Partnership, nonprofit and ethical reporting
What the domain tests
This domain covers appropriation of profit, partners' capital and current accounts, admission, retirement and dissolution. You must apply the partnership agreement and distinguish appropriation from expense.
Rules
A partnership agreement may provide for interest on capital, partners' salaries, interest on drawings and a profit-sharing ratio. Use the agreement explicitly supplied in the exercise; default profit-sharing, liability and dissolution rules depend on the applicable jurisdiction and are not invented here.
The appropriation account starts with profit and deducts interest on capital and salaries, adds interest on drawings, then shares the residual profit in the agreed ratio. Interest on capital and salaries are appropriations, not expenses. Interest on drawings is a credit in this appropriation model, not a new external operating revenue stream and is debited to the partner's current account.
Capital accounts record permanent capital. Current accounts record appropriations, drawings and interest. On admission, goodwill may be raised and written off, and the new partner pays for a share of goodwill, which compensates sacrificing partners. On retirement, the retiring partner is credited with capital, current account and share of goodwill, and paid the amount due. On dissolution, a realisation account records asset disposal, realisation expenses and the profit or loss on realisation, which is shared in the profit-sharing ratio.
Worked example
Profit is 1,200,000. A has capital 2,000,000 and B 1,000,000; interest on capital is 10%; B receives a salary of 150,000; interest on drawings is A 20,000 and B 10,000. Residual profit is shared 3:2.
- Interest on capital: A 200,000; B 100,000.
- Residual = 1,200,000 − 300,000 − 150,000 + 30,000 = 780,000.
- Share: A 468,000; B 312,000.
- A's current account credit = 200,000 + 468,000 − 20,000 = 648,000; B's = 100,000 + 150,000 + 312,000 − 10,000 = 552,000. Total 1,200,000.
Traps
Partners' salaries are appropriations, not wages expense. Interest on drawings is credited to the appropriation account and debited to the current account. Goodwill on admission is not a cash payment to the firm unless the agreement says so; it compensates sacrificing partners. Do not merge capital and current accounts unless the partnership uses fluctuating capital accounts.
What the domain tests
You must distinguish public sector and not-for-profit accounting from commercial accounting, prepare a receipts and payments account or income and expenditure account, and apply ethical principles to accountant dilemmas.
Public sector and not-for-profit rules
Public-sector budget control, financial reporting and stewardship answer related but different questions. A budget authorizes or plans resource use; an accounting statement records events under its specified cash or accrual basis. The applicable government framework and legal authority must be verified rather than inferred from a foreign donor. Fund accounting separates resources restricted to particular purposes.
Not-for-profit organisations aim to provide services, not profit. A receipts and payments account records cash actually received and paid, including capital items and loans. An income and expenditure account records income earned and expenses incurred on an accruals basis and shows a surplus or deficit. Subscriptions in arrears are income only if considered recoverable. Life-membership receipts require a stated policy for the benefits and periods covered; a classroom may use a membership fund and staged recognition, but no universal capitalization rule is asserted. The accumulated fund replaces capital.
Worked example
Subscriptions received are 2,400,000. Opening arrears 150,000; closing arrears 200,000; opening prepaid subscriptions 50,000; closing prepaid 80,000. Income = receipts − opening arrears + closing arrears + opening prepaid − closing prepaid = 2,400,000 − 150,000 + 200,000 + 50,000 − 80,000 = 2,420,000. The closing arrears are added because they relate to the current year but were not received; the opening arrears are deducted because they were received but relate to the prior year.
Ethics
Common professional ethics frameworks discuss integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. Threats include self-interest, self-review, advocacy, familiarity and intimidation. Safeguards include disclosure, independent review, rotation and declining the engagement. Confidentiality is not absolute: disclosure may be required by law or by the professional body.
Traps
A receipts and payments account is not an income and expenditure account; it includes capital receipts and payments. Do not treat a surplus as profit available for dividend. Do not count doubtful subscriptions as income. A gift from a client can create a self-interest threat even if small. Confidentiality does not prevent reporting a legal requirement.