FINAL ACCOUNTS OF A PARTNERSHIP BUSINESS
FINANCIAL ACCOUNTING SSS3 FIRST TERM
WEEK 2
FINAL ACCOUNTS OF A PARTNERSHIP BUSINESS
Performance Objectives
Students should be able to:
1. Explain (a) the appropriation account (b) the Balance sheet
2. What is interest on capital?
Contents
PROFIT AND LOSS APPROPRIATION ACCOUNT OF A PARTNERSHIP
This, as the name implies, is the account where either the profit or loss of the partnership business is shared between or among the partners as stipulated in the partnership agreement. The profit and loss appropriation account marks the beginning of the difference between the final accounts of a sole trader and that of a partnership. This is because while the sole trader does not share his profit with anybody, the profit of the partnership must be shared by the partners.
Some Terminologies in profit & Loss Appropriation Account of a partnership
1. Drawings:- Partners can withdraw at regular or irregular intervals, from the sum they are entitled to at the end of the year. The total drawings are credited to the cash book and debited to current accounts.
2. Interest on drawings:-This is the interest charged on drawings made by the partners. In order to discourage or reduce the amount of cash withdrawn, a fixed sum or % will be charged as interest. The interest in a drawing will increase net profit and discourage drawings. It can be calculated on monthly basis.
Interest is calculated from the date the amount is withdrawn to the end of the financial year.
3. Partners’ Salary: - The agreement made provision for salary to be paid to active partners. It is desirable to compensate the active partner for the day-to-day running of the business.
4. Interest in Capitals: Partners contribute different amounts as capital. In order to compensate the partners for capital contributed, interest on capital is allowed.
BALANCE SHEET OF A PARTNERSHIP BUSINESS
There is no significant difference between the balance sheet of a sole trader and that of a partnership. The only difference is in the display of capital accounts and current accounts of partners which will be illustrated in the formats below:-
Additional Information
i. Stock at close to N15,000
ii. Salaries and wages accrued N 1,000
iii. Electricity prepaid N 20
iv. Interest on capital at 10%
v. Interest in drawings at 5%
vi. Depreciate motor can 10% on the cost
vii. Partnership salary: O N 2,000
viii. Provision for doubtful debts to be reduced to N 200
viii. O withdrew N 7,000 goods for own use
You are required to:
a. Prepare the Trading, Profit and loss account for the year ended 31 Dec 2006.
b. Partners’ capital account
c. Balance sheet as of 31st Dec. 2006
READING ASSIGNMENT
Essential Financial Accounting by O. A. Longe, Pages 249 – 258
WEEKEND ASSIGNMENT
Use the following information to answer questions 1 – 5. A, B, and C are in partnership sharing profits and losses in the ratio of 3:2:1 respectively. Their capital accounts are A: N60,000 B. N40,000 and C: N 30,000. Interest on capital is agreed at 5% p.a. interest on drawings is also agreed at 5% p.a. Their drawings for the year are A: N 6,000 B: N 4,000 and C: N 3,000. The profit for the year before an appropriation is N 30,000 C is entitled to a partnership salary of N2,000 p.a
1. What is the total of A and B’s interest on capital? (a) N4,000 (b) N3,000 (c) N5,000 (d) N10,000
2. What is the total of B and C’s interest in drawing? (a) N350 (b) N250, (c) N450 (d) N400
3. Total interest on the partners’ capital for the year is (a) N7,000 (b) N6,000 (c) N6,500 (d) N5,500
4. Total credit entries in the appropriation account is (a) N550 (b) N30,000 (c) N35,500 (d) N30,550
5. Which of the following is not debited to the profit and loss appropriation account?
(a) C’s salary (b) Partner’s interest in the capital (c) Share of profit (d) Share of loss
THEORY
1. Write short notes on (a) Interest in the capital (b) Interest in drawing
2. Give the double entries for the following in the final account of a partnership. (i) Interest on drawings N500 (ii) Partnership salary N3,000 (iii) Interest on capital N5,000 (iv) Share of profit N10,000
GENERAL EVALUATION
- List five items that are debited in the sales ledger control account
- List five items that are credited in the purchases ledger control account
- List five subsidiary books from which the sales ledger control is compiled
- State five contents of the Appropriation Account of a partnership
- List five characteristics of depreciable assets