Learning unit 5

Page 1: Partnerships Learning Unit

• Title: Partnerships Learning Unit 5

Page 2: Learning Objectives

• Record Contributions of Partners: Keep track of what each partner brings into the partnership.

• Calculate and Record Distribution of Profits: Determine how profits are shared based on partnership agreements.

• Calculate Final Profit Share for Partners: Assess each partner's final earnings from profits.

• Prepare Financial Transactions: Properly record entries in capital and current accounts.

• Prepare Statements: Include financial statements such as:

  • Statement of Profit or Loss and Other Comprehensive Income

  • Statement of Changes in Equity

  • Statement of Financial Position

Page 3: Introduction

• Collaboration in Business: The saying "two heads are better than one" fits well in business contexts.

• Partnerships vs. Sole Proprietorships: Business owners may prefer partnerships or companies to share risks. Accounting for partnerships involves changes in proprietary accounts and equity sections on financial documents.

Page 4: Characteristics of Partnerships

• Definition of Partnership: An organization of 2 to 20 persons with a common goal.

• Legal Standing: Similar to sole traders, partnerships are not separate legal entities; owners share liability.

• Unlimited Liability: Key risk wherein creditors can claim personal assets if debts cannot be paid.

Page 5: Accounting Records of a Partnership

• Accounting Cycle: Similar to sole proprietors with differences in proprietary accounts.

• Proprietary Accounts: Include income account, drawings account, income account, and expense account.

Page 6: Equity Accounts of a Partnership

• Types of Equity Accounts:

  • Capital Account: Records partner contributions.

  • Current Account: Monitors partners' earnings and distributions.

  • Salary and Bonus Accounts: Individual accounts for partner compensation.

  • Interest on Capital Account: Tracks interest for capital contributions.

  • Interest on Drawings: Charges on partner withdrawals.

  • Interest on Current Account: Tracks interest for balances in current accounts.

  • Appropriation Account: Finalizes profit distribution among partners.

Page 7: Capital Account

• Individual Accounts: Each partner has a capital account for contributions.

• Capital Contributions: Credited for each partner's contributions, not directly tied to profits/losses.

• Drawings: Handled via current accounts, not capital accounts at year-end.

Page 8: Current Accounts

• Purpose: Reflect earnings and manage draws for each partner.

• Credit for Earnings: Accounts receive amounts for salaries and interest, managing profit distribution and year-end draws.

Page 9: Salary and Bonus Accounts

• Separate for Partners: Distinct from general staff salaries.

• Appropriation: These accounts are settled against the appropriation account.

• Performance Bonuses: Can incentivize productivity among partners.

Page 10: Interest on Capital Account

• Encouragement for Contributions: Offers interest on capital to motivate investment in the business.

• Attractive Rates: Interest rates on capital should be appealing in comparison to other investments.

Page 11: Interest on Drawings

• Managing Withdrawals: Interest charged on partner withdrawals to encourage leaving capital in the business.

• Higher Rates: Usually higher than interest on capital balances to deter excessive drawings.

Page 12: Interest on Current Accounts

• Profit Allocation: Ensures previous year’s distributions are reinvested in the partnership.

• Balancing Account: Accounts may show positive or negative balances affecting interest earned or paid.

Page 13: Appropriation Account

• Final Account for Partnerships: Used to close various individual partner accounts.

• Determining Distributable Profits: Helps ascertain remaining profits for distribution to current accounts of partners.

Page 14: Example 5.1

• Content on Appropriations: Discussion of year-end appropriations for partnerships.