SUBJECT:
ACCOUNTING
GRADE
11
CHAPTER:
PARTNERSHIPS
LESSON: ACCOUNTING EQUATION
LESSON
OVERVIEW (KNOWLEDGE AREAS)
1. Introduction 2. Partnership entries
LESSON
INTRODUCTION OF CAPITAL
•
THE EFFECT ON THE ACCOUNTING EQUATION
ACCOUNT DEBIT
Bank (favourable)
Equipment
ACCOUNT CREDIT
Capital: Charlie
Capital: Chaplin
ASSETS
OWNERS’
EQUITY
LIABILITIES
+
+
+
+
0
0
ASSETS
OWNERS’
EQUITY
LIABILITIES
-
-
0
0
MONEY/GOODS TAKEN FOR PERSONAL USE
•
THE EFFECT ON THE ACCOUNTING EQUATION
ACCOUNT DEBIT
Drawings: Charlie
Drawings: Chaplin
ACCOUNT CREDIT
Bank (favourable)
Trading Stock
SALARIES OF PARTNERS
A partner is not entitled to a salary as remuneration for his services to the partnership
unless the agreement stipulates this. One does not enter into a contract with oneself as
employer and employee.
However, when a partnership agreement does make provision for the payment of a
salary to a partner, this must be allocated to him even if there is insufficient profit for
appropriation of profit. Therefore the salaries of partners will be shown in the
Appropriation account and not in the Profit and Loss account.
A partner does not necessarily receive a monthly salary. An annual allowance is made
in terms of the partnership agreement.
•
MONTHLY SALARY PAID TO PARTNERS
DEBIT: Drawings: A and/or Drawings B
CREDIT:
Bank
•
CLOSING TRANSFER AT THE END OF THE YEAR
DEBIT:Current Account: A and Current Account: B
CREDIT:Drawings: A and Drawings: B
(TWO ENTRIES)
•
ANNUAL SALARY ALLOWANCES
DEBIT: Salary: A and/or Salary: B
CREDIT:Current Account: A and Current Account: B
•
CLOSING TRANSFER AT THE END OF THE YEAR
DEBIT: Appropriation Account
CREDIT:Salary: A and/or Salary: B
SALARIES TO PARTNERS
•
THE EFFECT ON THE ACCOUNTING EQUATION
ACCOUNT DEBIT
Drawings: A
Or
Salary: A
ASSETS
OWNERS’
EQUITY
LIABILITIES
Bank (favourable)
-
-
0
Current Account: A
0
+/-
0
ACCOUNT CREDIT
INTEREST ON CAPITAL
Interest on capital is not an operating expense, but is seen as an appropriation of
the profit. The interest is not paid in cash.
The journal entry to take interest on capital into account is as follows:
DEBIT:
Interest on Capital
CREDIT:Current Account: A and Current Account: B
•
•
•
The account for interest on capital (a nominal account) must be closed with
a closing transfer to the Appropriation account.
Interest will decrease profits.
Only one account is kept for both the partners’
The journal entry for the closing transfer is as follows:
DEBIT:
CREDIT: Interest on Capital
Appropriation Account
It is customary that interest on capital is calculated on the balance standing to the credit
of the partners’ Capital account at the beginning of the year. However, partners can
introduce additional capital. In this event, the interest must be calculated proportionally.
As in the case of partners’ salaries, the entries for interest on capital will be made even
if there is a net loss or the profit is too small to cover the interest.
INTEREST ON CAPITAL OF PARTNERS
•
THE EFFECT ON THE ACCOUNTING EQUATION
ACCOUNT DEBIT
Interest on Capital
ACCOUNT CREDIT
Current Account: A
ASSETS
OWNERS’
EQUITY
LIABILITIES
0
+/-
0
PRIMARY AND SECONDARY DISTRIBUTION
There are basically two steps involved in the sharing or distributing of the net profit
(income) obtained in the Profit and Loss account.
 Step one
Deduct the salaries of partners and the Interest on capital from the net income. This
deduction is called (or known as) the primary distribution.
 Step two
The remaining profit, after deducting the primary distribution is known as the final
division or secondary distribution.
This remaining profit (secondary distribution) is shared between (among) the
partners according to the Partnership Agreement.
It is important to be familiar with these terms viz.
•
•
PRIMARY DIVISION / DISTRIBUTION
FINAL DIVISION / SECONDARY DISTRIBUTION
These terms appear frequently in the preparation and analysis of financial statements.
The journal entry for the share of profits is as follows:
DEBIT: Appropriation Account
CREDIT:Current Account: A and Current Account: B
FOR THE SHARE OF PROFITS
•
THE EFFECT ON THE ACCOUNTING EQUATION
ACCOUNT DEBIT
Appropriation Account
ACCOUNT CREDIT
ASSETS
OWNERS’
EQUITY
LIABILITIES
0
+/-
0
Current Account: A
and
Current Account: B
Exercise 1
Analyse the following transactions under the following headings:
Account debited, Account credited, Journal, Effect on O; A and L. The business uses
the perpetual inventor system.
Example: Partner A contributes equipment as capital, R20 000.
No
eg
General ledger
Account
Account credited
debited
Equipment
Capital A
Effect on the accounting equation
Subsidiary
journal
GJ
O
+ 20 000
A
+ 20 000
L
0
TRANSACTIONS:
1. Partner A took stationery for personal use, R100.
2. Partner B increased his capital contribution by providing cash, R10 000.
3. The business paid the personal electricity account of Partner B, R102.
4. Trading stock costing R1 200 was destroyed in a fire. AB Insurance company has
agreed to pay out R1 000.
5. The partnership agreement stipulates salaries to the partners as follows:
Partner A, R50 000 p. a; Partner B, R40 000 p.a.
6. Interest on capital is due to Partner A, R6 000, and to Partner B, R4 000.
7. The remaining loss of R23 000, after the primary distribution, is to be shared equally
between Partner A and Partner B.
Homework
Columns are provided for:
Account debited, Account credited (In the General ledger), Subsidiary Journal, Amount,
Effect on O; A and L.
Analyse the following information in these columns: The business uses the perpetual
inventor system.
INFORMATION:
A partner S. Saro, contributes capital in the form of cash, R50 000, and a vehicle,
R30 000.
A partner, Y. Yano draws the following for personal use: cash, R2 000, and trading
stock, R800.
Partner S. Saro received his monthly allowance by cheque, R3 000.
A year-end adjustment is made in respect of the salary allowance for S. Saro, R36 000.
Interest on capital is due to the two partners as follows: Saro, R5 000, and Yano,
R2 500.
The remaining profit of R66 000, after the primary distribution, is to be shared between
Saro and Yano in the ratio 3: 1 respectively.