PARTNERSHIP ACCOUNTS 2

Partners’ Accounts

The partners’ capital and current accounts are to be presented in columnar form.

Among other items, both the drawings and interest on drawings should be shown in the current account

(debited to the current account).

 

 

 

Current Account

Shows the amount owed to or owed from the partnership to the partners.

The account shows the profit earned, drawings taken, partners’ salaries, interest on capital, interest on loan and so on each year.

 

 

 

What items are credited to the current account?

Items that are due to the partners (salary, interest on capital and profit sharing and so on).

 

 

 

What items are debited to the current account?

Items that are due from the partners to the partnership firm such as interest on drawings or amounts withdrawn by the partners.

 

 

 

 

Example: Columnar format of the Current Account
				Partners'  Current  Account

		Partner A		Partner B					Partner A		Partner B
Int on drawings		xxx		xxx			Int on capital		xxx		xxx
Drawings		xxx		xxx			Int on loan		xxx		xxx
							Salary to partner		xxx		xxx
							Profit sharing		xxx		xxx
		xxx		xxx					xxx		xxx

 

 

 

 

 

 

Important notes:

-          assets and liabilities from individual sole proprietors are introduced to the business at the value to the partnership, but not at the value to the sole traders.

 

-          Interest on drawings are added to the partnership profit before the appropriation.

 

 

-          Interest on partners’ loan is an expense in the Profit & Loss Account. It is therefore not an appropriation.

 

 

 

 

 

 

Admission/Retirement of partners

Goodwill

 

This is the excess of the business value over its net value of the individual assets and liabilities.

It is an intangible asset of the business.

 

Situation when a goodwill is required to be created

 

-          when a partnership is formed from a sole proprietor business

 

-          when there is a change in the profit sharing ratio

 

 

-          when there is either an admission or a retirement of partners taking place

 

-          when there is special skill introduced by a particular new partner being admitted to the partnership

 

However, the partners may not wish the goodwill to remain in the partnership and this means it may

need to be written out of the books.

 

Admission of new partner

-          the new partner may be required to pay for a share of the goodwill.

 

-          the new partner may not be required to pay for a share of the goodwill.

 

Retirement of a partner

-          entitled to be paid a share of the capital

 

-          a share of any profits and increase in the value of the business or assets

-           

This is done using the Revaluation Account.

-          the balance in the current account is then transferred into the capital account which will then either be paid in cash

or transferred into a loan account.

 

Important notes

Goodwill is written into the books using the old profit sharing ratio and written out of the books using the new profit sharing ratio.

Revaluation of Account

Goodwill is not the only adjustment when there is a change in the partnership.

It should include the partnership’s assets and liabilities too. These are done via revaluation account.

 

A)     An increase in asset value

Debit                     Asset (the increased amount)

Credit                                    Revaluation Account

 

B)      A decrease in asset value

 

Debit                     Revaluation Account

 

Credit                                    Asset (the decreased amount)

 

C)      An increase in value of liability

Debit                     Revaluation Account

Credit                                    Liability Account (the decreased amount)

 

 

 

 

 

 

 

 

 

 

 

IMPORTANT REMINDER

 

THIS IS TO PROVIDE STUDENTS A COURTESY REMINDER THAT THIS BLOG IS CATERED

TO HELP ACCOUNTANCY STUDENTS AT BASIC LEVEL TO GAIN A QUICK SUMMARY OF

MAJORLY ALL THE BASIC COMPONENTS OF THE BOOK-KEEPING AND ACCOUNTING STUDIES.

 

IT IS NOT MEANT TO PROVIDE A COMPLETE CONTENT OF THE SUBJECT MATTER.

 

THEREFORE, STUDENTS ARE ADVISED TO TAKE THIS INFORMATION RESOURCE AS A SUPPLEMENTARY READING ONLY.

 

THIS READING MATERIAL IS ONLY A SUMMARY OF WHAT IS ESSENTIAL IN GETTING  A GOOD

UNDERSTANDING BUT NOT AN EXHAUSTIVE ONE OF THE RELATED TOPIC.

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