Partnership Accounts Introduction

Question 1

Interest on Capital

Answer 1

This is an appropriation of the profits of the partnership and rewards those partners who have invested most.

Question 2

Partnership Salary

Answer 2

This is a payment to a partner and appears in the appropriation section, not with expenses. It is also entered in the partners current account. It may reflect that some partners may contribute more working hours than others.

Question 3

Interest on Drawings

Answer 3

In order to deter partners from taking excessive drawings there may be interest charged that is then debited to the partners accounts.

Question 4

Partnership Act 1890

Answer 4

This states how to share profits or losses if no agreement is in place.

Question 5

Deed of Partnership

Answer 5

This is a legal document. Ideally all partnerships should have one of these so they know exactly how profits will be shared.

Question 6

Fixed Capital Accounts

Answer 6

The amount of capital introduced or withdrawn by each partner is recorded in a separate account and does not alter unless agreed by the partnership.

Question 7

Goodwill

Answer 7

Reflects the reputation built up by a partnership, this is an intangible asset and there are several different approaches to valuing it, but it is essentially a reflection of the success of the partnership. This could be based on previous profits for example. It could also represent the difference between the net assets of the partnership and the amount the partnership could be sold for.

Question 8

Current Account

Answer 8

Records all the partners’ drawings, interest on capital, partnership salaries and shares of residual profit or loss.