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.