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PARTNERSHIPS. Partnerships This is when two or more persons enter into a business venture with the intention to make money. Partnership Agreement Legal document containing terms of agreement Signed by partners Used to avoid future disputes Items found In Agreement

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partnerships
PARTNERSHIPS

Partnerships

This is when two or more persons enter into a business venture with the intention to make money.

PartnershipAgreement

  • Legal document containing terms of agreement
  • Signed by partners
  • Used to avoid future disputes

Items found In Agreement

  • Share of profits/losses
  • Capital Contribution
  • Interest charged on drawings
  • Interest on Capital
  • Amount of salary to be paid
  • Duties and responsibilities
  • Agreement on admission of new partner
advantages disadvantages of partnership
Advantages

Increased Capital – Expand firm

Share burden of work/holidays

Allows for specialisation (lawyer may deal with criminal law, corporate law, or road traffic offences etc

Disadvantages

Profits must be shared

More chance of disagreement

Decisions slow

Partners have Unlimited Liability

ADVANTAGES/DISADVANTAGES OF PARTNERSHIP
terms associated with partnership accounts
Terms Associated with Partnership Accounts

Appropriation Account

Limited Liability

Profit Sharing Ratio

Unlimited Liability

Current Account

Capital Account

partnership terms
Partnership Terms
  • INTEREST ON CAPITAL
  • Partners are awarded cash for the amount of money they invested in the business.
  • This cash is taken from the NET PROFIT in the Appropriated Section of the Accounts
  • It is also added to the partners CURRENT ACCOUNT (source of income)
  • PROFIT SHARING RATIO
  • In a partnership the ‘Residual’ Profits are normally shared based on the amount of capital each partner has invested in the company.
  • EG if H Larsson invests £20,000 capital and G Best invests £10,000 into their business.The share of profits should a ratio of 2:1
  • Any share in profits partners receive is entered in each partners CURRENT ACCOUNT
terms associated with partnership
Terms Associated With Partnership
  • CURRENT ACCOUNT
  • Contains any share of profits, drawings, interest on capital. Interest on drawings
  • Allows distinction between capital investment and profit
  • CAPITAL ACCOUNT
  • Identifies initial fixed capital
  • Records further investment
  • Forms basis for profit calculation
  • Identifies fluctuations in capital
  • RESIDUAL PROFIT
  • This is the amount of profit remaining after any payments have been made or taken from each partner
  • This is the amount that is shared between partners
terms associated with partnership1
Terms Associated With Partnership

UNLIMITED LIABILITY

This is where the personal assets belonging to an individual are sold in order to cover any outstanding debts owed to the bank e.g. house; car etc

LIMITED LIABILITY

In the event of the company going bankrupt the owner/investor will only lose the original capital that they invested in the company nothing more.

procedure for creating partnership accounts
Procedure for Creating Partnership Accounts
  • Complete notes for TPL & Balance sheet
  • Work down to RESIDUAL PROFIT in TPL Acc
  • Work out share of profits for each partner
  • Complete appropriation account
  • Complete partner’s current accounts
  • Create balance sheet
template for partnership

Should Agree

Template for Partnership

PROFIT AND LOSS APPROPRIATED SECTION FOR Partner 1 AND Partner 2FOR YEAR ENDED (Enter Date)

£ £ £

NET PROFIT x

ADD Interest on Drawings

Partner 1 x

Partner 2 x x x

LESS

Salary (insert name)x

Interest on Capital

Partner 1 x

Partner 2 xx

RESIDUAL PROFIT x

SHARE OF RESIDUAL PROFIT

Partner 1 x

Partner 2 x x

template for partnership1
Template for Partnership

CURRENT ACCOUNTPARTNER 1

Details DR CR BAL

Opening Bank Balance X cr

+Interest in Capital XX cr

+Salary XX cr

+Share of Profit XX cr

-Drawings XX cr X

- Interest in Drawings XX cr X

(Closing Bank Balances get carried forward to Balance Sheet- Financed By Section)

template for partnership2
Template for Partnership

CURRENT ACCOUNTPARTNER 2

Details DR CR BAL

Opening OverdraftX dr

+Interest in Capital XX dr

+Salary XX cr

+Share of Profit XX cr

-Drawings XX cr

- Interest in Drawings XX cr  

(Closing Bank Balances get carried forward to Balance Sheet- Financed By Section)

template for partnership3

ADD

BALANCE SHEET OF (PARTNER 1 AND PARTNER 2) AS AT (Enter Date)

