Accruals, Prepayments and Accounting for Partnerships
This domain tests four period-end adjustments and partnership appropriation. Exam questions often combine accruals and prepayments with partnership profit sharing, interest on capital, salaries and current accounts.
Core rules
- Accrued expense: incurred, unpaid; debit expense, credit accrual.
- Prepaid expense: paid, not incurred; debit prepayment, credit expense.
- Accrued income: earned, not received; debit receivable, credit income.
- Deferred income: received, not earned; debit income, credit liability.
- Partnership profit is shared under the partnership agreement; appropriations include salaries, interest on capital and residual profit share.
- Drawings are not expenses; they reduce the partner's current or capital account.
Worked example
Profit for the year is 60,000. Salary allowances are A 10,000 and B 5,000. Interest on capital is A 2,000 and B 3,000. Residual profit = 60,000 - 15,000 - 5,000 = 40,000, shared 3:2. A gets 24,000 and B gets 16,000. Total allocations: A 10,000 + 2,000 + 24,000 = 36,000; B 5,000 + 3,000 + 16,000 = 24,000. The appropriation account distributes profit; it does not create an expense in the statement of profit or loss.
Traps
- Sharing residual profit before salaries and interest on capital.
- Treating partner salaries as employees' wages expense.
- Recording drawings as an expense.
- Mixing accrued income with deferred income.