Partnership accounts: appropriation, capital and current accounts, admission, retirement, and dissolution
Domain 5 covers partnership appropriations, capital and current accounts, admission, retirement and dissolution. Partners are not employees: salaries and interest on capital are appropriations of profit, not expenses. A fixed capital account stays unchanged; the current account records interest on capital, salary, share of residual profit, interest on drawings and drawings.
Appropriation
Start with profit for the year. Deduct interest on capital and partners’ salaries; add interest on drawings. Share the residual profit or loss in the profit-sharing ratio.
Worked example
Profit is N$90,000. A: capital N$60,000, salary N$12,000; B: capital N$40,000, no salary. Interest on capital is 5%: A N$3,000, B N$2,000. Residual = 90,000 − 3,000 − 2,000 − 12,000 = N$73,000, shared 3:2. A gets 43,800; B gets 29,200. A’s total appropriation = 3,000 + 12,000 + 43,800 = N$58,800; B’s = 2,000 + 29,200 = N$31,200. Reasoning: salaries and interest are deducted before the residual share, so they reduce the profit available to both partners.
Admission and retirement
On admission, revalue assets, recognise goodwill and establish the new ratio. Goodwill may be raised and written off to capital accounts, or adjusted through partners’ capital. On retirement, settle the retiring partner’s balance by cash or loan after revaluation and goodwill adjustments.
Dissolution
Open a realisation account: record assets sold, proceeds, expenses and liabilities paid. The realisation profit or loss is shared in the old ratio. Then close capital and current accounts and settle cash.
Traps
Expensing partners’ salaries; crediting interest on drawings to the appropriation as an expense; sharing admission profits in the old ratio; using book values rather than sale proceeds in realisation.