£ £ £

Cost Dep NBV

FIXED ASSETS

Equipment x xx

Premises xx x

CURRENT ASSETS

Stock x

Debtors x

Prepayments etc x

x

CURRENT LIABILITIES

Creditors x

Accruals x

Bank Overdraft x

VAT (Cr) x -x

WORKING CAPITAL + x

NET ASSETSx

Template for Partnership
template for partnership4

BALANCE SHEET OF (PARTNER 1 AND PARTNER 2) AS AT (Enter Date)

£ £ £ 

FINANCED BY

CAPITAL ACCOUNT BALANCES

Partner 1 x

Partner 2xx

CURRENT ACCOUNT BALANCES

Partner 1 x

Partner 2 xx

NET WORTH x

Template for Partnership

IF BALANCE SHEET BALANCES THEN

NET ASSETS (FROM PREVIOUS PAGE) = NET WORTH

procedure for creating partnership accounts1
Procedure for Creating Partnership Accounts
  • Complete notes for TPL & Balance sheet
  • Work down to RESIDUAL PROFIT in TPL Acc
exercise 1 stewart kinsey
Exercise 1 – Stewart & Kinsey

Notes

Interest on Capital 20%

P Stewart

Capital 20,000 Bal Sheet / Cap Acc

Interest 4,000 App Acc/ Current Acc

S Kinsey

Capital 15,000 Bal Sheet / Cap Acc

Interest 3,000 App Acc/ Current Acc

Interest on Drawings 10%

P Stewart

Drawings 9,000 Current Acc

Interest charged 900 App Acc/ Current Acc

S Kinsey

Drawings 10,000 Current Acc

Interest Charged 1,000 App Acc/ Current Acc

slide15
EX 1

Profit & Loss Appropriation Acc of P Stewart & S Kinsey for the year ended 31 Mar 2011 £ £

NET PROFIT 16,790

ADD Interest on Drawings

P Stewart 900

S Kinsey 1,0001,900

18,690

LESS

Salary Kinsey8,000

Interest on Capital

Stewart 4,000

Kinsey 3,00015,000

RESIDUAL PROFIT 3,690

procedure for creating partnership accounts2
Procedure for Creating Partnership Accounts

3 Work out share of profits for each partner

exercise 1 stewart kinsey1
Exercise 1 – Stewart & Kinsey

Notes

Share of Residual Profit 3:2

P Stewart

Residual profit 3,690

Profit 3/5 2,214 App Acc/ Current Acc

P Kinsey

Residual profit 3,690

Profit 2/5 1,476 App Acc/ Current Acc

procedure for creating partnership accounts3
Procedure for Creating Partnership Accounts

4 Complete appropriation account

slide19
EX 1

Profit & Loss Appropriation Acc of P Stewart & S Kinsey for the year ended 31 Mar 2011 £ £

RESIDUAL PROFIT 3,690

SHARE OF RESIDUAL PROFIT

P Stewart 2,214

S Kinsey1,476 3,690

exercise 2 glynn and maloy
Exercise 2 Glynn and Maloy
  • PROCEDURE
  • Complete notes for TPL & Balance sheet
  • Work down to RESIDUAL PROFIT in TPL Acc
  • NOTES
  • None at moment
  • No interest on capital or drawings
slide21
EX 2

Profit & Loss Appropriation Acc of Glynn & Maloy for the year ended 31 Dec 2010

£ £

NET PROFIT 7,000

LESS

Salary Glynn1.0001,000

RESIDUAL PROFIT 6,000

procedure for creating partnership accounts4
Procedure for Creating Partnership Accounts

3 Work out share of profits for each partner

exercise 2 glynn maloy
Exercise 2 – Glynn & Maloy

Notes

Share of Residual Profit 2:1

Glynn

Residual profit 6,000

Profit 2/3 4,000 App Acc/ Current Acc

Maloy

Residual profit 6,000

Profit 1/3 2,000 App Acc/ Current Acc

procedure for creating partnership accounts5
Procedure for Creating Partnership Accounts

