Accounting for Partnerships
What this domain tests
You must prepare an appropriation account, distinguish capital from current accounts, and handle admission, retirement and dissolution. Questions often supply a profit-sharing ratio and ask you to distribute profit after interest on capital, salaries and interest on drawings.
Core rules
- A partnership deed sets the profit-sharing ratio, interest on capital, partner salaries and interest on drawings. Without an agreement, profits and losses are shared equally and no interest or salaries are allowed.
- Net profit is not the partners' income. It passes through the appropriation account: net profit plus interest on drawings minus interest on capital minus partners' salaries = residual profit, shared in the profit-sharing ratio.
- Interest on drawings is income to the firm, which is why it is added to the profit being appropriated.
- Fixed capital method: capital accounts stay unchanged; drawings, interest on capital, salaries and profit shares go to current accounts. Fluctuating method: everything goes to the capital accounts.
- On admission, the incoming partner pays a premium for a share of goodwill; it is credited to the old partners in their old ratio (the sacrifice ratio). Goodwill raised in the books must be written off or adjusted through capital accounts.
- On dissolution, a realisation account records proceeds of asset sales, realisation expenses and payment of liabilities; the resulting profit or loss is shared in the profit-sharing ratio.
Worked example
Net profit $60,000. Interest on capital: A $3,000, B $2,000. Salary to B $6,000. Interest on drawings: A $500, B $300. Ratio 3:2. Residual = 60,000 − 3,000 − 2,000 − 6,000 + 500 + 300 = $49,800. A gets 3/5 = $29,880; B gets 2/5 = $19,920. A's total = 3,000 + 29,880 − 500 = $32,380. B's total = 2,000 + 6,000 + 19,920 − 300 = $27,620. These add back to $60,000. Reasoning: interest on drawings is a credit to the appropriation account, so it increases the pool rather than reducing a partner's share.
Traps that cost marks
- Charging partners' salaries as a business expense instead of an appropriation.
- Deducting interest on drawings instead of adding it.
- Using the new ratio to share profit that the question says is shared in the old ratio.
- Crediting goodwill premium to the incoming partner instead of the sacrificing partners.
- Putting drawings into the capital account under the fixed capital method.
Companies, Clubs and Non-Profit Organisations
What this domain tests
The exam tests company capital structures and the statement of financial position, and the distinction between a receipts and payments account and an income and expenditure account for clubs, including subscription adjustments and the accumulated fund.
Companies
- Share capital: ordinary shares (voting, variable dividend) and preference shares (fixed dividend, usually cumulative). Share premium is the amount received above par. Retained earnings are accumulated profits.
- Debentures are long-term loans, not capital; interest on them is an expense.
- Dividends are an appropriation of retained earnings, not an expense. Interim dividends are paid during the year; a final dividend is recorded when declared.
- Corporation tax is an expense charged against profit.
- Statement of financial position order: non-current assets, current assets, share capital and premium, retained earnings, non-current liabilities (debentures), current liabilities (payables, tax payable, dividends payable).
Clubs and non-profit organisations
- Receipts and payments account: a summary of the cash book covering all cash received and paid, including capital items. It is not an income statement.
- Income and expenditure account: accrual-based, matching income earned with expenses incurred, producing a surplus or deficit.
- Accumulated fund = assets − liabilities; it is the club's capital and is increased by a surplus.
- Subscriptions must be adjusted for arrears and advances: closing arrears are a receivable, closing advances are a liability.
- Trading activities such as a bar are shown as a separate trading account, and its gross profit is added to income.
Worked example
Subscriptions received during the year $18,000. Arrears at start $1,200; advances at start $800; arrears at end $1,500; advances at end $600. Subscription income = 18,000 − 1,200 (last year's arrears collected) − 600 (next year's subscriptions received early) + 1,500 (this year's unpaid) + 800 (last year's advance now earned) = $18,500. Reasoning: only amounts belonging to this accounting period count as income, so anything received for another period is removed and anything earned but unpaid is added.
Traps that cost marks
- Treating a receipts and payments account as the income and expenditure account.
- Charging the purchase of equipment as an expense instead of depreciating it.
- Classifying debentures as share capital.
- Treating dividends or corporation tax as operating expenses in the wrong section.
- Ignoring opening arrears and advances when calculating subscription income.