Partnerships (Copy)
Cheat Sheet: 5.2 Partnerships
O Level and IGCSE Accounting – Quick Revision
Definition: Partnership
- A partnership is a business owned by 2 to 20 persons who share profits, losses, responsibilities, and risks.
Advantages and Disadvantages of a Partnership
| Advantages | Disadvantages |
|---|---|
| More capital available | Unlimited liability (except LLPs) |
| Shared responsibilities and workload | Disagreements among partners |
| Wider range of skills and expertise | Profits must be shared |
| Simple to establish compared to a company | Lack of continuity if a partner leaves |
Partnership Agreement (Deed)
Importance:
- Prevents disputes
- Provides clarity on roles, profit-sharing, salaries, capital, etc.
Contents Include:
- Names and contributions of partners
- Profit-sharing ratio
- Interest on capital and drawings
- Salaries to partners
- Rules for admission, retirement, or death (though not examinable here)
Appropriation Account
Purpose:
- Distributes net profit between partners after all business expenses have been deducted
Format:
Appropriation Account for the year ended [Date]
| Particulars | Amount ($) |
|---|---|
| Net profit from Income Statement | xxxx |
| Add: Interest on drawings | xxx |
| Less: Interest on capital | (xxx) |
| Less: Partners’ salaries | (xxx) |
| Residual Profit | xxxx |
| Share of Profit: | |
| Partner A (e.g., 2/3) | xxxx |
| Partner B (e.g., 1/3) | xxxx |
Partner-Specific Items to Record
| Item | Dr/Cr | Where It Goes |
|---|---|---|
| Interest on Capital | Expense (Cr to Partner) | Appropriation A/c, Credited to Current A/c |
| Interest on Drawings | Income (Dr to Partner) | Appropriation A/c, Debited from Current A/c |
| Partners’ Salaries | Expense (Cr to Partner) | Appropriation A/c, Credited to Current A/c |
| Profit Share | – | Credited to Current A/c based on ratio |
| Partner’s Loan | Liability | Interest shown in Income Statement |
Capital and Current Accounts
| Capital Account | Current Account |
|---|---|
| Shows long-term fixed capital | Shows fluctuating balances (salaries, profits, etc.) |
| Normally fixed | Normally fluctuating |
| Only changed for additional or withdrawn capital | Changed each year with profits, drawings, interest |
Format: Capital Account (Fixed)
| Partner A – Capital Account |
|---|
| Opening Balance (Cr) |
| Additional Capital |
| Closing Balance |
Format: Current Account
| Partner A – Current Account | Amount ($) |
|---|---|
| Credit Side: | |
| Interest on Capital | xxx |
| Salary | xxx |
| Share of Profit | xxx |
| Debit Side: | |
| Drawings | (xxx) |
| Interest on Drawings | (xxx) |
| Closing Balance (Dr or Cr) | xxxx |
Example Summary Table
| Partner A | Partner B |
|---|---|
| Capital: 50,000 | Capital: 30,000 |
| Current A/c: 5,000 Cr | Current A/c: 2,000 Dr |
| Share Ratio: 3:2 |
Statement of Financial Position (Extract)
| Equity and Liabilities | Amount ($) |
|---|---|
| Capital Accounts | |
| Partner A | xx |
| Partner B | xx |
| Current Accounts | |
| Partner A | xx (Cr) |
| Partner B | xx (Cr) |
Adjustments Same as Sole Traders
| Adjustment | Effect |
|---|---|
| Depreciation | Increases expenses, reduces asset value |
| Accruals/Prepayments | Adjust income/expenses and affect liabilities/assets |
| Drawings | Reduce current account (NOT capital if capital is fixed) |
| Provision for doubtful debts | Expense in income statement, reduce trade receivables in SOFP |