4 Complete appropriation account

slide25
EX 2

Profit & Loss Appropriation Acc of Glynn & Maloy for the year ended 31 Dec 2010

£ £

RESIDUAL PROFIT 6,000

SHARE OF RESIDUAL PROFIT

Glynn 4,000

Maloy2,000 6,000

exercise 2 b current acc glynn
Exercise 2 b) – Current Acc - Glynn

1,000

1,200 cr

30 Dec

Salary

4,000

5,200 cr

30 Dec

Share of Profit

3,700 cr

30 Dec

Drawings

1,500

exercise 2 theory
Exercise 2 – Theory

a) Explain the term Capital Expenditure

This is the money spent on buying assets

b) Give 2 examples of Capital Exenditure

Machinery, Vehicles, Fixtures & Fittings

c) Explain the term Revenue Expenditure

This is money spent on the running of the business – eg paying bills

d) Give 2 examples of Revenue Expenditure

Rent, Rates, Telephone, Heating etc

ex 3 cagney lacey
EX 3 Cagney & Lacey

Profit & Loss Appropriation Acc of Cagney & Lacey for the year ended 30 Apr 11

£ £

NET PROFIT 33,000

LESS

Salary – Cagney 10,000

Salary - Lacey8,00018,000

RESIDUAL PROFIT 15,000

exercise 3 cagney lacey
Exercise 3 – Cagney & Lacey

Notes

Share of Residual Profit 2:1

Cagney

Residual profit 15,000

Profit 2/3 10,000 App Acc/ Current Acc

Lacey

Residual profit 15,000

Profit 1/3 5,000 App Acc/ Current Acc

slide30
EX 3

Profit & Loss Appropriation Acc of Cagney & Lacey for the year ended 30 April 2011

£ £

RESIDUAL PROFIT 15,000

SHARE OF RESIDUAL PROFIT

Cagney 10,000

Lacey5.000 15,000

exercise 3 current accounts
Exercise 3 – Current Accounts

Cagney

750

30 Apr

Opening Bal

750 Cr

30 Apr

Salary

10,750 Cr

10,000

30 Apr

Share of Profit

20,750 Cr

10,000

30 Apr

Drawings

15,750 Cr

5,000

Lacey

125

30 Apr

Opening Bal

125 Dr

30 Apr

Salary

7,875 Cr

8,000

30 Apr

Share of Profit

12,875 Cr

5000

30 Apr

Drawings

2,875 Cr

10,000

slide32

Balance Sheet of Cagney & Lacey as at 30 April 2004

EX 3

Equipment

12,128

1,000

11,128

Premises

31,244

0

31,244

42,372

Stock

8,900

Debtors

3,678

12,578

Bank Overdraft

6,200

-6,325

Vat

125

+6,253

Working Capital

48,625

NET ASSETS

slide33

Balance Sheet of Cagney & Lacey as at 30 April 2004 (Continued)

EX 3

Capital Acc

Cagney

20,000

Lacey

10,000

30,000

Current Acc

15,750

Cagney

Lacey

2,875

18,625

NET WORTH

48,625

introducing a new partner
Introducing a New Partner
  • When a new partner is introduced to a company
    • AT THAT POINT the final accounts of the company are drawn up and the profit appropriated
    • A NEW Partnership Agreement is then drawn up
    • Any further Accounts drawn up should take the conditions in the new agreement into account
exercise 6 williams stewart
Exercise 6 – Williams & Stewart

Notes

Interest on Capital

Williams

Capital 45,000

Interst 5% 2,250 per year

Divide by 2 1,125 6 months

Stewart

Capital 30,000

Interst 5% 1,500 per year

Divide by 2 750 6 months

slide36
EX 6

Profit & Loss Appropriation Acc of Williams & Stewart for the 6 months ending 30 June 2010

£ £

NET PROFIT 8,200

LESS

Salary – Stewart 2,500

Interest on Capital

Williams 1,125

Stewart 750 4,375

RESIDUAL PROFIT 3,825

exercise 6 williams stewart1
Exercise 6 – Williams & Stewart

Notes

Share of Profit

Williams

Residual Profit 3,825

3/5 2295

Stewart

Residual Profit 3,825

2/5 1,530

slide38
EX 6

Profit & Loss Appropriation Acc of Williams & Stewart for the 6 months ending 30 June 2010

£ £

RESIDUAL PROFIT 3,825

Share of residual profit

Stewart 2,295

Williams 1,5303,825

exercise 6 current accounts
Exercise 6 – Current Accounts

Stewart

30 Jun

Opening Bal

800 Dr

30 Jun

Salary

1,700 Cr

2,500

30 Jun

Interest on Cap

2,450 Cr

750

30 Jun

Share of profit

3,980 Cr

1,530

2,400

30 Jun

Drawings *

1,580 Cr

*Drawings - £400 per month x 6 months

exercise 6 part b williams stewart dennis
Exercise 6 Part B – Williams, Stewart & Dennis

Notes

Interest on Capital

Williams

Capital 60,000 (45,000 + 15,000)

Interst 10% 6,000 per year

Divide by 2 3,000 6 months

Stewart

Capital 30,000

Interst 10% 3,000 per year

Divide by 2 1,500 6 months

Dennis

Capital 15,000

Interst 10% 1,500 per year

Divide by 2 750 6 months

ex 6 part b
EX 6 – Part B

Profit & Loss Appropriation Acc of Williams Stewart & Dennis for the 6 months ending 31 Dec 2010

