Partnership Accounts: notes

Features and Agreement

• Partnership: two or more people running a business together to earn a profit.
• Partnership agreement: written rules on capital, profit sharing, salaries and interest. Without one, profits are shared equally and no interest or salaries are paid.
• Unlimited liability: each partner is personally responsible for the business debts.

Capital, Current and Drawings

• Capital account: the long-term amount each partner puts into the business. Example: Tendai invests $10,000 and Rudo invests $6,000.
• Current account: a running balance for each partner's profit share, salary and interest, minus their drawings.
• Drawings: cash or goods a partner takes out for personal use. Example: Tendai draws $1,500 in cash.

Interest, Salaries and Profit Sharing

• Interest on capital: a reward for money invested, usually at an agreed rate. Example: 10% of $10,000 is $1,000.
• Interest on drawings: a charge to the partner for taking money out. Example: 5% on $2,000 drawn for a year is $100 charged to them.
• Partners' salary: a fixed payment for work done in the business. Example: Rudo earns a salary of $3,000.
• Profit sharing ratio: the fraction of remaining profit each partner gets. Example: a ratio of 3:2 splits $9,000 into $5,400 and $3,600.

Appropriation Account

• Appropriation account: shows how the net profit is shared among partners. It divides profit but does not earn it.
• Layout: start with net profit, deduct salaries and interest on capital, then share the rest by ratio. Example: net profit $20,000, less Rudo's salary $3,000 and interest on capital $1,600 (Tendai $1,000, Rudo $600), leaves $15,400. Shared 3:2, Tendai gets $9,240 and Rudo gets $6,160.
• Sharing losses: losses are shared using the same ratio unless the agreement says otherwise.

Balance Sheet and Admission

• Balance sheet: shows each partner's capital and current balances under their own headings. Example: Tendai's current balance is $1,800 and Rudo's is minus $200 (overdrawn).
• Admission of a partner: a new partner joins and must be given a share of capital and profit.
• Goodwill: the value of reputation and customers beyond the asset values. Example: goodwill of $6,000 is credited to the old partners in their 3:2 ratio, giving Tendai $3,600 and Rudo $2,400, with no cash paid.