Accounting for Partnerships Flashcards
Nature of a partnership
Definition
4 Features?
“The relationship which subsists between persons carrying on a business in common with a view of profit”
The Partnership Act, 1890
- Must be at least 2 partners
- Partners are jointly and severally liable with each other
- A partnership agreement or deed is usually in place
- A partner is equally and independently liable
Partnership agreement
Agreements typically cover the following areas: (6)
Which of those 3 are used to work out overall profit split?
Bold are used to work out overall profit split
- Profit share ratio (PSR)
- Salaries and drawings
- Interest on capital and drawings
- Long term capital introduced by each partner
- Procedures to change the agreement
- Authority of partners to bind others
Partnership agreement (5)
All partnerships should have an agreement which is usually in writing and referred to as a partnership deed
If not, provisions of the Partnership Act 1890 apply:
- Profits shared equally by partners
- No interest on capital or drawings
- No partners’ salaries
- Loans by partners attract interest at 5% pa
Partnership financial statements (4)
What do they usually consist of?
Income statement?
What shows the split?
What is there?
- Usually consist of a balance sheet, income statement and an appropriation of profit statement
- Income statement - same as for a sole trader
- Appropriation of profit statement shows the split of the overall partnership profit to each partner
- In a partnership there is a current and capital account for each partners to represent owners equity within the balance sheet.
Appropriation of profit
When does this go?
What does it show?
What can it contain information on (4)
Extra fact
- A further section is added to the income statement which is known as the appropriation statement.
- This shows the net profit for the period and the division of that profit according to the partnership agreement/deed.
- Remember the deed may contain information on salaries, interest on capital, interest on drawings, and profit share ratios.
- Salaries, interest on capital and interest on drawings do not go through the income statement. They are just an appropriation (allocation) of profit.
Capital and Current accounts (2 differences)
Capital account
- For long term
- Few transactions – only capital introduced / withdrawn.
Current account
- For short term
- Regularly changes as profit share from appropriation account and drawings are entered here.
Partnership loans
- Rather than injecting money into the partnership through a capital account a partner may make a loan to the partnership at an agreed rate of interest.
- This loan is shown in the balance sheet as a non current liability
Dr Bank Cr Loan to partner (non current liability) - and interest on the loan is allowed as a normal business expense in the income statement.
Dr interest expense Cr Partners Current account
Accounting System
Definition?
Can be simple?
Cloud?
- Process by which a business can record, process and store financial information
- Today nearly all accounting systems are computerised – but it is essential accountants understand the processes.
- Accounting software – can be as simple as a spreadsheet, or an off the shelf programme (eg Sage, Xero) or bespoke software
- Cloud computing (accounting) – service giving a business access to software (accounting) via the internet
Remember - Garbage in, garbage out!
What can be challenging?
What needs to be entered?
What needs to be set up?
What needs to be determined?
Needs…
- Setting-up the computerised accounting system can be challenging
- Standing data (data that does not regularly change) needs to be entered correctly and be tightly controlled
- Account codes need to be set up in a logical fashion for all items that could appear in the financial statements
- Need to determine which source documents are input, when they are input and how they are input
- Need controls and checks in place and regular reviews
Purpose of BOPE
What isn’t practical?
Instead?
Typically there are…?
Even though
- In a manual system its not practical to record transactions directly into the nominal/general ledger
- Instead, transactions are categorised and recorded in BOPE then transferred periodically into the nomial/general ledger
- Typically there are five BOPE, often referred to as the day books
- Even though manual systems are rarely used today, the terminology of the BOPE is still often used in computerised systems
The 5 main BOPE
- Sales Day Book (SDB)
- Record credit sales and returned sales
- Purchase Day Book (PDB)
- Record credit purchases and returns
- Cash Book (CB)
- Recording bank receipts and payments
- Petty Cash Book (PCB)
- Record petty cash transactions
- Journal Book (JB)
- Record unusual and period end adjustments
Uses of the Journal
The Journal is a book of prime entry and is used for the following; (4)
The Journal is a book of prime entry and is used for the following;
- Recording entries to open a new set of ledger accounts
- Recording purchase and sale of non current assets on credit (if not entered in SDB or PDB)
- Recording year end adjustments
- Correcting errors
Potential bookkeeping errors(4/1,2,2,1)
- Errors of omission
- Transaction not recorded (both or one side missing)
- Errors of commission
- Correct theory but error by bookkeeper - Post repairs to rent, addition or transposition error
- Errors of principle
- Dr or Cr to completely wrong account - Drawings to wages, repairs to non current asset additions
- Compensating errors
- Two unrelated errors which balance each other out
The need for control accounts (4)
- Individual transactions are categorised and entered into the respective BOPE (SDB, PDB, CB etc)
- The BOPE are totalled and entered via double entry into the nominal ledger
- Problem – not clear how much is owed to individual creditors/payables or from individual debtors/receivables
- Solution – keep additional ledgers, one for all credit sales, one for all credit purchases
Control Accounts
In the traditional manual accounting system there would be…
Debtors (2)
Creditors (2)
- In the traditional manual accounting system there would be three ledgers (general, sales and purchase)
- Debtors (receivables) in the general ledger should equal the total of all the individual debtors in the sales ledger
- Debtors in the general ledger sometimes referred to as the sales ledger control account
- Creditors (payables) in the general ledger should equal the total of all the individual creditors in the purchase ledger
- Creditors in the general ledgers sometimes referred to as the purchase ledger control account
