Partnership Financial Statements Flashcards
What is a partnership?
An arrangement between two or more individuals in which they share the risks and rewards of a joint business operation.
In what two ways are partnership accounts different?
The ownership interest of each partner must be shown.
The net profit must be appropriated between the partners and shown in the account.
What does the appropriation of profit mean?
Sharing out profits in accordance with the partnership agreement.
What is a current account?
A record of the profits retained in the business by the partner.
What are the differences between the capital accounts and the current accounts?
The balance on the capital account stays static from year to year however the current account is continually fluctuating up and down.
What is the accounting treatment for the appropriation of profits?
Dr P+L Account with Net Profit
Cr P+L Appropriation Account with Net Profit
Dr Appropriation Account
Cr The Current Accounts of Each Partner
What are the steps for the appropriation of profit?
1) Establish the net profit after deducting interest on loans from partners.
2) Appropriate interest on capital and salaries.
3) Charge partners interest on their drawings.
4) Residual profits are shared out between the partners.
5) Each partners share of profits are credited to their current account.
