Partnerships Flashcards
Define a partnership
A business in which two or more people work together as owners with the goal of making a profit
Suggest why one would want to form a partnership
- Capital required exceeds what one person can provide
- Experience and management skills required is more than what is found in one person
- Sharing management tasks
- Partners are often family
Name the characteristics of a partnership
- Formed to make a profit
- Must obey partnership law
- 2-20 partners
- Each partner must pay a share of debts
- Unlimited liability
Name the advantages of a partnership
- Additional finance available
- Each partner’s knowledge, skill and experience can be used to the advantage of the business
- Management responsibilities can be shared
- Owners can stand in for each other in times of illness or when one goes on holiday
- Risks involved are shared
In which business is a partnership a good form of ownership?
Trading businesses. A partnership is not a good form of ownership for a trading business
Name the disadvantages of a partnership
- Profits are shared
- All partners must follow joint policy decisions
- An action by one parters affects all the others
- Decisions take longer
- Disagreements can occur
Explain what a limited parter is
- Not liable for debts
- Liability limited to capital invested
- No part in management
- NB Not all partners can be limited, because then there would be no business…
Explain the importance of an appropriation account
- Shows how the net profit is shared between partners
- Shows all appropriations required by the partnership agreement
Explain the importance of a current account
- Partners’ personal account
- Anything to which the partner is entitled to is credited in this account
What is a fixed capital account?
- Capital & current accounts kept seperately
- Capital account fixed with money invested by partner
- Current account consists of pofits, interests, salary & bonus
What is a fluctuating capital account?
- Profits, salaries, bonusses, etc will be credited in the capital account
- Drawings & interest on drawings will be debited
What does the Partnership Act state when no partnership agreement is made?
- Profits & losses shared equally
- No interest on capital & drawings
- No salaries allowed
- Money which is in excess = 5% interest per annum
Define interest on capital
Where partners share the work equally but invest different amounts of capital, they may decide to pay interest to compensate the partners for a loss of interest that they could otherwise earn on the money now tied up in the business
Define interest on drawings
Used to discourage partners from making drawings early in the financial year
What is the effect of interest on drawings & capital on a partner’s account?
Interest on drawings: Decreases
Interest on capital: Increases
