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Chapter18 Partnership Accounts
Chapter18 Partnership Accounts
Chapter18 Partnership Accounts
PARTNERSHIP ACCOUNTS
1 WHAT IS A ACCOUNTS
A partnership is created when a sole proprietor takes is one or more partners (co-proprietors) in common with a view to profit. In many countries a partnership is not a corporate entity, but a collection of individuals jointly carrying on business.
Advantages: ---Business risks are spread among more that one person. ---Individual partners can develop specialist skills upon which the other partners can rely. ---Certain partners may be able to inject more capital resources. ---Less formal than setting up a company, which requires the issue of shares and the appointment of directors. If the partners wish to dissolve the business, that is easier to achieve by a partnership than by a company.
Disadvantages: ---Effect of disputes between partners. ---Joint and several liability for the debts of the partnership in some but not all countries). This means that id one partner is being sued in relation to the business of the partnership, the other partners share in the responsibility ---In a company the share holders may be protected from the creditors of the company as regards the payment of outstanding debts.
---Drawing by partners ---Arrangements for dissolution, or on the death or retirement of partners ---Settling of disputes ---Preparation and audit of accounts
Sole traders books Capital account Inapplicableone proprietor only Capital account
Partnerships books Partners fixed capital accounts Income statement (see below) Partners current accounts
Capital accounts ---At the start of the partnership, an agreement will have to be reached as to the amount of capital to be introduced. This could be in the form of cash or other assets. take partners X and Y Dr Cash or other assets $15000 Cr Fixed capital accounts X:$5000 Y:$10000
---These are called fixed capital accounts because they are not then used to record drawings or shares of profits but rather: Capital introduced or withdrawn by new or retiring partners. Revaluation adjustments.
---Notional interest on capital accounts is usually paid to partners. This is dealt with in the calculations for the profit shares transferred from the income statement. Division of profit ---All allocations to partners are part of the process of dividing the profit: they are not expenses of the business. ---How profit is divided among the partners is shown in an addition to the income statement. ---The allocations are dealt with by transferring them to the credit of the partners current accounts. The double entry is therefore:
Debit
Credit
Income statement Partners current accounts ---Say X and Y make a net profit of $20000.Each receive interest on capital of $200,and salaries if $8000.They share the balance of profit 2to X and 1 to Y Extract from income statement for the year ended $ Sales revenue X Cost of sales X Gross profit X Enxpenses X Net profit for year 20000 Division of profit
Interest on capital Salaries Balance of profits ($20000-16400) 2400 (2/3) 1200 (1/3) 3600 In ratio 2:1 Totals 10600 9400 20000 (Dr Income statement, Cr Current accounts)
X 200 8000
Y 200 8000
Current account ---Current accounts are used to deal with the regular transactions between the partners and the firm. Most commonly these transactions are: ---Share of profits (computed annually), In certain partnership agreement, a partner may be guaranteed a minimum share of profits. 1 Dividend the profit as usual 2 If the result is that the partner has less than this minimum, the deficit will be made good by the other partners profit-sharing ratio or in any other way they have agreed.
---Interest on capital (computed annually) ---Partners salaries (computed annually). A partners salary is part of the division of profit, whereas a salary paid to an employee is an expense. If a partner has withdrawn his salary: 1 Include the salary in the division of profit as usual. 2 Quite separately treat the withdrawal of the salary as drawings. Debit Credit With Partners current Bank Amount withdrawn account
---Monthly drawings against the annual share of profit. Say X and Y have drawn a total of $3000 for X and $4000 for Y: Partners current accounts
X $ Y $ X $ Y $ 20X6 20X6 31 Dec Drawings 3000 4000 31 Dec Income Balance c/d7600 5400 statement 10600 9400 -profit share 10600 10600 9400 10600 20X7 1 Jan Balance b/d 7600
Remember that each partners account is separate from the other partner(s) Balance sheet presentation
Balance sheet at 31 December 20X6 (extract) Capital Current Total accounts accounts $ $ $ Partners accounts: X 5000 7600 12600 Y 10000 5400 15400 15000 13000 28000
In answering examination question, the partners capital and current accounts are often required as well as a balance sheet. It is a waste of time to repeat in the balance sheet detail already given in the partners accounts, so you will not usually have to show movements in partners capital on the face of the balance sheet. Overdrawn current account If a current account is overdrawn, it is shown as follows:
Division of loss ---If a partnership makes a loss, or has a loss after allocations of salaries and interest etc, it is divided between the partners in the profit sharing ratio. ---Say C and D have a profit of $5000 to be allocated. They share profits and losses 5:3
Division of profit/(loss) C
Interst on capital Salaries Balance of loss
($5000-$20600)=($15600)
D $ 100 15000
$ 500 5000
(4250)
9250
5000
Interest on drawings Where there is a notional interest charge on the drawing by each partner ,the interest charges are a negative profit share-they are included in the division of profit/(loss) calculation.