Business Accounts - Partnership Accounts Flashcards
(10 cards)
How do partnership accounts compare to sole trader accounts?
Similar, including year-end adjustments, but partnership accounts differ in the capital structure and require a profit appropriation statement to allocate profit between partners.
What two types of accounts are commonly held for each partner?
- Capital account – long-term capital that cannot be withdrawn
- Current account – reflects share of profits and drawings and can be withdrawn
What type of classification are partner capital and current accounts?
Both are capital accounts - they reflect the partner’s ownership interest in the business
What are ‘drawings’ in a partnership context?
Withdrawals of estimated profit by a partner throughout the year; not salaries but distributions from profits.
In what order are profits appropriated in a partnership?
- Notional interest on capital
- Notional salaries
- Remaining profit is split per agreed profit share ratio
What is a notional interest on capital?
A hypothetical allocation of profit based on the partner’s capital investment, not treated as an expense in the profit and loss account
How is a partner’s notional salary treated in the accounts?
- As profit appropriation, not an expense
- Is is treated as a drawing, reducing the partner’s current account balance
What are residual profits in a partnership?
The remaining profit after allocating any notional interest and notional salaries, to be split by profit-sharing ration
What must be done before preparing the balance sheet of a partnership?
The profit appropriation statement must be completed to determine each partner’s share of the profit
How does the capital section of a partnership balance sheet differ from a sole trader’s?
It includes individual capital and current accounts for each partner, instead of a single owner’s capital account
