Accounting

6 Paragraphs - ½ Page - 3 pages for Excellence 

1. PPE

2. Goodwill

3. Absence of partnership agreement

4. Salaries

5. Interest on Capital

6. Interest on Current Account

All follow the same format for: 

Achieved (What did you do?)

Merit (Why did you do that?)

Excellence (Consequences of doing/not doing that). - Biggest part of your report (At least ½)

Make sure to be clear on what you are talking about (What partner? Partnership or Sole Trader business) e.g Partner A has , Partner B has .

1. PPE (Property, Plant and Equipment) - Don’t say PPE, use the listed PPE (e.g If it says shop fittings, we don’t care about land or buildings etc.)

Achieved - Explain how the carrying amount is calculated for the sole trader business. 

Shop fittings at 10000, Accumulated depreciation at 2000 and a carrying amount of 8000 in the sole trader business. THEN state the agreed value which could be 12000.

Given the cost, agreed value - COPY THEM 

4 NUMBERS SHOULD BE HERE 

Merit - Explain what the carrying amount for the sole trader business represents. - Use concepts knowledge.

Why the agreed value is different to the carrying amount.

Agreed value is what the partners agreed, economic benefit in the assets. 

Could be 8000 in the sole trader, 12000 in the partnership - more economic benefit in the partnership. That agreed value becomes our historical cost. For the partnership it is a brand new asset.

FOR THE SOLE TRADER IT IS OLD

THE PARTNERSHIP IT IS NEW - EVEN IF IT IS SECOND HAND, IT IS NEW TO ME

The agreed value becomes the historical cost for the partnership

WHY WE DON'T TAKE OVER ACCUMULATED DEPRECIATION

New assets can’t be depreciated on the first day, so therefore we don’t take it (accumulated depreciation) over

^ 4 THINGS FOR MERIT - What carrying amount was to the sole trader, What the agreed value represents to the partnership, agreed value becomes historical cost, why we don’t take over accumulated depreciation

EXCELLENCE 

What do we use PPE for? 

Offered land and buildings for security - SECURITY over loans

Any property plant and equipment can be used for security over loans

EXPANDING - Why? MORE PROFIT

SECURITY TO GET LOANS TO GET PPE TO EXPAND TO GET MORE PROFIT

If I sell goods, a way to expand is to grow my footprint. Does this make sense for this business?

One way to expand my store, make sure it makes sense for the business.

I could buy a new store somewhere else that’s EXPANSION ( e.g one in mt roskill, another in mt albert) - SPECIFIC EXAMPLE 

LOAN IS USED TO EXPAND MY BUSINESS - GIVE AN EXAMPLE IN CONTEXT

2. GOODWILL

Achieved - Goodwill is calculated as the difference between the fair value of a partner’s capital contribution and the agreed values of the net assets 

Merit - Goodwill represents the potential economic benefit from those assets with no physical presence e.g Customer base, location, unique product etc which is immediately profitable for the partnership

Why customer base and location are immediately profitable for the partnership. PROFIT straight away on the first day. As soon as I open the business I start making profit, which means I'm selling goods and services on the first day.

Why does having a good location/customer base 

I start up an ice cream business I have two choices to start my business

1. I started up a business without knowledge of making ice cream. I started a partnership with a mate and we have no idea of what we are doing. - No reputation, no customers, nothing known about me. Unlikely to turn up on the first day therefore I’m unlikely to make profit on the first day.

2. I’m going into partnership with my mate, top seller of ice cream/multiple awards, we will make ice cream together. - Customers expect the ice cream to be of the same quality, now it’s got good quality ice cream and customer service. Good customer base because they know it’s good, more likely to make sales = profit.

1. Location - Everest Base Camp - In the middle of winter - People will hardly be wanting an ice cream at this time of year.

2. Location - Mission Bay in Summer - Immediately profitable, people will come looking for ice cream makers because that’s what they want. Good location = customers = immediately profitable

Is there competition there

3. Absence of Partnership Agreement

Achieved - 1 SENTENCE

-You take the net profit and divide by how many partners there are - EQUALLY

NOT PROFIT SHARES/DISTRIBUTION divided by no. partners

What each partner receives and what they do

Specifically state what each partner is doing and what they are getting

3 figures - NET PROFIT, EACH PARTNER’S AMOUNT

MERIT - 1 SENTENCE

PARTNERSHIP LAW ACT 2019 that governs our partnership that runs and the partnership law act 2019 if you don’t have a partnership agreement then you have to share profits equally

You are not allowed to have interest on drawings, interest on current etc

3 things 

Partnership law

Share profits equally

Not allowed profit distribution clauses

EXCELLENCE - MOST OF ½ the page

If you don't have a partnership agreement that doesn’t recognise the work that is put into the partnership.

If I'm working 80hrs a week compared to 0hrs that isn’t fair to me if we split profits equally.

Focus on the fairness for each partner, fairness in terms of the risk you are taking. 

Not fair if I have a bigger capital than the other partner and it is a huge risk for me.

WHY IS THAT THE MOST RISK?

IS IT FAIR TO SHARE PROFITS EQUALLY IF YOU SHARE PROFITS EQUALLY.

Less capital = less to lose

More capital = more to lose

If it fails it’s unfair for the partner who has least risk has to lose half

Therefore the person with the most capital is entitled to more profits but is also entitled to greater losses. <- BECAUSE OF RISKS

Only way to recognise this risk is if we have a partnership agreement

WRITE IT PROPERLY - TALK ABOUT BOTH PARTNERS

4. Salaries

ACHIEVED - 

COPY THE SALARIES AMOUNT

MERIT

You need to talk about who has the most salaries, either does more work or has higher qualifications. 

1. Higher salaries either means more work or higher qualifications

2. Lower salaries either have less work or lower qualifications.

Specifically state each partner - CANNOT IMPLY

EXCELLENCE

Talk about the consequences of if we don’t have salaries. 

WHAT HAPPENS WHEN WE DONT HAVE SALARIES

THEY STOP WORKING

We need the salaries to Live - water, food, etc

They will leave if we fail to compensate them because they need the salaries

Working 40hr they don’t have time to get another job elsewhere. They leave to get a job that pays them to pay for everyday essentials. - Doesn’t have time to get another job to work to get money.

Working 1-2hrs a week means they could get another job.

 ^ FIRST CONSEQUENCE OF WHAT HAPPENS

We both get paid the same amount 

1 works 60hrs in the partnership - I WILL DO LESS WORK

1 plays golf, fishing, pub

IF ONE GETS PAID $$$ FOR NOTHING I SHOULD DO AS MUCH AS THEM

Demotivates a partner from working - Partnership will gain less profits = Risk of failing 

^ SECOND CONS

SAME GET PAID SAME AMOUNT

THE PERSON WHO GETS MORE GETS DEMOTIVATED STARTS WORKING LESS.