that bring about changes in the structure and financial position of a partnership business. It has introduced the accounting treatments to be applied as the changes happen. Adequate illustrative examples were given to shade more light on the issues. These issues are: admission of new partners, retirement or death of a partner and conversion of a partnership business to a company business.