Partnership Accounts: Appropriation, Capital and Current Accounts, Admission, Retirement and Dissolution
This domain tests how profits are shared between partners and how changes in the partnership are recorded. Questions usually ask for an appropriation account, partners' current accounts, or the adjustments on admission or retirement of a partner.
Appropriation of profit
Start with net profit, then add interest on drawings, deduct partners' salaries and interest on capital. The residual is shared in the profit-sharing ratio. Interest on capital, interest on drawings and salaries are appropriations of profit, never expenses of the business.
Capital and current accounts
Where capital accounts are fixed, the capital account records only permanent capital introduced or withdrawn, and the current account records interest on capital, salary, share of profit, drawings and interest on drawings. Where capital accounts are fluctuating, all of these are recorded directly in the capital account. A debit balance on a current account means the partner has withdrawn more than their share.
Admission of a partner
- The new partner brings capital and possibly a premium for goodwill.
- Goodwill is raised, then written off to the old partners in the old ratio, so the new partner does not gain from past effort.
- Assets are revalued and the revaluation profit or loss is shared among the old partners.
- A new profit-sharing ratio applies from the date of admission.
Retirement
Revalue the assets, adjust goodwill, close the retiring partner's current account and settle the amount due in cash, by transfer to a loan account, or both.
Dissolution basics
Open a realisation account: transfer assets (Dr) and liabilities (Cr), record sale proceeds and realisation expenses, then the balance is a profit or loss shared in the profit-sharing ratio. Remaining cash settles outside liabilities first, then partners' capital.
Worked example
Net profit 900,000. A: capital 400,000; B: capital 300,000. Interest on capital 10%; salary to B 60,000; interest on drawings A 5,000 and B 3,000; ratio 3:2. Appropriation: 900,000 + 8,000 − 70,000 − 60,000 = 778,000. A receives 3/5 × 778,000 = 466,800; B receives 311,200. These are posted to current accounts along with interest on capital, salary and drawings.
Traps
- Charging interest on capital or partners' salaries as expenses in the profit and loss account.
- Ignoring interest on drawings, which is added to profit available.
- Using the old ratio after admission or retirement.
- Failing to write off goodwill against the old partners.