Partnership Accounts and Incomplete Records
Partnership Accounts and Incomplete Records
This domain tests partnership profit appropriation and reconstruction of missing figures from incomplete records.
Partnership rules
- Partners share profits according to the partnership agreement or, if silent, equally.
- The appropriation account deducts partners' salaries and interest on capital, then shares the residual profit.
- Interest on drawings is added to distributable profit.
- Capital accounts record permanent capital; current accounts record salaries, interest, share of profit and drawings.
Incomplete records
Single-entry records require reconstruction. A statement of affairs finds opening or closing capital. Mark-up on cost and margin on sales convert sales to cost or gross profit. Control accounts and cash summaries fill missing receipts and payments.
Worked example
Profit before appropriation is ₦300,000. A partner's salary is ₦120,000 and interest on capital totals ₦20,000. Residual profit is ₦160,000, shared 3:2, giving ₦96,000 and ₦64,000. Salary and interest are appropriations of profit, not business expenses, so they do not reduce the ₦300,000 as operating expenses.
Traps that cost marks
- Treating partners' salaries and interest on capital as expenses.
- Treating drawings as an expense rather than a current account debit.
- Confusing mark-up on cost with margin on sales.
- Forgetting that interest on drawings increases distributable profit.
- Using the statement of affairs as a substitute for a cash summary when cash figures are missing.