Chapter 15: Sole trader and partnership financial statements under UK GAAP

Question 1

How should interest charged on partners’ drawings be dealt with in partnership financial statements?

Answer 1

Added to profit in allocating the profit among the partners

Question 2

What journal is necessary to record interest payable on partners’ drawings?

Answer 2

Debit Partners’ current accounts, Credit Profit and loss appropriation account: Interest payable by partners increases the amount of profits available for appropriation. It must be charged against the partners’ current accounts.

Question 3

What equation represents the closing capital of a sole trader?

Answer 3

Opening capital + capital introduced + profit - drawings

Question 4

True or false: In relation to accounting for partnerships, goods taken by a partner from the business are treated as drawings

Answer 4

True: Goods taken by a partner count as drawings in the same way as does cash

Question 5

True or false: In relation to accounting for partnerships, interest on drawings by a partner is income in the partnership’s profit and loss account

Answer 5

False: Interest on drawings by a partner are negative appropriations of profit, not income

Question 6

True or false: In relation to accounting for partnerships, interest on a partner’s loan capital is income in the partnership’s profit and loss account

Answer 6

False: Interest on a partner’s loan capital is an expense in the profit and loss account, not income

Question 7

True or false: In relation to accounting for partnerships, drawings by a partner are credited in the current account

Answer 7

False: Drawings by a partner are debited to the current account, not credited

Question 8

True or false: In relation to accounting for partnerships, in the absence of a partnership agreement, no salaries are due to partners

Answer 8

True: No salaries are appropriated to partners unless they specifically agree that they should be

Question 9

True or false: In a partnership, interest on partners’ drawings affects neither net profit available for appropriation nor the cash position

Answer 9

True: Interest on drawings is an appropriation of profit. It affects neither the partnership’s net profit available for appropriation nor the cash position. Drawings, rather than interest on them, affect the cash position.