Year 13 Malapoa College – Partnership Summary Notes

ANNUAL ACCOUNTS OF PARTNERSHIP

The accounting process from source documents to the Trial balance remains same.
The major final accounts for partnership are discussed below:

Final Accounts of Partnership

1. Statement of Financial Performance (Revenue Statement)

This account will show the income earned by partnership and the expenses
incurred. The profit or loss derived will be transferred to the Statement of
Profit and Loss Appropriation.

2. Profit And Loss Appropriation Statement (Profit Distribution Statement)

The function of the Profit and Loss Appropriation Statement is to effect the
distribution of profits to the partners. This account will commence with net
profit or loss transferred from the Statement of Financial Performance. It will
also show partners salary, interest on capital, interest on drawings and
interest on current account etc. and the resulting figure would be the share of
profit or loss to each partner, which will be transferred to the current
account.

Current Account or Retained Profits Account

Before preparing the Statement of Financial Position, a current account for
each partner must be prepared. The current account records any periodic
changes to the partners‟ capital account. A current account will commence
with an opening balance and it will include all the relevant entries and will
conclude with a debit or credit balance, which will be transferred to the
Statement of Financial Position.

Capital Account
Records the capital contributed by each partner which is kept intact (fixed).

3. Statement of Financial Position (Balance Sheet)

This is prepared to show the financial position of the partnership business.

Treatment of items in the Profit Distribution Statement

a) Interest on Capital
If the partnership agreement states that interest is to be paid on capital, then this
must be brought into account through the following general journal entry:

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Where profits are not distributed in proportion to the capital contributed, interest on
capital is allowed to ensure fair distribution. Interest on capital is an expense account
because the business has to pay an amount to the partners, so it is debited. The
current account is credited because the interest increases the amount owing to the
partners.
Interest on Capital Account must be closed off to Profit Distribution Statement.

b) Interest on Drawings
Interest is charged on drawings to discourage partners from making excessive
borrowings from the business. The general journal entry to record interest charged
on drawings is:

Interest on drawings is a revenue account and is credited because partners are

charged interest on drawings made. The current account is debited, since owners
equity account is decreased. Interest on drawings is closed off to Profit Distribution
Statement through the following journal entry:

c) Partner’s Salary
There are two situations to consider:
(i) The salary is paid and entries are already made in the Cash Payments
Journal.

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(ii) If the salary has not been paid, the partners account must still be credited
with their salary. This is shown by the following general journal entry:

Partner’s salary is debited because it is an expense account and current account is

credited since the owner’s equity is increasing.
Salaries are provided to the partners for their service to the business. There are two
types of partners:
a) Working partners
b) Non–working partners

Working partners
Are those that are involved in the running of the business and their accounts are
closed off to the Income Statement or Statement of Financial Performance as follows:
The partner’s salary represents administrative expense in the Statement of Financial
Performance. The following general journal entry records the closing of working
partner’s salary:

Non-working partners
Are those who are not engaged in the business operations. It is where the partners‟
salary is subjectively agreed on and has no direct connection to the actual running of
the
partnership, they are considered as distribution of profit. The partner’s salary
account is posted to the Profit Distribution Statement as follows:

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d) Interest on Current Account

Partnership businesses usually have a debit or a credit balance on a current account.

(i) Interest on Current Account (Debit balance)

This item is treated as the business revenue and it is added to the net profit in the
Profit Distribution Statement or increases the share of profit. The Current Account is
debited as the owner’s equity decreases.

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Format of Profit Distribution (Profit and Loss Appropriation)

Statement
The Profit Distribution Statement is used to distribute the profit or loss. The usual
items
included in this Statement are:
Net profit or loss transferred from the Statement of Financial Performance.
Interest allowed on fixed capital.
Interest charged on partners drawings.

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Partners salaries for non- working partners.

Interest on current account.

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