accounting for different organisational forms: partnerships Flashcards
what is the difference between sole traders and partnerships?
partnerships have more than one person in business with the intention of making profit
how many people are normally in a partnership?
2 to 20 §
who governs partnerships?
the partnerships act 1890
what do partnerships and sole traders have in common?
they are small
what is the nature of partnerships?
partners can agree own arrangements for financial and management aspects of business
partnerships can be resurrected or dissolved by agreement in partners
what are the advantages from moving from sole trader to partnerships?
- more capital raised with additional partner
- additional skills and expertise and variety
- responsibility of management shared
- access to bigger network of contacts
what are the disadvantages of moving form sole trader to partnerships
- partners have unlimited liability (may be responsible for debts of other partner)
- profit must be shared
- control is diluted
- disputes
do you need to have a partnership agreement?
no but it is sensible to have something in writing as it can reduce confusion
what is the content of a partnership agreement?
- capital contributed bye act pattern
- ratio of profits
- rate of interets on partner drawings
- salaries to be paid to partners
- resolution of disputes
- dissolution
- preparation of audits and accounts
what happens concerning the capital contributed?
does not have to be the same amount by each but it is important to note how much each partner did contribute
what happens with profit sharing?
can agree to share profits in any ratio they want
does not have to be ratio of capital
if one partner does more work then they may revise a bugger profit
how could you compensate for someone who invested more?
you could compensate through interest on their capital
how do you do interest on capital?
deduct the interest in capital prior to calculations of profit
what are drawings?
money from the business withdrawn for perusal use
why is it best if partners withdraw as little drawings as possible?
more cash in business = more expansion can be financed e.g bulk buying and economies of scale
how can you deter partners from taking out money?
you can charge interest on money they rake out
when is interest on drawings world out?
date of withdrawal to end of financial year
what happens with salaries?
if one partner does more work they may have a bigger salary rather than change profit ratio
net profit - salaries
what are common appropriations?
partner salaries and interest on capital
take these off net profit and anything left can be divided by profit sharing
what are the differences in the SOFP compared to sole traders?
shows capital contributed by each partner
equity section is listed as 2 capital figures
what is differences in income statement compared to sole traders?
shows how the profit is appropriated between partners ](under profit you have an appropriation)
what are the two new things added in the accounts?
look like t accounts
capital and current account
what is capital account?
what they are owned by partnership
what is a current account?
activities throughout the year
- balance of profits
- drawings made by each
- interest on drawings
- intérêts on capital
- salaries
where is the income statement appropriation account?
underneath the net profit figure
shows the sharing out of partnership profits
what are the appropriation steps?
1) establish net profit (end of income statement)
2) if interest charged on drawing, debits partners current account and credit appropriation
3) appropriate interest on capital and salaries
4) share out residual in profit sharing ratio
5) credit each partners current account with share of profits
6) debit each current account for their drawings against profit
what is the current account?
what they are making and taking out
in the current account what is on the right dn left side?
right - expenses (taking out) drawings
left - revenue (going in) salaries and profit
