Changes In Partnerships Flashcards
(13 cards)
Recommend to X whether or not they should introduce Y as a new partner
Intro:
- Briefly state purpose of response
- Identify key points of answer
Financial considerations:
- Capital contribution of new partner and will it improve liquidity
- will new partner improve overall profitability of dilute existing partnership profits
- will intro of partner add risk or financial stability
Non-financial considerations:
- Does Y have expertise that’s benefits the business
- Could conflict arise
- Legal structure of business - will it change
Advantages v. Disadvantages
Recommendations and Justifications:
- Clearly state decisions
- Justify recommendation with evidence
*can suggest alternative solutions
Conclusion
Explain the purpose of a partnership capital account
A partner’s capital account tends to be a fixed account (1) which includes the initial investment into the business by each partner (1)
This account would then only change with either the introduction of extra capital (1) or due to a change in the structure of the partnership such as a new partner joining (1) an existing partner retiring (1) or the partnership being dissolved (1).
These changes could include adjustments for revaluation of non-current (fixed) assets (1), goodwill (1) and realisation profit/loss on a dissolution (1)
Used as a means of calculating interest on capital (1)
Explain the purpose of a partnership current account
A current account is a fluctuating account (1) which is used to record the allocation of profit to the partners from the appropriation account (1).
These allocations can include partners’ salaries/interest on capital/profit shares/interest on drawings (1) It is then used by the partners for drawings (1).
What are the 5 claims of the partnership act 1890
- if a partner lends money to the partnership, they’re entitled to 5% interest on the loan per annum
- profits and losses are to be shared equally
- no partner is entitled to a salary
- no interest is to be received on their capital
- interest is not to be charged on partners drawings
What is debited in the current account
- drawings
- interest charged in drawings
- share of loss
- bal c/d
What is credited in the current account
- bal b/d
- share of net profits
- salary
- commission
- interest allowed on capital
What is goes in the appropriation account
Profit for the year b/d
ADD interest on drawings
LESS salary
LESS interest on capital
Share of profits/loss
Define goodwill
The difference between the value of the business and the net value of the separate assets & liabilities
Give 2 benefits of having a partnership agreement
- Prevents misunderstandings and ensures smooth business operations
- Specifies how profits and losses are shared among partners
- Reduces the risk of costly legal battles
- Protection against unexpected events; covers scenarios like a partner’s exit, retirement, or death
- Allows partners to set their own rules rather than relying on generic legal provisions
In what circumstances would partnerships use a capital account only
- In small partnerships, where financial transactions are minimal, partners may prefer a single capital account to simplify bookkeeping
- If partners do not frequently withdraw profits, a current account may be unnecessary
Give 2 arguments FOR and 2 arguments AGAINST the use of a capital account
FOR:
- Helps define each partner’s stake in the business
- Encourages commitment to the partnership
- Profits can be reinvested, increasing the capital balance
AGAINST:
- Fixed capital accounts may not reflect short-term financial changes
- Unequal contributions can lead to disagreements
- Partners may lose their capital if the business fails
Give 2 arguments FOR and 2 arguments AGAINST the use of a current account
FOR:
- Shows how profits and losses are distributed
- Flexibility: Allows partners to withdraw earnings as needed
- Performance Tracking: Reflects each partner’s financial activity
AGAINST:
- Excessive withdrawals can lead to a debit balance
- Requires careful management to avoid disputes
- If not managed properly, partners may feel unfairly compensated
What does a debit and credit balance mean in current accounts
Debit Balance:
Indicates a partner has withdrawn more than their share of profits
Credit Balance:
Shows a partner has earned more than they have withdrawn
