Partnership Financial Statements

Question 1

How profit shared when no partnership agreement

Answer 1

1. Profits shared equally between partners
2. Partners who advance funds over agreed amount receive 5% interest p.a.

Question 2

Extra statement for partnership

Answer 2

Statement of division of profit

Question 3

Accounts that each partner has

Answer 3

1. Capital account
2. Current account

Question 4

Partner’s capital account uses

Answer 4

1. Initial capital invested
2. Further injection or withdrawal

Question 5

Partner’s current account uses

Answer 5

1. Annual profit paid
2. drawings

Question 6

Profit or loss account in UK GAAP

Answer 6

Profit AND loss account

Question 7

SFP in UK GAAP

Answer 7

Balance sheet

Question 8

Partnership accounts presentation style

Answer 8

UK GAAP

Question 9

Partner ‘overdrawn’ current account

Answer 9

Debit balance
(Usually credit)

Question 10

If no partnership agreement

Answer 10

1. Profits shared equally
2. Excess funds 5% interest

Question 11

Statement where profit is shared between partners

Answer 11

Appropriation statement

Question 12

Appropriation statement elements

Answer 12

Salaries
Interest on capital
Interest on drawings
PSR

Total profit share
Net profit from P&L account

Question 13

Partner current account debits

Answer 13

Drawings

Question 14

Partner current accounts credits

Answer 14

Profit share

Question 15

Partnership losses - how is appropriation done?

Answer 15

Salaries, interest etc. allocated

Balance divided according to PSR

Question 16

Interest on drawings treatment steps (partnerships)

Answer 16

1. Added back to profit in appropriation statement and deducted from partners’ total share
2. Interest on drawings time-apportioned for the number of months in the year they were taken (if no dates assume full year’s interest)

Question 17

Guaranteed minimum profit share

Answer 17

If P hasn’t received their guaranteed amount after allocating profits in usual way, the shortfall is funded from other partners according to the PSR

Question 18

Loan from partner DE

Answer 18

Dr Cash
Cr Loan (liability)

Question 19

How is partnership loan interest accounted for?

Answer 19

Business expense
So charged to profits before shares between Ps

Question 20

Loan interest DE

Answer 20

Dr interest expense (P&L)
Cr bank (if paid)
/current account (if outstanding)

Question 21

Appropriating profits if partnership structure changes

Answer 21

Appropriate profit for months of separate sections of the year

Question 22

Extra adjustments in adjusted TB for partnership

Answer 22

1. Interest accrued on partner loan
2. Transfer drawings to current account
3. Divide profits

Question 23

Interest accrued to partner on partner loan DE

Answer 23

Dr Interest expense
Cr current accounts

Question 24

Transfer drawings to current account DE

Answer 24

Dr current accounts
Cr drawings

Question 25

Dividing profits DE

Answer 25

Dr Profit and loss account Cr Current accounts

Question 26

What to do when partner dies or retires

Answer 26

Calculate full amounts due to him

Question 27

Full amounts due to partner

Answer 27

1. Capital account balance 2. Current account balance 3. Share of any goodwill in partnership (Not in FS but share should be allocated to retiring partner)

Question 28

Is goodwill recorded in ledger accounts?

Answer 28

No

Question 29

Goodwill comes about due to

Answer 29

E.g… Business excellence/reputation Product quality After-sales Location Employee excellence

Question 30

Why should goodwill be allocated to retiring partner?

Answer 30

Because they are giving up their share of the business

Question 31

Goodwill for new partners

Answer 31

Portion allocated to current partners to reflect GW at time new P joins. As well as the capital introduced by the new P, they will also be purchasing some of the existing goodwill

Question 32

Accounting adjustments made on retirement/admission of partners steps

Answer 32

1. Allocate profit up to date using old PSR Transfer retiring P’a current account to capital account 2. Determine goodwill Temporarily create a goodwill account and credit all Ps’ capital accounts their share in PSR 3. Pay retiring P in cash from their capital account, or loan 4. Remove goodwill from the ledger

Question 33

Removing goodwill from ledger DE

Answer 33

Dr Ps’ capital accounts using PSR after change l Cr Goodwill account

Question 34

Paying retiring partner cash DE

Answer 34

Dr capital account Cr bank

Question 35

Giving retiring partner loan DE

Answer 35

Dr capital account Cr loan account