£ £

NET PROFIT 22,250

LESS

Salary – Williams 3,000

Interest on Capital

Williams 3,000

Stewart 1,500

Dennis 7508,250

RESIDUAL PROFIT 14,000

exercise 6 williams stewart2
Exercise 6 – Williams & Stewart

Notes

Share of Profit

Total Capital = £105,000

Williams = 60/105 = 4/7

Residual Profit 14,000

4/7 8,000

Stewart = 30/105 = 2/7

Residual Profit 14,000

2/7 4,000

Dennis = 15/105 = 1/7

Residual Profit 14,000

1/7 2,000

ex 6 part b1
EX 6 Part B

Profit & Loss Appropriation Acc of Williams Stewart & Dennis for the 6 months ending 31 Dec 2010

£ £

RESIDUAL PROFIT 14,000

Share of residual profit

Stewart 8,000

Williams 4,000

Dennis 2,00014,000

exercise 8 a correcting net profit
Exercise 8 – a) Correcting Net Profit

Lawson & Johnston

£ £

Net Profit 24000

Add Wages 3000

Depreciation (£1500-£1000) 500

Discount Received 500 4000

28000

Less Sales Returns 300

Office Stationery 100 400

Corrected Profit £27600

goodwill
GOODWILL
  • Successful business build a reputation over a number of years
  • This reputation is linked to their name
  • Example Marks & Spencer is associated with good quality products at a reasonable price They also have lots of loyal customers.
  • This reputation and loyalty associated with a business is called Goodwill
  • Goodwill is a an asset to the company and is acquired through time but it is not specifically bought like other assets
  • It is also difficult to quantify in money terms
  • Goodwill therefore is known as an Intangible Asset (cannot be seen or touched)
goodwill1
GOODWILL

HOW TO TREAT GOODWILL IN THE FINAL ACCOUNTS:

  • It is entered just below the fixed assets in the Balance Sheet under a new heading – Intangible Assets

WRITING OFF GOODWILL

In this instance the value of Goodwill should be

  • Entered as Zero in the balance sheet
goodwill2
GOODWILL

Calculating goodwill

  • Calculated by taking the average weekly, monthly or annual sales over a period of time
  • Goodwill is A DEBIT balance in the ledger
  • No Guarantee that a purchaser or an incoming partner will agree to the value of goodwill .
  • This is the main reason that goodwill very rarely appears in the balance sheet
  • If goodwill is introduced, when a new partner joins, it is normally shared between the original partners based on their PROFIT SHARE RATIO.
  • This amount is then CREDITED to each partners CAPITAL ACCOUNT
revaluation of assets
REVALUATION OF ASSETS
  • Fixed and current Assets of any Partnership Account are normally REVALUED with the introduction of a new partner

RISE IN VALUE

  • Split the rise between the partners according to their profit sharing ratio.
  • Credit (Add) the amount for each partner in his/her CAPITAL ACCOUNT

DROP IN VALUE

  • Split the decrease between each partner according to their profit sharing ratio
  • Debit (subtract) the amount for each partner from the value in his/her CAPITAL ACCOUNT
exercise 9 bendix chan
Exercise 9– Bendix & Chan

Question ai)

  • Chan has paid a premium for goodwill because the business
    • is a going concern
    • Has a large number of customers will continue to use the business
    • Has a good reputation
    • Has experienced and efficient staff
    • Situated in a good location
    • It has established links with suppliers
exercise 9 bendix chan1
Exercise 9 – Bendix & Chan

Question aii)

