Topic 14

Question 1

What is a partnership?

Answer 1

A business that has more than one owner but is not a limited liability company

Question 2

If there is a deed of partnership it must have:

Answer 2

Capital from each partner
Interest on drawings
Interest on Capital
Any salaries to partners
Ratio for profit/loss shared

Question 3

If there isn’t a deed of partnership:

Answer 3

No interest on Capital/Drawings
No salaries to partners
Profit/loss shared equally
Partners get 5% interest per annum on loans made to partnership

Question 4

State 5 advantages of a partnership

Answer 4

• More owners leads to access to more capital
• Banks will be more willing to lend as there is more security for repayment of loan
• decisions are able to be discussed
• some partners may have special skills
• Suppliers more willing to sell on credit as there more owners to turn to if business can’t pay

Question 5

Give 4 disadvantages of Partnerships

Answer 5

• Profits will be shared with others
• unlimited liability
• Any agreement made by one partner binds them all (Except LLPs)
• if partnership fails and a partner can’t pay their debts, other partners will have to pay it off

Question 6

How does an appropriation account work

Answer 6

Profit for the year
Then add interest on Drawings

Less salary

Less interest on Capitals

This produces the value of residual profit

Which you use the profit ratio on residual value to work out profit share

Question 7

What are the advantages of keeping Capital + Current A/C seperate

Answer 7

• Easy to identify when a partner is overdrawn
• Reduces risk to other partners
• Easy to calculate interest on Capitals
• Capital accounts only changed when there is a change in the partnership agreement

Question 8

What are the disadvantages of keeping Capital + Current A/C seperate

Answer 8

Extra work - as there is another account to prepare

Only worth doing if there’s interest on capital present