chapter18 partnership accounts
TRANSCRIPT
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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.