  • Calculate the initial amount of capital for each partner

Bendix

Original capital £53,000

Add good will £10,000

£63,000

Less Loss in

Revaluation £ 3,000

£60,000

Chan

Original capital £40,000

exercise 9 bendix chan2
Exercise 9 – Bendix & Chan

Notes

General Reserve

Net profit 30,000

Gen Res 20% 6,000

Interest on Capital

Bendix

Capital 60,000

Interest 5% 3,000

Chan

Capital 40,000

Interest 5% 2,000

exercise 9 bendix chan3
Exercise 9 – Bendix & Chan

Notes

Interest on Drawings

Bendix

Drawings 10,000

Interest 20% 2,000

Chan

Drawings 5,000

Interest 20% 1,000

ex 9 bendix chan

Profit & Loss Appropriation Acc of Bendix & Chan for the year ending 31 May 2011

£ £

NET PROFIT 30,000

Less Transfer to Gen Reserve 6,000

24,000

ADD Interest on Drawings

Bendix 2,000

Chan 1,0003,000

27,000

LESS

Salary – Chan 2,000

Interest on Capital

Bendix 3,000

Chan 2,0007,000

RESIDUAL PROFIT 20,000

Ex 9 Bendix & Chan
exercise 9 bendix chan4
Exercise 9 – Bendix & Chan

Notes

Profit Sharing Ratio

Capital

Bendix 60,000 3

Chan 40,000 2

= 3:2

Bendix

Residual Profit 20,000

3/5 12,000

Chan

Residual Profit 20,000

2/5 8,000

ex 9 bendix chan1

Profit & Loss Appropriation Acc of Bendix & Chan for the year ending 31 May 2011

£ £

RESIDUAL PROFIT 20,000

SHARE OF RESIDUAL PROFIT

Bendix12,000

Chan 8,00020,000

Ex 9 Bendix & Chan
exercise 9 q1 iv
Exercise 9 – Q1(iv)

Current Account - Chan

31 May

Opening Bal

0 Cr

31 May

Salary

2,000 Cr

2,000

31 May

Interest on Cap

4,000 Cr

2,000

31 May

Share of profit

12,000 Cr

8,000

5,000

31 May

Drawings

7,000 Cr

Int on Drawings

1,000

31 May

6,000 Cr

exercise 9 q2 i
Exercise 9 – Q2(i)

Bendix & Chan

Sales understated

Increase

+450

Purchases Overstated

Increase

+2,700

Wrong type of account

-70

Decrease

Wages understated

Decrease

-180

0

Omission of VAT

Nil

Wrong type of account

Decrease

-100

Loss on asset

Decrease

-800

Change on profit

Increase

+2,000

ex 9 bendix chan2
Ex 9 Bendix & Chan

Additional Appropriation Acc of Bendix & Chan for the year ending 31 May 2011

£ £

Change to profit 2,000

Less

Transfer to Gen Reserve (20%) 400

RESIDUAL PROFIT 1,600

SHARE OF ADDITIONAL RESIDUAL PROFIT

Bendix 960

Chan 640 1,600

h partnership revision bogart bacall
(H) Partnership revision Bogart & Bacall

Notes

Bacall

Interest on Capital

Bacall

Interest 10% 3,000

Capital = 3,000 x 10 = 30,000

Drawings

Capital 30,000

Drawings 25% 7,500

h partnership revision bogart bacall1
(H) Partnership revision Bogart & Bacall

a) Current Account - Bacall

Int on Capital

3,000

3,000 Cr

Salary

11,000 Cr

8,000

Drawings

3,500 Cr

7,500

1,500

Int on Drawings

2,000 Cr

Share of profit

4,000

6,000 Cr

h partnership revision bogart bacall2
(H) Partnership revision Bogart & Bacall

b) Bogart

i) Capital Invested(twice as much as Bacall)

= 30,000 x 2 = £60,000

ii)Bogart Annual Drawings

Capital 60,000

Drawings 25% £15,000

iii) Bogart Share of Profit 3:2

= Bacall’s profit = £4,000 (2/5)

Bogart = 3/5 so (£4,000 / 2) = £2,000 (1/5)

= £2000 x 3 = £6,000 = 3/5

h partnership revision bogart bacall3

Profit & Loss Appropriation Acc of Bogart & Bacall for the end of Year 1 £ £

NET PROFIT x

ADD Interest on Drawings

Bacall

Bogartl

LESS

Salary – Bacall

Interest on Capital

Bogart

Bacall

RESIDUAL PROFIT

SHARE OF PROFIT

Bogart

Bacall

(H) Partnership revision Bogart & Bacall

22,500

1,500

3,000

4,500

8,000

6,000

17,000

3,000

10,000

6,000

4,000

10,000

Reverse workings = 10,000 + 17,000 – 4,500

h partnership revision bogart bacall4
(H) Partnership revision Bogart & Bacall

di ) Introduction of a new partner

Bacall

Share of Goodwill = 15,000 x 2/5 = 6,000

Share of deficit = 20,000 x 2/5 = 8,000

CAPITAL ACCOUNT -BACALL

Balance

30,000

30,000 Cr

Share of premium

36,000 Cr

6,000

Share of deficit

28,000 Cr

8,000

h partnership revision bogart bacall5
(H) Partnership revision Bogart & Bacall

d) ii) Profit Sharing Ratio

New partners share = 25% = 1/4

Left over = 3/4 (to be split in a ratio of 3:2)

Bacall – Share of profit

= 2/5 x 3/4

= 6/20

= 3/10 = 30%

To Check Bogart

= 3/5 x 3/4

= 9/20 = 45%

Cagney = 25%

100%