accounting for different organisational forms: partnerships

Question 1

what is the difference between sole traders and partnerships?

Answer 1

partnerships have more than one person in business with the intention of making profit

Question 2

how many people are normally in a partnership?

Answer 2

2 to 20 §

Question 3

who governs partnerships?

Answer 3

the partnerships act 1890

Question 4

what do partnerships and sole traders have in common?

Answer 4

they are small

Question 5

what is the nature of partnerships?

Answer 5

partners can agree own arrangements for financial and management aspects of business

partnerships can be resurrected or dissolved by agreement in partners

Question 6

what are the advantages from moving from sole trader to partnerships?

Answer 6

• more capital raised with additional partner
• additional skills and expertise and variety
• responsibility of management shared
• access to bigger network of contacts

Question 7

what are the disadvantages of moving form sole trader to partnerships

Answer 7

• partners have unlimited liability (may be responsible for debts of other partner)
• profit must be shared
• control is diluted
• disputes

Question 8

do you need to have a partnership agreement?

Answer 8

no but it is sensible to have something in writing as it can reduce confusion

Question 9

what is the content of a partnership agreement?

Answer 9

• 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

Question 10

what happens concerning the capital contributed?

Answer 10

does not have to be the same amount by each but it is important to note how much each partner did contribute

Question 11

what happens with profit sharing?

Answer 11

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

Question 12

how could you compensate for someone who invested more?

Answer 12

you could compensate through interest on their capital

Question 13

how do you do interest on capital?

Answer 13

deduct the interest in capital prior to calculations of profit

Question 14

what are drawings?

Answer 14

money from the business withdrawn for perusal use

Question 15

why is it best if partners withdraw as little drawings as possible?

Answer 15

more cash in business = more expansion can be financed e.g bulk buying and economies of scale

Question 16

how can you deter partners from taking out money?

Answer 16

you can charge interest on money they rake out

Question 17

when is interest on drawings world out?

Answer 17

date of withdrawal to end of financial year

Question 18

what happens with salaries?

Answer 18

if one partner does more work they may have a bigger salary rather than change profit ratio

net profit - salaries

Question 19

what are common appropriations?

Answer 19

partner salaries and interest on capital

take these off net profit and anything left can be divided by profit sharing

Question 20

what are the differences in the SOFP compared to sole traders?

Answer 20

shows capital contributed by each partner

equity section is listed as 2 capital figures

Question 21

what is differences in income statement compared to sole traders?

Answer 21

shows how the profit is appropriated between partners ](under profit you have an appropriation)

Question 22

what are the two new things added in the accounts?

Answer 22

look like t accounts

capital and current account

Question 23

what is capital account?

Answer 23

what they are owned by partnership

Question 24

what is a current account?

Answer 24

activities throughout the year

• balance of profits
• drawings made by each
• interest on drawings
• intérêts on capital
• salaries

Question 25

where is the income statement appropriation account?

Answer 25

underneath the net profit figure

shows the sharing out of partnership profits

Question 26

what are the appropriation steps?

Answer 26

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

Question 27

what is the current account?

Answer 27

what they are making and taking out

Question 28

in the current account what is on the right dn left side?

Answer 28

right - expenses (taking out) drawings

left - revenue (going in) salaries and profit