Partnerships Flashcards
Define partnership
A partnership is a business in which two or more people work together as owners with a view to make a profit
Where is partnerships common in
-sometimes a partner ship is formed when a sold trader wished to explain his/her business
-sometimes a partnership is formed when two of more sole traders agree to amalgamate their business
What’s different from a partnership and a sole trader
A partnership business will maintain double entry records in the same way as a sole trader (and income statement and a statement of financial position are prepared.however a partner ship will make a extra account known as profit and loss appropriation account
What are the advantages of a partnership business
-additional finance is available
-additional knowledge,experience and skills are available
-the responsibilities are shared
-the risks are shared
-discussions can take place before decisions are taken
What are the disadvantages of a partnership business
-profits have to be shred among the partners
-decisions have to be recognised by all partners
-decisions may take longer to put into effect
-one partners actions on behalf of the business are brining on all the partners
-disagreements can occur
-all partners are responsible for the debts of the businesses
Define a partnership agreement
A partnership agreement is a document setting out the rules under which the partners will operate the business,including profit-sharing agreements
why should we have a partnership agreement
Drawing up an agreement can avoid misunderstandings and arguments later
What are the entries made when a loan is obtained from a partner
Debit bank account
Credit load from partner X account
What are the entries made when a loan is repaid to a partner
Debit loan from partner X account
Credit bank account
(Non current liability)
What are the entries made when interest on loan is paid
Debit i trestle on loan account
Credit bank account
What are the entries made when Interest on loan due but not paid
Debit interest on loan account
Credit partner X current account
(Debit side of the income statement)
when is the appropriation account made
After the income statement and shows how the profit for the year is shared between the partnerships
Define a partnership appropriation account
A partnership appropriation account is part of the year end financial statements.it shows the Davison of the profit or loss between the partners
Define residual profit
The residual profit is the profit remaining after adjusting the profit for the year for the interest on drawings,interest on capital and partners salaries.it is divided between the partners in the agreed profit-sharing ratio
Explain why partners may agree to charge interest on drawings
Partners may decide to charge interest on drawings in order to discourage drawings being made (especially early in the financial year) and to penalise a partner who makes excessive drawings.
