Accounting_for_Partnerships_lecture_PowerPoints_2024-25

Page 1

• ACFI101 Topic 9: Accounting for Partnerships

• Lecturer: Lewis Gordon

• Attendance code: 1

Page 2: Introduction to Partnerships

• We have previously covered Single Proprietorships (Sole Traders)

• Two types of multiple ownership:

  • Partnerships

  • Limited Companies

• Definition of a Partnership:

  • An agreement between two or more individuals to share ownership of a business.

  • Simpler than setting up a company.

• Typical partnership structure:

  • Minimum of 2 partners and a maximum of 20 (exceptions for certain professions).

Page 3: Advantages and Disadvantages of Partnerships vs. Sole Traders

Advantages of Partnerships:

• Shared investment and risk among partners.

• Pooling of time, skills, experience, and contacts.

Disadvantages of Partnerships:

• Dilution of control over business decisions.

• Profits need to be shared.

• Potential for disputes among partners.

• Partners are jointly and severally liable, usually to an unlimited degree.

Page 4: Nature of Limited Liability

• Partnerships typically expose partners to unlimited liability.

• Shareholders in a company enjoy limited liability; they are only liable up to the amount they paid for their shares.

• The Limited Liability Partnership Act 2000 allows some professional firms to become Limited Liability Partnerships (LLPs).

Page 5: Statement of Profit or Loss for a Partnership

• The SPL for partnerships mirrors that of sole traders.

• Net profit must be appropriated/shared among partners.

• An appropriation account follows the SPL.

• Distribution rules are outlined in a Partnership Agreement.

Page 6: Sharing of Profits - Example with Raj and Fay

• Example setup:

  • Fay invests £100,000, Raj invests £10,000.

  • Raj works full-time; Fay works part-time.

  • Consideration of cash withdrawals (drawings) affects net profit sharing.

Page 7: Appropriation of Net Profit

Key Components:

• Interest on Drawings: Partners charged a percentage on their withdrawals.

• Salaries: Some partners may receive fixed salaries.

• Interest on Capital: Partners earn interest on their capital investment.

• Profit Sharing Ratio: Remaining profits shared in an agreed ratio.

Page 8: Appropriation Account Illustration

• Example:

  • Net profit from the SPL: £120

  • Add Interest on Drawings: Ava £4, Ben £6 (total £10)

  • Subtract Salaries: Ava (£30)

  • Subtract Interest on Capital: Ava (£11), Ben (£9) (total £20)

  • Residual profit: £80, shared equally: Ava £40, Ben £40.

Page 9: Understanding the Appropriation Account

• Ava’s entitlement:

  • Total: £77 (salary £30 + interest on investment £11 - interest on drawings £4 + residual share £40).

• Ben’s entitlement:

  • Total: £43 (interest on investment £9 - interest on drawings £6 + residual share £40).

• Total profit appropriation: £77 + £43 = £120.

Page 10: Question on Meg & Dev

• Meg and Dev sharing profits in a 7:3 ratio.

• Year ended 31 May 20X9: Net profit £106,000.

• Drawings: £62,000 (Meg), £34,000 (Dev).

• Salary: Dev receives £15,000.

• Capital accounts: Meg £200,000, Dev £140,000.

Page 11: Requirement for Meg & Dev

• Prepare the appropriation account for the year ended 31 May 20X9.

• Calculate the balance on each partner’s current account.

Page 12: Question about Peters & Lee

• Partnership: profit sharing ratio 3:2.

• Net profit before appropriations: £58,000.

• Lee’s salary: £11,000.

• Interest on drawings: £970 (Peters), £630 (Lee).

• Interest on capital: £2,500 (Peters), £1,900 (Lee).

• Determine Peters’ share of residual profit.

Page 13: Question regarding Romeo & Juliet

• Net profit before appropriations: £176,000.

• Profit sharing ratio 3:2.

• Juliet’s salary: £23,000.

• Calculate Juliet’s share of the residual profit.

Page 14: The Statement of Financial Position (SFP) for a Partnership

• Similar structure to sole trader SFP, with a unique capital section:

  • Example: Opening capital £370, profit £120, less drawings £100, closing capital £390.

Page 15: Fixed vs. Fluctuating Accounts

Fixed Capital Accounts:

• Rarely change, always have a credit balance.

Current Accounts:

• Reflect profit shares and drawings; fluctuations occur, can be credit or debit balances.

Page 16: Partners’ Capital Accounts

• Example: Partners' Capital for Ava and Ben.

• Example structure highlighting fixed balances.

Page 17: Partners’ Current Accounts in T-Account Format

• Continuously fluctuating based on:

  • Opening balance, salary, interest on capital, residual profit share, drawings, interest on drawings.

Page 18: Alternative Presentation of Current Accounts

• Columnar format to show account balances with debits in brackets.

Page 19: Question on Meg & Dev (Repeat)

• Same question as before with details reiterated.

Page 20: Meg & Dev Requirement (Repeat)

• Repeat of previous specific requirements for the appropriation account.

Page 21: Question on Portman & Palmer

• Determine balance on Palmer’s current account based on financial activities.

Page 22: Question on Mary & Celeste

• Find the residual profit share for Mary from provided financial data.

Page 23: Question on Shipman & Parker

• Determine interest on Parker's drawings from the partnership records.

Page 24: Loans from Partners

• Partner loans represented as liabilities on SFP; interest is an expense in the SPL, not an appropriation.

Page 25: Essential Private Study

• Engage with PowerPoint short questions & quiz on Canvas; review all covered materials.

Page 26: Additional Recommended Study Materials

• Read Chapter 31 of the textbook, focusing on sections 31.1 - 31.2 and 31.5-31.11, and attempt related review questions.