Partnership accounts Flashcards
What is a partnership?
- Two or more people
- Making a profit and sharing that profit
How would a partnership work in simplified terms?
- Invest capital
- each partner - share in profits of business
- profit/loss - allocation to partners
How each partner in a partnership invest capital into the business?
Same as sole trader
How would you record the capital invested by each partner?
Capital paid - separate
business owes back
Separate capital account
What is a capital account?
- Each partner
- records - capital invested into business
What is the double entry when a partner invests capital into the business?
Dr bank
Cr partner’s capital account
What is apporpriation?
- Profit/loss - accounting period
- shared - partners
How are profits shared?
- Partnership agreement
- Partnership Act 1890 - equally
Where is the profit from each partner recorded?
- individual current accounts
- not bank account of same name
What would capital accounts or current accounts balance likely be?
- Credit balances =- owed back to partners
- special payables of the business
What would the credit balance in the partner’s current account be?
- net profit for the year - bottom of SOFP
- owners proprietors
What is the double entry if a partner withdraws money out of the business?
Dr Partners current account
Cr bank account
What is the double entry if a partner withdraws inventory?
Dr partner current account
cr purchases
What is an alternative for drawings ?
- Drawings account for each partner
- transfer - end of the year
- Dr current account / Cr Drawings
How are ledger accounts for capital and current accounts produced in some partnerships?
- columnar form
- Each supplier columns - joint capital and current
What is the capital account only used for?
Capital paid into business
What is the current account only used for?
Profit earned and drawings made
What if the partner’s current account shows a debit balance?
- Withdraw
- More cash than accumulated profits
What is an appropriation account?
- follows profit/loss
- split between partners
How are appropriation accounts set up ?
- partnership agreement
- ledger account
- vertical calculation
What would the agreement include?
- Salaries
- Commissions
- interest on capital and drawing
- residual profit sharing
How are salaries appropriated?
- Partnership agreement
- level of work
- before residual share calculation
How are sales commissions appropriated?
- appropriation of profit
- before calculation of residual profit share
How are interests on capital appropriated?
- Different amounts of capital
- partnership agreement - interest on capital
- before residual profit share
What is interests on drawings ?
pentaly charge
based - all drawings/ above a certain level
reduces profit
increases profit - residual profit share
How are partnership losses appropriated?
- salaries/interest appropriated - even in loss
- appropriation turns profit to loss
- debit current accounts
- same - profits
How would a new partner be introduced into the partnership ?
- partnership - agree sum
- dr bank
- cr new partner capital account
- goodwill
What is goodwill?
not in ledger
products, services, location , excellence
What is the problem with goodwill?
- difficult to measure - monetary
- volatile
- value over assets = value is estimate
- nature - i.e. head chef
What must be recognized in the accounting procedures with the admission of a new partner?
- Recorded net assets
- unrecorded goodwill
- accounting procedures
What are the steps for the admission of a new partner?
- 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)
What would the investment of the new partner be made up of ?
- net asset worth + remainder of goodwill
- purchases capital from other partners
What must be calculated when a partner retires?
- full amounts
- capital balance, current account balance , goodwill
- similar - admission new partner
What must the accounting adjustments for the retirement of a partner ensure?
Full amount paid
Steps for retiring a partner
- 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)
Why might there be a change in the profit share ratio, if the number of partners remains the same?
- Increase in capital investment
- more active role in day to day running
What must be established when a change in profit share occurs?
Value of goodwill
Steps for accounting for goodwill and a change in profit share?
- Value goodwill recognition - old profit shared = dr goodwill account value / cr partners capital account old profit share
- goodwill elminated - newly established profit share = dr partners capital account new profit / cr goodwill account - elminating goodwill value
What are the steps of preparing a financial statement for a partnership ?
- Statement of profit/loss
- appropriation of profit
- drawings
- statement of financial position
How do you prepare a statement of profit/loss for a partnership?
same as sole trader
How do you appropriate profit for a partnership?
- Net profit - statement of profit/loss
- Prepare appropriation account - split profit- profit share ratio - current account
- if profit/share ration change - two separate calculations
How do you account for drawings in a partnership?
- trial balance - each partner’s drawings
- transferred to partners’ current accounts
- balance - current account - identified
How do you account for the statement of financial position for a partnership?
- Top part - same as sole trader
- capital section - sofp - different
- capital account and current account balances - listed and totalled
- agree - net asset total - sofp
