Partnerships Flashcards
Define a partnership
Business with 2-20 owners working together to make a profit. More business partners can provide more capital and more skills to lead to more profit.
Explain the meaning of the term partnership by listing a few characteristics of a partnership
- Legally binding agreement between partners
- All partners are responsible for debts, accourding to a specific ratio
- Don’t have any auditing requirements
- No continuity (if a partner dies/ leaves the partnership must be dissolved)
- When a partnership dissolves, the partnership must be liquidated
- Each partner contributes to capital/ labour/ assets/ skills
- The business must be managed in a way that all partners can benifit
- Each partner is liable in personal capacity for all debts - unlimited liability
- Each partner should have unlimited access to the financial records of the business
- All the partners must include all income from the partnership in personal income tax return
What is a partnership agreement?
An agreement that partners (natural people) draw up to outline how things will be done in the partnership business
It’s a written document signed by all the partners
Explain a limited partner
A partner that is not liable for debts of the partnership. Liability is limited to the capital invested. They may not take part in the management. Not all the partners may be limited. (Sleeping/ silent partner)
Explain the features of a partnership agreement
- Name of business
- Type of business
- Profit/ loss ratio’s
- Banking arrangements
- How long the partnership will last
- Changes of partners (active vs silent)
- Value of the type of capital contribution by each partner
- Whether the partners will receive salaries, interest on capital/ bonus and a percentage of each
- Amounts and percentages of drawings and interest on drawings
- Percentages of the profit that will be invested for future growth and expansion
- Arbitration procedures (to solve disputes)
- Provision if changes need to be made for dissolving/ death/ dissability
Name a few advnatages of a partenship
- partners can combine different skills to benifit the business
- capital can be increased if all the partners agree
- easy and cheap to start
- the business is stronger financially which means more capital for partners
- partners pay tax as part of personal tax liability and not a fixed percentage on the business profits
Name a few dissadvantages of partnerships
- share authority for decision-making which slows down the process
- each partner is personally liable for all debts meaning all partners are liable for bad decisions
- or fraud of one partner
- partners have more capital than sole traders but less than companies
- no continuity
Explain the position fo the partnership when there is no partnership agreement
- No interest on capital
- no rules for drawings, holidays and resolve of disputes
- all profits and losses must be shared equally
- all parterns must agree on new partners
- if partners are guilty of fraud they can’t be asked to leave
- partners can decide which duties they want to do and which not
- can use and own the partnership property
- they don’t need to be reimbursed for expenses that they paid for the partnership
- any partner may vote for the partnership to be dissolved and may leave immediately
- if partner is ill/ declared bankrupt, then the partnership must be dissolved immediately
In what two forms can current accounts be done
Column form
Separate account
Explain the importance of the appropriation account
An account that shows how the net profit is shared between the partners. The account also shows all appropriation required by the partnership agreement
E.g. interest on capital
Explain the importance of the current account
The partners personal account. Anything which the partner is entitled to is credited. Anything the partner is charged with is debited. A credit balance b/d - part of the profit owed to the partner by the business. A debit balance b/d - partner has drawn too much.
Differenciate between fixed capital accounts and fluctuating capital accounts
Fixed: capital and current accounts are kept separately, capital account is fixed with money invested by the partner, current account consists of profits/ interests/ salaries and bonuses
Fluctuating: profits/ salaries/ bonuses etc. Are credited in the capital account, drawings and interest on drawings are debited to the capital account, in other words the capital and current account in one
Define the term interest on capital
Where partners share work equally but invest different amounts of capital, they may decide to pay interest to compensate partners for loss of interest. Could otherwise earn on money which is tied up in the business
(Expense)
Define the term interest on drawings
Used to discourage partners from making drawings early in the financial year
(Income)
Define the term loans of partners
When extra capital is needed
Liability
Define the term partners salaries
If partners work longer hours/ have more responsibilities than another, they can be compensated with a salary
(Expense)
