Partnership Accounts

Final Accounts for Sole Traders and Partnerships

(FSTP)

Partnership AccountsBy the end of the session all learners will be able to :1. Describe Goodwill 2. Identify the accounting entries for changes to partnerships includingIntroduction of a new partnerPartner leaving3. Accurately determine the allocation of profit to partners after allowing for interest on capital, interest on drawings and any salary paid to partner(s) 4. Prepare the capital and current accounts for each partner Calculate the closing balances on each partner’s capital and current accounts, including drawings

A Question . .

What is one of the main DIS-ADVANTAGES of a partnership?

How to share out the ‘value or benefit’ of the partnership if a partner joins or leaves

Goodwill

Normally only created when a business is sold and/or acquired by new owner(s)

Difference between value of business as a whole and the net value of its assets and liabilities

Intangible non-current asset

In partnership accounting, goodwill is created temporarily whenever a new partner joins, or an existing partner leaves, and is then written off. (This is due to the accounting concept of prudence which says that items should not be overstated)

GoodwillAdmission of a new partner to the partnership

2 step process:1. Create goodwill in the existing profit share ratio

Dr Goodwill Cr Partner capital a/c’s

2. Clear goodwill in the new profit share ratio

Dr Partner capital a/c’s Cr Goodwill

Worked Example – Kate & Ed

Step ONECreate the Goodwill

Estimated at £35,000

Kate & Ed share 50% of Goodwill each

Worked Example – Kate & EdCapital

  Kate Ed Rob   Kate Ed Rob

Bal b/d 50000 40000 0

Goodwill 17500 17500 0

Step ONECreate the Goodwill

Estimated at £35,000Kate & Ed share 50% of Goodwill each

Worked Example – Kate & EdCapital

  Kate Ed Rob   Kate Ed Rob

Bal b/d 50000 40000 0

Goodwill 17500 17500 0

Bank 0 0 30000

 

Rob invests £30,000 capital into the partnership

Worked Example – Kate & EdCapital

  Kate Ed Rob   Kate Ed Rob

Goodwill 14000 14000 7000Bal b/d 50000 40000 0

Goodwill 17500 17500 0

Bank 0 0 30000

Step TWOClear the Goodwill in the NEW ratios

Worked Example – Kate & EdCapital

  Kate Ed Rob   Kate Ed Rob

Goodwill 14000 14000 7000Bal b/d 50000 40000 0

Bal c/d 53500 43500 23000Goodwill 17500 17500 0

  Bank 0 0 30000

 

67500 57500 30000 67500 57500 30000

  Bal b/d 53500 43500 23000

 

Balance the Capital Account and carry down the balances

Worked Example – Kate & EdCapital

  Kate Ed Rob   Kate Ed Rob

Goodwill 14000 14000 7000Bal b/d 50000 40000 0

Bal c/d 53500 43500 23000Goodwill 17500 17500 0

  Bank 0 0 30000

 

67500 57500 30000 67500 57500 30000

  Bal b/d 53500 43500 23000

 

GoodwillAdmission of a new partner to the partnership

Summary2 step process:1. Create goodwill in the existing profit share ratio

Dr Goodwill Cr Partner capital a/c’s

2. Clear goodwill in the new profit share ratio

Dr Partner capital a/c’s Cr Goodwill

Leaving . . . . .

The effect is to credit the leaving partner with the amount of the goodwill built up whilst he or she was a partner.

This amount plus the capital and current accounts can be paid from the partnerships bank account.

The Current Account balance is transferred to the leaving partners Capital Account

If there are insufficient amount to pay this it may be left as a loan by the leaving partner

GoodwillExisting partner leaves the partnership

2 step process:

