Partnership accounts flashcards

Topic 15: Partnership accounts

Partnership Act 1890 default terms

Profits and losses shared equally; no interest on capital; no interest on drawings; no partnership salaries; interest on a partner's loan allowed.

Profit £40,000; interest on drawings £600; interest on capital £5,000; salaries £12,000. Residual profit shared 3 : 1?

40,000 + 600 − 5,000 − 12,000 = £23,600, shared £17,700 and £5,900.

Interest on capital vs interest on a partner's loan

Interest on capital is an appropriation of profit. Interest on a loan is an expense in the income statement, before profit for the year; the loan is a liability.

Fixed vs fluctuating capital accounts

Fixed: the capital account holds agreed capital only; everything else goes to the current account. Fluctuating: no current account; all appropriations and drawings pass through capital.

A partner draws £9,000 on 1 May. Year end 31 December; interest on drawings 6% a year. Interest?

9,000 × 6% × 8/12 = £360, added in the appropriation account and debited to the current account.

On admission: building up £20,000, inventory down £1,500, provision for doubtful debts up £500. Old ratio 2 : 1. Shares?

Revaluation profit £18,000, shared in the old ratio: £12,000 and £6,000.

A and B share equally and admit C; new ratio 2 : 2 : 1. Goodwill of £18,000 is not kept. Net effect on each capital?

Created 1 : 1 (A £9,000, B £9,000); written off 2 : 2 : 1 (£7,200, £7,200, £3,600). Net: A +£1,800, B +£1,800, C −£3,600.

On a change in partnership, which ratio is used for revaluation, creating goodwill and writing goodwill off?

Old ratio for revaluation and creating goodwill. New ratio for writing goodwill off.

Retiring partner: capital £20,000, current account debit £1,500, revaluation share £2,000, goodwill share £5,000. Amount due?

20,000 − 1,500 + 2,000 + 5,000 = £25,500. Anything not paid in cash becomes a loan (a liability).

What does a debit balance on a partner's current account show?

The partner has drawn more than the opening balance plus everything credited for the year, draining cash from the firm.

Interest and salaries exceed the profit available. What happens?

They are still credited in full, and the shortfall is shared as a residual loss in the profit-sharing ratio.

Two partners have capitals of £30,000 and £10,000 and no agreement. Profit is £25,000. Each partner's share?

£12,500 each: shared equally under the Partnership Act 1890.