Week 8 Flashcards
(8 cards)
What is interest on capital and interest on drawings?
Interest on capital – reward partners for keeping capital in the firm
2.Interest on drawings – penalise partners for removing capital from the firm
What is included in the appropriations of profits?
- Interest on Capital
- Interest on Drawings
- Partner salaries
- Residual Profits
- Share of profits (total)
What if there is no partnership agreement?
The Partnership Act declares that:
●Profits and losses to be shared equally
●No interest allowed on capital
●No interest to be charged on drawings
●Salaries are not allowed
●If partners put capital in to the business in excess of the amount they agreed to subscribe, they are entitled to interest at a rate of 5% per annum.
How do the partners share goodwill?
-Unless agreed otherwise, partners share goodwill in the same proportion as profit sharing agreement.
How do you dissolve a partnership? (Double entries)
1)Dr Realisations a/c
Cr Assets
Use book value
Dr Realisations a/c
Cr Bank
Expenses of realisation
2.Dr Bank
Cr Realisations a/c
Cash from sale of assets
Dr Capital
Cr Realisations a/c
Assets taken over by partners at valuation
3.Dr Liabilities
Cr Bank
Settle liabilities
Dr Realisations a/c
Cr Capital a/c
Profit on realization
What is limited liability partnerships?
- Limited Liability Partnership Act 2000 allows a new type of business
- LLP is separate legal entity.
- No limit on the number of members.
Why do we calculate ratios?
- To review performance over time;
- Compare performance of competitors;
- Compare performance with industry averages;
- Use past performance to help forecast future performance;
- Highlight problems, then take corrective action.
What are limitations of ratios?
- Only useful guidelines
- Miss seasonal variations
- Financial Statements contain assumptions & estimates
- Uses historic information
- If comparing companies must be fair comparison and have similar accounting policies
