Partnerships

Partnerships Accounting Concept of Partnerships Capital Contributions - Partners need not contribute equal amounts. Partners mayincrease amount of capital at any time. Profit (or loss) sharing ratios - Partners can agree to share profits/losses in any ratio or way that they may wish. This may be in the same ratio as capital contributed (not necessarily so though) Interest on capital - sometimes interest is paid on capital contribution out of profits. This is treated as a deduction prior to the calculation of profits and their distribution among the partners Interest on drawings - to deter partners from taking cash unnecessarily partners may be charged interest on withdrawal, calculated from the date of withdrawal to the end of the financial year Partnership salaries - instead of changing profit and loss sharing ratio - partner may have a partnership salary deducted before sharing the balance of profits Performance related payments to partners - Partners may agree to pay bonuses related to performance. These would be deducted before sharing balance of profits Profit re-investment into net reserve - this can occur whereby portions of profits can be reinvested into net reserve each year back into the business Accounting Concepts of Partnerships Characteristics of Partnership Formed to make profits Must obey the relevant laws of parliament Normally minimum of 2 Partners and maximum of 20 partners (except banks which <=10 partners and firms of accountants, etc) Each partner (except for limited partners) must pay share of debts -unlimited liability Characteristics of Partnerships Procedure Determine Partnership Accounting Rules Determine partnership ratio for profits and losses Determine interest per annum on capital if any Determine capital investment of each partner Determine Interest on Drawings Determine salary of each partner Determine re-investments of net profits from previous year Calculate 1. Interest on Drawings 2. Interest on Capital for each Create "Profit and Loss Appropriation Account for year ended ..." Net Profit Add Interest on Drawing for each Partner Less Interest on Capital for each Partner Less Partners Salaries for each party Less Share of Profits based on Ratio of Partner We can determine for each partner their earnings using 1. Balance of Profits 2. Interest on Capital 3. Salary paid 4. Less Interest on Drawings Procedure Types of Accounts Fixed Capital a/c The capital a/c for each partner remains year by year the figure put into the firm by the partner. Current a/c The profits, interest on capital, and salaries to which each partner is entited are credited to the Current a/c and the drawings and interest on drawings debited to it Types Balance of Current A/C Balance of current a/c at the end of financial year -> amount of profits withdrawn or unwithdrawn. Credit Balance -> undrawn Debit balance -> Drawings in excess of entitled profits Current A/C Current A/C DEBIT | CREDIT Debit Side 1. Opening Balance 2. Drawings 3. Interest on Drawings 4. Share of Loss (if app) Credit Side 1. Opening Balance 2. Interest On Capital 3. Partners Salary 4. Share of Profit

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Partnerships