Partnership Accounts and Non-Profit Organisations
Partnerships
A partnership has two or more owners governed by a partnership agreement. It usually covers profit-sharing ratio, interest on capital, partner salaries and interest on drawings. Where there is no agreement, assume profits and losses are shared equally.
The appropriation account follows the income statement. It shows net profit, then deducts interest on capital and partners' salaries, adds interest on drawings, and splits the residual profit in the agreed ratio. Each partner has a capital account (fixed or fluctuating) and a current account for drawings, interest and share of profit.
Traps: charging partners' salaries as an expense (they are appropriations of profit); ignoring interest on drawings (it increases divisible profit); and splitting profit before deducting interest on capital.
Non-profit organisations
Clubs and charities prepare a receipts and payments account (a cash summary), a subscription account, and an income and expenditure account (like an income statement, on an accruals basis). The surplus or deficit is added to or deducted from the accumulated fund, which is the equivalent of capital.
Traps: treating a life membership payment as ordinary income; ignoring subscriptions in arrears or in advance; and confusing receipts and payments (cash) with income and expenditure (accruals).
Rule of thumb
Partnership: appropriate first, then share. Non-profit: cash summary first, then adjust to accruals for the income and expenditure account.