Chapter 11: Partnership Accounts Flashcards Preview

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Flashcards in Chapter 11: Partnership Accounts Deck (3)
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1
Q

11.2 Detailed pro forma profit and loss account and balance sheet

A

The appropriation statement – the profit and loss account are the same for a partnership as it is for a sole trader expect that it has an appropriation statement at the bottom. With a sole trader all of the net profit belongs to them, but with a partnership the net profit has to be divided between partners. This is done according to the partnership agreement. It is common for all or some of the partners to be allocated a salary with the remainder of the profit divided according to a certain formula, often referred to as the profit-sharing ratio.
The salary is not a salary in a traditional sense, the salary of a partner is not an expense of the business as it relates to the owners, this is not an expense in the profit and loss account. The salary of the partners is a fixed amount of profit, irrespective of how well the business has performed.
A partnership agreement may provide for interest on capital. This is not an expense of the business, instead it is a way of remunerating the partners for the capital they have invested in the business.

2
Q

11.2 Detailed pro forma profit and loss account and balance sheet - Partners accounts

A

Partners accounts – the bottom half of the balance sheet doesn’t show capital, profit and drawings separately, instead we have partner’s capital and current accounts. If you added partner’s capital and current accounts together it would represent the total amount that the partner had invested into the business.
With partnerships it is normal to show the original capital introduced and any subsequent capital introductions in the capital account. Fixed capital is dealt with in this way because it represents the amount that the partner cannot withdraw until they leave the partnership.
This leaves the current account to deal with a partner’s share of any profit, which increases the balance on the current account and any drawings which reduce the balance on the current account. The balance on the current account represents the amount that any partner can withdraw from the business at any time. The partner’s share of profit comes from the appropriation statement. The relevant double entries are:
£ £
Dr Profit and loss account X
Cr Partner’s current accounts X
to allocate the profit for the period
to the individual partners

Dr Partners current accounts X
Cr Bank with the amount of any X
drawings taken out of the business
by the partners

3
Q

11.3 Partnerships and Tax

A

A share of a partner’s profit is taxed on the individual partners rather than on the partnership business itself. In particular despite referring to interest and salaries these are not taxed as real interest and salaries, but instead taxed as if they were trading profits. This is consistent with the treatment for accounting purposes.