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AAT - Final account preparation > Partnership accounts > Flashcards

Partnership accounts Flashcards

1
Q

What is a partnership?

A
  • Two or more people
  • Making a profit and sharing that profit
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2
Q

How would a partnership work in simplified terms?

A
  • Invest capital
  • each partner - share in profits of business
  • profit/loss - allocation to partners
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3
Q

How each partner in a partnership invest capital into the business?

A

Same as sole trader

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4
Q

How would you record the capital invested by each partner?

A

Capital paid - separate

business owes back

Separate capital account

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5
Q

What is a capital account?

A
  • Each partner
  • records - capital invested into business
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6
Q

What is the double entry when a partner invests capital into the business?

A

Dr bank

Cr partner’s capital account

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7
Q

What is apporpriation?

A
  • Profit/loss - accounting period
  • shared - partners
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8
Q

How are profits shared?

A
  • Partnership agreement
  • Partnership Act 1890 - equally
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9
Q

Where is the profit from each partner recorded?

A
  • individual current accounts
  • not bank account of same name
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10
Q

What would capital accounts or current accounts balance likely be?

A
  • Credit balances =- owed back to partners
  • special payables of the business
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11
Q

What would the credit balance in the partner’s current account be?

A
  • net profit for the year - bottom of SOFP
  • owners proprietors
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12
Q

What is the double entry if a partner withdraws money out of the business?

A

Dr Partners current account

Cr bank account

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13
Q

What is the double entry if a partner withdraws inventory?

A

Dr partner current account

cr purchases

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14
Q

What is an alternative for drawings ?

A
  • Drawings account for each partner
  • transfer - end of the year
  • Dr current account / Cr Drawings
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15
Q

How are ledger accounts for capital and current accounts produced in some partnerships?

A
  • columnar form
  • Each supplier columns - joint capital and current
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16
Q

What is the capital account only used for?

A

Capital paid into business

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17
Q

What is the current account only used for?

A

Profit earned and drawings made

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18
Q

What if the partner’s current account shows a debit balance?

A
  • Withdraw
  • More cash than accumulated profits
19
Q

What is an appropriation account?

A
  • follows profit/loss
  • split between partners
20
Q

How are appropriation accounts set up ?

A
  • partnership agreement
  • ledger account
  • vertical calculation
21
Q

What would the agreement include?

A
  • Salaries
  • Commissions
  • interest on capital and drawing
  • residual profit sharing
22
Q

How are salaries appropriated?

A
  • Partnership agreement
  • level of work
  • before residual share calculation
23
Q

How are sales commissions appropriated?

A
  • appropriation of profit
  • before calculation of residual profit share
24
Q

How are interests on capital appropriated?

A
  • Different amounts of capital
  • partnership agreement - interest on capital
  • before residual profit share
25
Q

What is interests on drawings ?

A

pentaly charge

based - all drawings/ above a certain level

reduces profit

increases profit - residual profit share

26
Q

How are partnership losses appropriated?

A
  • salaries/interest appropriated - even in loss
  • appropriation turns profit to loss
  • debit current accounts
  • same - profits
27
Q

How would a new partner be introduced into the partnership ?

A
  • partnership - agree sum
  • dr bank
  • cr new partner capital account
    • goodwill
28
Q

What is goodwill?

A

not in ledger

products, services, location , excellence

29
Q

What is the problem with goodwill?

A
  • difficult to measure - monetary
  • volatile
  • value over assets = value is estimate
  • nature - i.e. head chef
30
Q

What must be recognized in the accounting procedures with the admission of a new partner?

A
  • Recorded net assets
  • unrecorded goodwill
  • accounting procedures
31
Q

What are the steps for the admission of a new partner?

A
  • Step 1 goodwill - shared between partners = dr goodwill account - estimated goodwill / cr- existing partner’s capital account - old profit share ratio
  • Step 2 - new partner admitted = dr bank account / cr new partners capital account
  • Step 3 - goodwill elimination = dr partner’s capital account ( new profit share ratio) / cr goodwill account (value of goodwill)
32
Q

What would the investment of the new partner be made up of ?

A
  • net asset worth + remainder of goodwill
  • purchases capital from other partners
33
Q

What must be calculated when a partner retires?

A
  • full amounts
  • capital balance, current account balance , goodwill
  • similar - admission new partner
34
Q

What must the accounting adjustments for the retirement of a partner ensure?

A

Full amount paid

35
Q

Steps for retiring a partner

A
  • Step 1 - current account to capital ( one) - dr r p current account / cr capital account
  • step 2 recognise goodwill - dr goodwill account ( value at retirement) / cr all partners capital profit share ratio
  • step 3 retire - total amount - payoff - dr retiring partner capital account / cr bank account
  • step 3 ii - could be loan - dr retiring partner capital account / cr loan account
  • step 4 - remove goodwill - dr remaining partner’s capital account ( new profit) / cr goodwill ( value of goodwill)
36
Q

Why might there be a change in the profit share ratio, if the number of partners remains the same?

A
  • Increase in capital investment
  • more active role in day to day running
37
Q

What must be established when a change in profit share occurs?

A

Value of goodwill

38
Q

Steps for accounting for goodwill and a change in profit share?

A
  1. Value goodwill recognition - old profit shared = dr goodwill account value / cr partners capital account old profit share
  2. goodwill elminated - newly established profit share = dr partners capital account new profit / cr goodwill account - elminating goodwill value
39
Q

What are the steps of preparing a financial statement for a partnership ?

A
  • Statement of profit/loss
  • appropriation of profit
  • drawings
  • statement of financial position
40
Q

How do you prepare a statement of profit/loss for a partnership?

A

same as sole trader

41
Q

How do you appropriate profit for a partnership?

A
  • Net profit - statement of profit/loss
  • Prepare appropriation account - split profit- profit share ratio - current account
  • if profit/share ration change - two separate calculations
42
Q

How do you account for drawings in a partnership?

A
  • trial balance - each partner’s drawings
  • transferred to partners’ current accounts
  • balance - current account - identified
43
Q

How do you account for the statement of financial position for a partnership?

A
  • Top part - same as sole trader
  • capital section - sofp - different
  • capital account and current account balances - listed and totalled
  • agree - net asset total - sofp

AAT - Final account preparation (4 decks)

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