1. Create goodwill for all partners in the existing profit share ratio

Dr Goodwill Cr Partner capital a/c’s

2. Clear goodwill in the new profit share ratio (leaving partner should have zero balance c/d)

Dr Partner capital a/c’s Cr Goodwill

Worked Example – Liam, Sam & FredPartner Retiring

Enter the opening balances in the Capital accounts

Capital

Liam Sam Fred Liam Sam Fred

Goodwill 0 9000 9000 Bal b/d 50000 40000 30000

Bank 20000 0 0 Goodwill 9000 6000 3000

Loan 43000 0 0 Current a/c 4000 0 0

Bal c/d 0 37000 24000

63000 46000 33000 63000 46000 33000

Bal b/d 0 37000 24000

Worked Example – Liam, Sam & FredPartner Retiring

Capital

Liam Sam Fred Liam Sam Fred

Goodwill 0 9000 9000 Bal b/d 50000 40000 30000

Bank 20000 0 0 Goodwill 9000 6000 3000

Loan 43000 0 0 Current a/c 4000 0 0

Bal c/d 0 37000 24000

63000 46000 33000 63000 46000 33000

Bal b/d 0 37000 24000

STEP 1Create goodwill for all partners in the existing profit share ratioDr Goodwill Cr Partner Capital a/c’s

Worked Example – Liam, Sam & FredPartner Retiring

Capital

Liam Sam Fred Liam Sam Fred

Goodwill 0 9000 9000 Bal b/d 50000 40000 30000

Bank 20000 0 0 Goodwill 9000 6000 3000

Loan 43000 0 0 Current a/c 4000 0 0

Bal c/d 0 37000 24000

63000 46000 33000 63000 46000 33000

Bal b/d 0 37000 24000

STEP 2Transfer the balance of the retiring partners current account

Worked Example – Liam, Sam & FredPartner Retiring

Capital

Liam Sam Fred Liam Sam Fred

Goodwill 0 9000 9000 Bal b/d 50000 40000 30000

Bank 20000 0 0 Goodwill 9000 6000 3000

Loan 43000 0 0 Current a/c 4000 0 0

Bal c/d 0 37000 24000

63000 46000 33000 63000 46000 33000

Bal b/d 0 37000 24000

STEPWrite of the Goodwill using the NEW ratios i.e. 1:1

Worked Example – Liam, Sam & FredPartner Retiring

Capital

Liam Sam Fred Liam Sam Fred

Goodwill 0 9000 9000 Bal b/d 50000 40000 30000

Bank 20000 0 0 Goodwill 9000 6000 3000

Loan 43000 0 0 Current a/c 4000 0 0

Bal c/d 0 37000 24000

63000 46000 33000 63000 46000 33000

Bal b/d 0 37000 24000

STEPPay Liam £20,000 and show the loan to the partnership

Worked Example – Liam, Sam & FredPartner Retiring

Capital

Liam Sam Fred Liam Sam Fred

Goodwill 0 9000 9000 Bal b/d 50000 40000 30000

Bank 20000 0 0 Goodwill 9000 6000 3000

Loan 43000 0 0 Current a/c 4000 0 0

Bal c/d 0 37000 24000

63000 46000 33000 63000 46000 33000

Bal b/d 0 37000 24000

STEPBalance off the account to determine the Capital Account balances for the remaining partners

Worked Example – Liam, Sam & FredPartner Retiring

Capital

Liam Sam Fred Liam Sam Fred

Goodwill 0 9000 9000 Bal b/d 50000 40000 30000

Bank 20000 0 0 Goodwill 9000 6000 3000

Loan 43000 0 0 Current a/c 4000 0 0

Bal c/d 0 37000 24000

63000 46000 33000 63000 46000 33000

Bal b/d 0 37000 24000

STEPBalance off the account to determine the Capital Account balances for the remaining partners

GoodwillExisting partner leaves the partnership

Review2 step process:

1. Create goodwill for all partners in the existing profit share ratio

Dr Goodwill Cr Partner capital a/c’s

2. Clear goodwill in the new profit share ratio (leaving partner should have zero balance c/d)

Dr Partner capital a/c’s Cr Goodwill

Now try . . . Question 3 Peter & Paul

Practice Questions 4 - 6

Goodwill

Partner Joins

Partner Leaves

Change in Ratio

1. Create goodwill for all partners in the existing profit share ratio2. Clear goodwill in the new profit share ratio3. Draw up appropriation account apportioning the transactions for time periods before change and after change

Complete remaining questions