chapter18 partnership accounts

8/6/2019 Chapter18 Partnership Accounts

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CHAPTER 18CHAPTER 18

PARTNERSHIPPARTNERSHIPACCOUNTSACCOUNTS


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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 wishto dissolve the business, that is easier to

achieve by a partnership than by a company.


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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, theother partners share in the responsibility

---In a company the share holders may be

protected from the creditors of the company asregards the payment of outstanding debts.


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2 THE PARTNERSHIP

AGREEMENT A partnership agreement, which need notnecessarily be in written form, will govern therelationships between the partners including:

---Name of firm ,the type of business, and

duration

---Capital to be introduced by partners

---Division of profits between partners,

including salary which is a device for

calculating the division of profit, it is not a

salary in the normal meaning of the term.


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---Drawing by partners

---Arrangements for dissolution, or on thedeath or retirement of partners

---Settling of disputes

---Preparation and audit of accounts


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3 ACCOUNTING FOR

PARTNERSHIPS The accounting techniques developed for

sale traders are generally applicable

partnerships, but there are certainimportant differences:


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Items Sole traders

books

Partnerships

books

Capitalintroduced

Capital account Partners fixedcapital accounts

Division ofprofit

Inapplicable-oneproprietor only

Incomestatement (see

below)

Drawings andshare of the

profit

Capital account Partners currentaccounts


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Capital accounts

---At the start of the partnership, an agreementwill 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


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Partners capital accounts

X Y X Y

$ $ $ $ 20X6 1,Jan Cash 5000 10000

---These are called fixed capital accounts becausethey are not then used to record drawings orshares of profits but rather:

Capital introduced or withdrawn by new or

retiring partners. Revaluation adjustments.


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---Notional interest on capital accounts is usually paid to partners.This is dealt with in the calculations for the profit shares transferredfrom 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:


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Debit Credit Income statement Partners current accounts

---Say X and Y make a net profit of $20000.Each receiveinterest on capital of $200,and salaries if $8000.Theyshare 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


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X Y Total

Interest on capital 200 200 400

Salaries 8000 8000 16000

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)


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Current account

---Current accounts are used to deal with the regular

transactions between the partners and the firm. Most commonlythese transactions are:

---Share of profits (computed annually), In certain partnershipagreement, a partner may be guaranteed a minimum share of

profits.

1 Dividend the profit as usual2 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.


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---Interest on capital (computed annually)

---Partners salaries (computed annually). A partners

salary is part of the division of profit, whereas a salary paidto an employee is an expense. If a partner has withdrawnhis salary:

1 Include the salary in the division of profit as

usual.

2 Quite separately treat the withdrawal ofthe salary as drawings.

Debit Credit With

Partners current Bank Amount withdrawn

account


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---Monthly drawings against the annual shareof 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 9400 10600 9400 10600 9400 20X7 1 Jan Balance b/d 7600 5400


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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


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In answering examination question, the partnerscapital and current accounts are often required as

well as a balance sheet. It is a waste of time torepeat in the balance sheet detail already given inthe partners accounts, so you will not usuallyhave 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 asfollows:


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Balance sheet at 31 December 20X7(extract)

Capital Current Total

accounts accounts

$ $ $

partners accounts:

A 3000 (300) 2700 B 12000 1000 13000

15000 700 15700


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Division of loss

---If a partnership makes a loss, or has aloss 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


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Division of profit/(loss)

C D Total $ $ $

Interst on capital 500 100 600

Salaries 5000 15000 20000

Balance of loss

($5000-$20600)=($15600) (9750) 5/8 (5850) 3/8 (15600)

In ratio 5:3

Total profit (4250) 9250 5000


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The double entry in this case is :

Debit Credit With Income statement Ds current account $9250

Cs current account Income statement $4250

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.

chapter18 partnership accounts

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