Partnerships
Overview
A partnership is what happens when two or more people pool their money and their skills to run a business together. It brings more capital and more expertise than a sole trader can manage alone, but it also raises a new question that a single owner never faces: when the year ends and the profit is counted, who gets what? Answering that fairly is the whole point of partnership accounting.
In this lesson you will prepare the extra statement a partnership needs, the appropriation account, which shares the profit according to the partnership agreement: interest on capital, interest on drawings, salaries and the final split of what remains. You will then see how each partner's rewards and charges flow into their capital and current accounts, and how those accounts appear in the statement of financial position. Every figure is worked through and checked so you can follow the profit from the income statement right down to each partner's balance.
Objectives
- how a partnership can be a trading, service, manufacturing business or a combination of these.
- the advantages and disadvantages of forming a partnership.
- the importance and contents of a partnership agreement.
- the purpose of an appropriation account.
- how to prepare statements of profit or loss, appropriation accounts and statements of financial position.
- how to record interest on partners’ loans, interest on capital, interest on drawings, partners’ salaries and the division of the balance of profit or loss.
- how to make adjustments to financial statements as detailed in 5.1 (sole traders).
- the uses of and differences between partners’ capital and current accounts.
- how to prepare partners’ capital and current accounts in ledger account form and as part of a statement of financial position.
Lesson Note
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Lesson Evaluation
Congratulations on completing the lesson on Partnerships. Now that youve explored the key concepts and ideas, its time to put your knowledge to the test. This section offers a variety of practice questions designed to reinforce your understanding and help you gauge your grasp of the material.
You will encounter a mix of question types, including multiple-choice questions, short answer questions, and essay questions. Each question is thoughtfully crafted to assess different aspects of your knowledge and critical thinking skills.
Use this evaluation section as an opportunity to reinforce your understanding of the topic and to identify any areas where you may need additional study. Don't be discouraged by any challenges you encounter; instead, view them as opportunities for growth and improvement.
- In which account does a partner's salary appear? A. The income statement as an expense B. The appropriation account C. The capital account only D. The trading section Answer: B
- A partner has capital of $50,000. Interest on capital is allowed at 6% per year. How much interest on capital is credited to the partner? A. $300 B. $3,000 C. $6,000 D. $30,000 Answer: B
- In the appropriation account, interest charged on partners' drawings is: A. deducted from the profit B. added to the profit C. ignored D. shown as an expense in the income statement Answer: B
- Profit for the year is $60,000. Interest on capital totals $4,000 and salaries total $10,000. There is no interest on drawings. What is the residual profit? A. $46,000 B. $50,000 C. $54,000 D. $74,000 Answer: A
- Where is interest on a loan made by a partner to the business recorded? A. As an appropriation of profit B. As an expense in the income statement C. In the capital account D. It is not recorded Answer: B
Available on the Green Bridge App
Download the Green Bridge CBT app on your phone or computer to access full lesson notes, practice questions, and more.
Available on the Green Bridge App
Download the Green Bridge CBT app on your phone or computer to access full lesson notes, practice questions, and more.
Recommended Books
Practice Mock Questions
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