Chapter 8 Financial Statements for Partnerships
A
Partnership agreement
1
To prevent conflicts, partners need to agree on important issues and put them in a partnership
agreement. Such issues include:
a
Capital contribution by each partner
b
Profit and loss sharing ratio
c
Rate of interest on capital
d
Rate of interest on drawings
e
Salaries to partners
B
Differences in accounting features between partnership and sole proprietorship
2
The accounting process and the presentation of the partnership financial statements are nearly the same
as that in a sole proprietorship. There are mainly three differences:
a
The net profit (loss) should be divided among partners and the appropriation of the profit (loss)
must be shown in the income statement.
b
When a partnership uses fixed capital accounts, the capital contributed by partners will be shown
in the capital account.
The recurrent items namely, the profit or loss shared, the amount of drawings made, and the
appropriations such as the interest on capital, the interest on drawings and the salary to the partner
would be shown separately in the current account.
c
When a partnership uses fluctuating capital accounts, the capital contributed by partners and all the
recurrent items would be recorded in the capital accounts.
3
The double entries needed under the fixed capital method:
a
Transfer of year-end balances of drawings
Dr
Partners’ current accounts
Cr
b
Interest on drawings and share of loss
Dr
Partners’ current accounts
Cr
c
Profit and loss appropriation account
Interest on capital, salaries to partners and share of profit
Dr
Profit and loss appropriation account
Cr
4
Partners’ drawings accounts
Partners’ current account
If a partner makes excessive drawings, the current account of that partner will show a debit balance.
5
The double entries needed under the fluctuating capital method:
a
Transfer of year-end balances of drawings
Dr
Partners’ capital accounts
Cr
b
Interest on drawings and share of loss
Dr
Partners’ capital accounts
Cr
c
Profit and loss appropriation account
Interest on capital, salaries to partners and share of profit
Dr
Profit and loss appropriation account
Cr
6
Partners’ drawings accounts
Partners’ capital account
A capital deficiency means that a partner’s capital balance is a negative figure. He is indebted to the
partnership and will be required to repay the amount owed.
C
Income statements of a partnership
7
After the net profit is calculated, an appropriation section should be prepared to show the distribution
of profit or loss and the division of final amount arrived among partners according to the profit and
loss sharing ratio.