Partnerships

Question 1

What should a partnership agreement cover?

Answer 1

capital
interest on capital
partner salary
profit sharing ratio
guaranteed minimum profit shares
drawings and interest on drawings

Question 2

what does salary look like for the 3 entities?

Answer 2

sole trader -> drawings
company -> expense in P&L
partnerships -> sharing profits

Question 3

what is a current account?

Answer 3

type of capital, constantly fluctuating, calculated as profit - drawings

Question 4

what is a capital account?

Answer 4

type of capital, remains static, calculated as initial capital introduced + any extra introduced

Question 5

how do excess drawings affect the current account?

Answer 5

if drawings exceed the balance, then the account has a debit balance brought forward at start of next period

Question 6

how are loans by partner treated?

Answer 6

the interest on the loan is a deduction from profit, and it’s credited to partner’s current account if unpaid

Question 7

double entry: individual share of profits for each partner

Answer 7

Dr P&L ledger a/c with net profit c/d
Cr P&L appropriation a/c with net profit b/d
Dr P&L appropriation a/c
Cr current accounts of each partner

Question 8

steps for individual share of profits for each partner

Answer 8

1. work out net profit after deducting interest on loans from partners
2. appropriate interest on capital (capital a/c only) and salaries
3. charge interest on drawings (negative)
4. residual profits shared out b/w partners in PSR
5. each partner’s share of profit is credited to account

Question 9

how is profit share calculated on retirement/death of partner?

Answer 9

• calculate profit up to date of change and allocate according to old PSR
• allocate profits after date of change and according to new PSR

Question 10

how is profit share affected upon admission of a new partner?

Answer 10

if the partner introduces capital, the total amount brought in is credited to their capital account.

calculate goodwill (Cr using old PSR, Dr using new PSR) = result shows new partner has purchased goodwill by introducing cash