Partnerships

Question 1

Describe a partnership

Answer 1

• A partnership occurs where two, or more, people carry out business with a view to making a profit.
• Like a group of sole traders so whilst we account for the business and the individuals separately, legally there is no distinction between the business and the individual partners.
• When it is formed it is quite common to have a partnership agreement in place to determine what each partner shall be entitled to including how profit will be split amongst them.

Question 2

Define capital in terms of partnerships

Answer 2

The amount each partner must contribute to the business.

In partnerships capital is usually fixed and will not be withdrawn until a partner leaves the partnership.

Question 3

Define profit share in terms of partnerships

Answer 3

This determines how the profit figure shall be split between the partners.
- May be equally split but can be split in any ratio that the partner decides.

Question 4

Define salaries in terms of partnerships

Answer 4

NOT expenses that go through P/L in the same way an employee’s salary does. They are an allocation of profit meaning it is a way for a partner to get a fixed amount of the profit for the year.

Question 5

Define commissions in terms of partnerships

Answer 5

These could be calculated based on the amount of sales made by each partner.

Like salaries, not expenses that go through P&L but just another way of sharing the profits.

Question 6

Define interest on capital in terms of partnerships

Answer 6

Partners may receive interest on the capital they put into the business.

This is again an allocation of profit and may be a way for a partner to receive a fixed amount of the profit before it is split under the profit sharing ratio.

Question 7

Define drawings in terms of partnerships

Answer 7

This is the value of cash, goods, or services withdrawn from the business by the partner.

Question 8

Define interest on drawings in terms of partnerships

Answer 8

Partners may pay interest on drawings they have taken out of the business.

This is part of the profit allocation reducing what the individual partner receives and effectively putting more profit into the pot for allocation under the profit sharing ratio.

Question 9

What is one of the differences between partnerships and sole trader accounts?

Answer 9

The bottom of the SFP — we will not longer show capital, profit, and drawings as separate items. Instead we will show capital and current accounts.

Question 10

Describe capital accounts

Answer 10

• A separate capital account exists for each partner.
• They record fixed capital, i.e., the amount a partner contributes to the business.
• For exam purposes we will use on account but will subdivide it between the partners. It is effectively 3 separate accounts but by convention we draw 3 T accounts in 1.

Question 11

Describe current accounts

Answer 11

• A separate current account is held for each partner.
• They records how much profit each partner has less any drawings they may have taken.
• Unlike capital accounts (which are usually fixed) they will fluctuate from year to year.

Question 12

Describe an appropriation account

Answer 12

• An appropriation account is used to split the profit between the partners after taking allowance for any other entries.
• The profit sharing ratio (PSR) is ALWAYS the last entry and splits whatever profit is left after the other entries have been made.
• The PSR will ALWAYS clear the appropriation account so that no balance is left after it is done.

Question 13

What does not feature on the appropriation account?

Answer 13

Drawings — just partners taking capital back out the business, it is nothing to do with the profit. Interest charges DO feature.

Question 14

If a partner brings a car worth £5000 into the business, how would you account for this?

Answer 14

This wold be classified as capital/investment