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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. 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

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  1. 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

  2. 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

  3. Terms Associated with Partnership Accounts Appropriation Account Limited Liability Profit Sharing Ratio Unlimited Liability Current Account Capital Account

  4. 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

  5. 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

  6. 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.

  7. 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

  8. 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

  9. 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)

  10. 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)

  11. ADD BALANCE SHEET OF (PARTNER 1 AND PARTNER 2) AS AT (Enter Date) £ £ £ Cost Dep NBV FIXED ASSETS Equipment x xx Premises xx x 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

  12. 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

  13. Procedure for Creating Partnership Accounts • Complete notes for TPL & Balance sheet • Work down to RESIDUAL PROFIT in TPL Acc

  14. 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

  15. 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

  16. Procedure for Creating Partnership Accounts 3 Work out share of profits for each partner

  17. 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

  18. Procedure for Creating Partnership Accounts 4 Complete appropriation account

  19. 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

  20. 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

  21. 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

  22. Procedure for Creating Partnership Accounts 3 Work out share of profits for each partner

  23. 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

  24. Procedure for Creating Partnership Accounts 4 Complete appropriation account

  25. 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

  26. 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

  27. 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

  28. 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

  29. 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

  30. 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

  31. 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

  32. 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

  33. 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

  34. 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

  35. 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

  36. 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

  37. 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

  38. 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

  39. 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

  40. 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

  41. 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

  42. 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

  43. 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

  44. 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

  45. 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)

  46. 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

  47. 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

  48. 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

  49. 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

  50. 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

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