Partnerships | IGCSE Accounts, Study notes of Accounting

Download Partnerships | IGCSE Accounts and more Study notes Accounting in PDF only on Docsity! Partnerships Theory 1. An agreement between two or more people to carry on a business in order to make a profit. Advantages: a. Raise more capital b. More skills & knowledge c. Share the work Disadvantages a. Profits must now be shared b. Disagreements can occur c. Partners cannot act independently According to the Partnership Act 1890, in the absence of a partnership agreement: All partners contribute equal capital Partners are not entitled to interest on capital or salaries Partners will not be charged interest on drawings Profits or losses will be shared equally Partners are entitled to 5% interest on a loan they make to the partnership eaeger Special accounts for partnerships 1. APPROPRIATION ACCOUNT ¢ Continues from the Profit and Loss Account and shows how the profit or loss will be treated between the partners. ¢ Items under the Appropriation Account: i. Partners’ SALARIES ii. INTEREST ON CAPITAL iii. INTEREST ON DRAWINGS iv. SHARE OF THE REMAINING PROFIT A2 Level Accounting - Resources, Past Papers, Notes, Exercises & Quizes Example: Trading and Profit and Loss and Appropriation Account Net Profit 20 000 ADD Interest on Drawings : Abrahams 2 000 : Peterson 3 000 5 000 25 000 LESS Interest on Capital : Abrahams 4000 : Peterson 2.000 6000 LESS Salaries : Abrahams 9 000 15 000 10 000 Share of Profit :Abrahams(1/2) 5 000 : Peterson (1/2) 5000 10 000 2. DRAWINGS e Each partner has their own Drawings account. 3. CAPITAL ACCOUNTS e Each of the partners will have their own Capital accounts ¢ The capital accounts may either be: o Fluctuating Capital Accounts — all the items in the Appropriation account are entered into the Capital accounts of the partners; the Drawings account of each partner is closed off to the partners Capital accounts. o Fixed Capital Accounts — The capital account balances do not change unless a partner contributes more capital. The items in the Appropriation account now get entered into the partners’ Current Accounts. A2 Level Accounting - Resources, Past Papers, Notes, Exercises & Quizes Step three: Adjust Provision for Bad Debts (if required) e Increasing: DEBIT Revaluation CREDIT Provision for Bad Debts e Decreasing: DEBIT Provision for Bad Debts CREDIT Revaluation Step four: Close off the Revaluation account to the Partners Capital accounts(profit ratio) GOODWILL What is Goodwill? - an intangible asset representing the value added to a business (over and above the value of net assets) by factors such as: ¢ a loyal customer base, good management, good reputation, good supplier contacts, well known brand names good location Goodwill is usually valued when a change in the partnership occurs. How to account for Goodwill? Partners may choose to keep a Goodwill account in the books or not. 1. Ifa Goodwill account is to be kept in the books: OLD PARTNERS OLD RATIO DEBIT Goodwill CREDIT the (old) Partners’ Capital accounts A2 Level Accounting - Resources, Past Papers, Notes, Exercises & Quizes 2. Ifa Goodwill account is NOT to be kept in the books: OLD PARTNERS OLD RATIO DEBIT Goodwill CREDIT the (old) Partners’ Capital accounts Then NEW PARTNERS NEW RATIO DEBIT the (new) Partners Capital accounts CREDIT Goodwill A2 Level Accounting - Resources, Past Papers, Notes, Exercises & Quizes Partnership Dissolution When a partnership business ceases to exist. Reasons The business is no longer profitable Partners simply agree to do so for any personal reasons eg ill health What happens upon dissolution? 1. 2. 3. the assets are all sold off or they may be taken over by a partner the liabilities are all paid the partners are paid the balances of their capital accounts A REALISATION account is opened in the ledger for this purpose Journal Entries: 1. Close the Provisions for Depreciation and Provision for Bad debts to the Asset account DEBIT Provision for Depreciation (on vehicles) CREDIT Vehicles Close the Asset accounts to the Realisation account DEBIT Realisation CREDIT Vehicles Record the money received from the sale of assets and from debtors DEBIT Bank CREDIT Realisation Record the assets taken over by the partners (without payment) DEBIT Partners Capital account CREDIT Realisation Payment of liabilities DEBIT liability (eg creditors) CREDIT Bank Discounts received from creditors DEBIT the creditor CREDIT Realisation A2 Level Accounting - Resources, Past Papers, Notes, Exercises & Quizes