Partnerships | O Level Accounting 7707 & IGCSE Accounting 0452 | Detailed Free Notes To Score An A Star (A*)
- A partnership is between 2 and 20 people coming together to form an organization
- It is usually unincorporated, but can become a limited liability partnership
- In a limited liability partnership, there is at least 1 partner with unlimited liability.
- Advantages
- More capital can be raised
- Decision making can take perspective of more than 1 person
- Losses are shared
- Different partners can fulfill different roles in the business so management is easier
- Disadvantages
- Still unincorporated in most cases
- Unlimited liability in most cases
- Profits have to be shared
- Decision making can be slow
- The blunders of one partner can become a huge issue for the entire business.
- Partnership agreement
- Partnership agreement acts as a contract between business partners
- Rights, responsibilities are outlined
- Profit and loss distribution mentioned
- Interest on drawings mentioned
- Interest on capital mentioned
- Partner’s salary mentioned as well
- Rules for drawings and capital contributions mentioned as well.
- Appropriation Account
- The account shows the different areas in which the net income for the year is divided.
- It also shows the application of the partnership agreement included the charge of interest on drawings and interest on capital etc.
- Income Statement for the partnership account will be made in exactly the same way as a sole trader, based on whether it is a goods business or service business.
- After the income statement, we create the appropriation account.
- The format is as follows
XYZ Partnership
Appropriation Account
For the Year Ended XX-XXX-XXXX
| Reason | $ | $ |
| Net Profit For the Year | – | |
| Deductions | ||
| Partner’s Salary | – | |
| Interest on Capital | – | |
| Sales Commission | – | |
| Total Deductions | (-) | |
| Total Residual Profit Before Additions | – | |
| Additions | ||
| Interest of Drawings | – | |
| Interest on Loan Taken by Partner | – | |
| Total Additions | – | |
| Net Residual Profit Available For Distribution
Partner 1’s share of profit Partner 2’s share of profit |
–
(-) (-) |
- After the appropriation account, the statement of financial position is rest the same, but it has two parts in the owner’s equity section: the capital account and the current account.
- I prefer that you make the current account separately outside the balance sheet, and just include its amount at the end.
- Current Account goes as follows: Make it like a T Account
XYZ Partnership
Current Account
As Per XX-XXX-XXXX
| Debit Side | Credit Side | |||||
| Partner 1 | Partner 2 | Partner 1 | Partner 2 | |||
| Interest on Drawings | Balance B/D | – | – | |||
| Interest on Loan | Interest on Capital | – | – | |||
| Partner’s Salary | – | – | ||||
| Sales Commission | – | – | ||||
| Balance C/D | Partner’s share of profit | |||||
| Total | – | – | Total | – | – |
- After doing this account, after writing capital for each partner in the balance sheet, just add their current account C/D to their capital to find their current equity in the business.
- Capital account includes the changes to actual capital. It will increase by investment in the business and reduce by drawings.
- Current account is the ongoing transactions, it includes other things like partnership’s salary, interest on capital, interest on drawings, sales commission, interest on loan.
- If you are asked to draw the capital account as part of the balance sheet, then use the simple calculation after current account
- Partner 1’s current accounts
- Additions (list them all)
- Deductions (List them all)
- Net Partner 1’s current.
