Partnership accounts

Question 1

What is a partnership?

Answer 1

• Two or more people
• Making a profit and sharing that profit

Question 2

How would a partnership work in simplified terms?

Answer 2

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

Question 3

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

Answer 3

Same as sole trader

Question 4

How would you record the capital invested by each partner?

Answer 4

Capital paid - separate

business owes back

Separate capital account

Question 5

What is a capital account?

Answer 5

• Each partner
• records - capital invested into business

Question 6

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

Answer 6

Dr bank

Cr partner’s capital account

Question 7

What is apporpriation?

Answer 7

• Profit/loss - accounting period
• shared - partners

Question 8

How are profits shared?

Answer 8

• Partnership agreement
• Partnership Act 1890 - equally

Question 9

Where is the profit from each partner recorded?

Answer 9

• individual current accounts
• not bank account of same name

Question 10

What would capital accounts or current accounts balance likely be?

Answer 10

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

Question 11

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

Answer 11

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

Question 12

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

Answer 12

Dr Partners current account

Cr bank account

Question 13

What is the double entry if a partner withdraws inventory?

Answer 13

Dr partner current account

cr purchases

Question 14

What is an alternative for drawings ?

Answer 14

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

Question 15

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

Answer 15

• columnar form
• Each supplier columns - joint capital and current

Question 16

What is the capital account only used for?

Answer 16

Capital paid into business

Question 17

What is the current account only used for?

Answer 17

Profit earned and drawings made

Question 18

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

Answer 18

• Withdraw
• More cash than accumulated profits

Question 19

What is an appropriation account?

Answer 19

• follows profit/loss
• split between partners

Question 20

How are appropriation accounts set up ?

Answer 20

• partnership agreement
• ledger account
• vertical calculation

Question 21

What would the agreement include?

Answer 21

• Salaries
• Commissions
• interest on capital and drawing
• residual profit sharing

Question 22

How are salaries appropriated?

Answer 22

• Partnership agreement
• level of work
• before residual share calculation

Question 23

How are sales commissions appropriated?

Answer 23

• appropriation of profit
• before calculation of residual profit share

Question 24

How are interests on capital appropriated?

Answer 24

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

Question 25

What is interests on drawings ?

Answer 25

pentaly charge based - all drawings/ above a certain level reduces profit increases profit - residual profit share

Question 26

How are partnership losses appropriated?

Answer 26

* salaries/interest appropriated - even in loss * appropriation turns profit to loss * debit current accounts * same - profits

Question 27

How would a new partner be introduced into the partnership ?

Answer 27

* partnership - agree sum * dr bank * cr new partner capital account * goodwill

Question 28

What is goodwill?

Answer 28

not in ledger products, services, location , excellence

Question 29

What is the problem with goodwill?

Answer 29

* difficult to measure - monetary * volatile * value over assets = value is estimate * nature - i.e. head chef

Question 30

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

Answer 30

* Recorded net assets * unrecorded goodwill * accounting procedures

Question 31

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

Answer 31

* 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)

Question 32

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

Answer 32

* net asset worth + remainder of goodwill * purchases capital from other partners

Question 33

What must be calculated when a partner retires?

Answer 33

* full amounts * capital balance, current account balance , goodwill * similar - admission new partner

Question 34

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

Answer 34

Full amount paid

Question 35

Steps for retiring a partner

Answer 35

* 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)

Question 36

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

Answer 36

* Increase in capital investment * more active role in day to day running

Question 37

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

Answer 37

Value of goodwill

Question 38

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

Answer 38

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

Question 39

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

Answer 39

* Statement of profit/loss * appropriation of profit * drawings * statement of financial position

Question 40

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

Answer 40

same as sole trader

Question 41

How do you appropriate profit for a partnership?

Answer 41

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

Question 42

How do you account for drawings in a partnership?

Answer 42

* trial balance - each partner's drawings * transferred to partners' current accounts * balance - current account - identified

Question 43

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

Answer 43

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