Financial Statements of Partnerships and Limited Companies
What you must understand
For a partnership, prepare an appropriation account showing interest on capital, partners' salaries, interest on drawings, and the sharing of residual profit or loss in the agreed ratio. Know the partners' capital and current accounts. For a limited company, prepare an income statement and a statement of financial position showing share capital, retained earnings, and the treatment of dividends and corporation tax. Understand the difference between ordinary shares and preference shares, and between share capital and reserves.
Traps in questions
- Charging interest on drawings to the income statement; it belongs in the appropriation account.
- Forgetting that partners' salaries are appropriations, not expenses.
- Treating dividends as an expense; they are a distribution of profit.
- Mixing share premium (a reserve) with share capital.
Worked example
Partners X and Y share profits 3:2. Net profit $30,000. Interest on capital: X $2,000, Y $1,000. Salary to Y $5,000. Residual = $30,000 − $2,000 − $1,000 − $5,000 = $22,000. X gets 3/5 × $22,000 = $13,200 plus $2,000 = $15,200. Y gets 2/5 × $22,000 = $8,800 plus $1,000 plus $5,000 = $14,800. Rule of thumb: appropriate first, then share the remainder.