Financial Statements for Partnerships (Cambridge (CIE) IGCSE Accounting): Flashcards
Exam code: 0452 & 0985
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Define partnership agreement.
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Define partnership agreement.
A partnership agreement is a document setting out the terms on which the partnership operates.
Its purpose is to help the partners avoid disagreements later on.
Complete the sentence about a partnership agreement:
The agreement states the rate of interest to be paid on partners'
and the rate to be charged on their .The completed sentence is:
The agreement states the rate of interest to be paid on partners' capital and the rate to be charged on their drawings.
Why are partners given interest on their capital?
To reward them for investing their own money in the business.
A partner who has put in more capital therefore earns more interest.
Why is interest charged on partners' drawings?
To discourage partners from taking money out of the business.
It makes withdrawing money cost the partner something, which is the opposite purpose to interest on capital.
Why might a partner lend money to the business rather than invest more capital?
Because a loan is repayable, so the money is not tied up in the business, and it gives the partner a guaranteed income from the repayments.
It also avoids having to alter the partnership agreement.
How are losses shared between partners?
In the same agreed ratio as profits.
The agreement covers the distribution of profits and losses, so one ratio serves for both.
Which partnership items are kept out of the statement of profit or loss?
Interest on partners' capital, interest on partners' drawings, and partners' salaries.
All three are dealt with in the appropriation account instead.
Why is a partner's salary not an expense of the business?
Because it is not a payment for work in the way an employee's wage is: it is an agreed way of dividing the profit between the partners.
An employee's salary is a genuine expense and does appear in the statement of profit or loss.
True or False?
Interest on a partner's loan is treated differently from interest on a partner's capital.
True.
Loan interest is a finance cost, an expense in the statement of profit or loss. Interest on capital is a share of the profit and is dealt with in the appropriation account.
A partner lends the partnership $5000 with loan interest at 5% per annum. How does that appear in the statement of profit or loss?
As a finance cost of $250, since $5000 × 5% = $250.
It is subtracted after the profit from operations to give the profit for the year.
Do the adjustments after a trial balance work differently for a partnership?
No, they work exactly as they do for a sole trader.
Depreciation, accruals, prepayments and irrecoverable debts are all dealt with in the same way.
Define the appropriation account.
The appropriation account shows how a partnership's profit or loss for the year is divided between the partners.
It is prepared after the statement of profit or loss, following the terms of the partnership agreement.
Why is the appropriation account prepared after the statement of profit or loss?
Because it starts with the profit for the year, which is what the statement of profit or loss produces.
There is nothing to divide between the partners until that figure is known.
Is the appropriation account part of the double entry system?
Yes.
The profit or loss for the year is transferred into it from the statement of profit or loss by a double entry, rather than simply being copied across.
Complete the sentence about transferring a profit:
A profit for the year is moved into the appropriation account by
the statement of profit or loss and the appropriation account.The completed sentence is:
A profit for the year is moved into the appropriation account by debiting the statement of profit or loss and crediting the appropriation account.
Why is the interest on drawings added rather than subtracted?
Because the account is written from the business's point of view, and that interest is money the partners owe the business.
It therefore increases the amount available to share out between them.
What is subtracted from the profit before the residual profit is found?
The interest on partners' capital and the partners' salaries.
What remains is the residual profit, which is then shared in the agreed ratio.
The profit is $30 000, interest on drawings totals $850, interest on capital $4250 and salaries $6000. What is the residual profit?
$20 600.
Add the interest on drawings, then subtract the interest on capital and the salaries: $30 000 + $850 − $4250 − $6000 = $20 600.
What is recorded in a partner's capital account?
Only the capital the partner has invested: the original amount, plus anything put in later, less any capital withdrawn.
Drawings and loans from the partner are never entered there.
Why do partnerships keep a capital account and a current account separately?
To keep permanent changes apart from temporary ones.
The capital account then shows plainly what each partner has invested, which also makes the interest on capital straightforward to calculate.
Which entries go on the credit side of a partner's current account?
Anything that increases what the business owes the partner.
That means the profit share, the interest on capital, the interest on a loan, and a partner's salary.
Which entries go on the debit side of a partner's current account?
Anything that decreases what the business owes the partner.
That means the loss for the year, the partner's drawings, and the interest on drawings.
True or False?
A partner receives cash when they are awarded a salary or interest on capital.
False.
No money moves at that point. The amount is credited to the partner's current account, and they may then take it out as drawings, which is when the bank account is used.
What does a debit balance on a partner's current account mean?
That the partner has taken more out of the business than their share of the profits.
A credit balance means the opposite: they have left part of their share in the business.
What is the double entry for awarding interest on a partner's capital?
Debit the appropriation account and credit the partner's current account.
The appropriation account is where the profit is being divided, and the current account is where the partner's share builds up.
Complete the sentence about a loan from a partner:
A loan from a partner is not part of their capital account: it is shown as a
in the statement of financial position, and the interest on it is added to their account.The completed sentence is:
A loan from a partner is not part of their capital account: it is shown as a liability in the statement of financial position, and the interest on it is added to their current account.
What is the double entry for charging interest on a partner's drawings?
Debit the partner's current account and credit the appropriation account.
The partner owes the business that interest, so the amount the business owes them falls.
How does a partnership's statement of financial position differ from a sole trader's?
Only in the capital section.
The assets and liabilities are set out in exactly the same way, but each partner's capital account and current account balances are shown separately.
In the capital section, how is a debit balance on a partner's current account shown?
In brackets, and treated as a negative figure when the section is totalled.
It is subtracted rather than added, because that partner owes money back to the business.
Which columns are used in the capital section of a partnership's statement of financial position?
One column for each partner, and one for the total.
Each partner's capital and current account balances go in their own column, and the combined figures go in the total column.
A partner's capital account stands at $12 000 and their current account works out at a debit balance of $1000. What is their total?
$11 000.
The current account balance is written as (1000) and subtracted, so $12 000 − $1000 = $11 000.
True or False?
The two halves of a partnership's statement of financial position still have equal totals.
True.
The total assets equal the partners' combined capital plus the liabilities, exactly as they do for a sole trader.
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