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PARTNERSHIPS Partnerships This is when two or more persons enter into a business venture with the intention to make money. Partnership Agreement  Legal.

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Presentation on theme: "PARTNERSHIPS Partnerships This is when two or more persons enter into a business venture with the intention to make money. Partnership Agreement  Legal."— Presentation transcript:

1 PARTNERSHIPS Partnerships This is when two or more persons enter into a business venture with the intention to make money. Partnership Agreement  Legal document containing terms of agreement  Signed by partners  Used to avoid future disputes Items found In Agreement  Share of profits/losses  Capital Contribution  Interest charged on drawings  Interest on Capital  Amount of salary to be paid  Duties and responsibilities  Agreement on admission of new partner

2 ADVANTAGES/DISADVANTAGES OF PARTNERSHIP Advantages  Increased Capital – Expand firm  Share burden of work/holidays  Allows for specialisation (lawyer may deal with criminal law, corporate law, or road traffic offences etc Disadvantages  Profits must be shared  More chance of disagreement  Decisions slow  Partners have Unlimited Liability

3 Terms Associated with Partnership Accounts Unlimited Liability Current Account Capital Account Profit Sharing Ratio Appropriation Account Limited Liability

4 Partnership Terms INTEREST ON CAPITAL Partners are awarded cash for the amount of money they invested in the business. This cash is taken from the NET PROFIT in the Appropriated Section of the Accounts It is also added to the partners CURRENT ACCOUNT (source of income) PROFIT SHARING RATIO In a partnership the ‘Residual’ Profits are normally shared based on the amount of capital each partner has invested in the company. EG if H Larsson invests £20,000 capital and G Best invests £10,000 into their business.The share of profits should a ratio of 2:1 Any share in profits partners receive is entered in each partners CURRENT ACCOUNT

5 Terms Associated With Partnership CURRENT ACCOUNT Contains any share of profits, drawings, interest on capital. Interest on drawings Allows distinction between capital investment and profit CAPITAL ACCOUNT Identifies initial fixed capital Records further investment Forms basis for profit calculation Identifies fluctuations in capital RESIDUAL PROFIT This is the amount of profit remaining after any payments have been made or taken from each partner This is the amount that is shared between partners

6 Terms Associated With Partnership UNLIMITED LIABILITY This is where the personal assets belonging to an individual are sold in order to cover any outstanding debts owed to the bank e.g. house; car etc LIMITED LIABILITY In the event of the company going bankrupt the owner/investor will only lose the original capital that they invested in the company nothing more.

7 Procedure for Creating Partnership Accounts 1Complete notes for TPL & Balance sheet 2Work down to RESIDUAL PROFIT in TPL Acc 3Work out share of profits for each partner 4Complete appropriation account 5Complete partner’s current accounts 6Create balance sheet

8 Template for Partnership PROFIT AND LOSS APPROPRIATED SECTION FOR Partner 1 AND Partner 2 FOR YEAR ENDED (Enter Date) ££££££ NET PROFITx ADD Interest on Drawings Partner 1x Partner 2xx x LESS Salary (insert name)x Interest on Capital Partner 1x Partner 2xx RESIDUAL PROFITx SHARE OF RESIDUAL PROFIT Partner 1 x Partner 2 xx Should Agree

9 Template for Partnership CURRENT ACCOUNT PARTNER 1 Details DRCRBAL Opening Bank BalanceX cr +Interest in CapitalXX cr +SalaryXX cr +Share of ProfitXX cr -DrawingsXX crX - Interest in DrawingsXX crX (Closing Bank Balances get carried forward to Balance Sheet- Financed By Section)

10 Template for Partnership CURRENT ACCOUNT PARTNER 2 Details DRCRBAL Opening OverdraftX dr +Interest in CapitalXX dr +SalaryXX cr +Share of ProfitXX cr -DrawingsXX cr - Interest in DrawingsXX cr (Closing Bank Balances get carried forward to Balance Sheet- Financed By Section)

11 Template for Partnership BALANCE SHEET OF (PARTNER 1 AND PARTNER 2) AS AT (Enter Date) ££££££ CostDepNBV FIXED ASSETS Equipmentxxx Premises xxx x CURRENT ASSETS Stockx Debtorsx Prepayments etcx x CURRENT LIABILITIES Creditorsx Accrualsx Bank Overdraftx VAT (Cr)x -x WORKING CAPITAL + x NET ASSETSx ADD

12 Template for Partnership BALANCE SHEET OF (PARTNER 1 AND PARTNER 2) AS AT (Enter Date) £££ FINANCED BY CAPITAL ACCOUNT BALANCES Partner 1x Partner 2 xx CURRENT ACCOUNT BALANCES Partner 1x Partner 2xx NET WORTHx IF BALANCE SHEET BALANCES THEN NET ASSETS (FROM PREVIOUS PAGE) = NET WORTH

13 Procedure for Creating Partnership Accounts 1Complete notes for TPL & Balance sheet 2Work down to RESIDUAL PROFIT in TPL Acc

14 Exercise 1 – Stewart & Kinsey Notes Interest on Capital 20% P Stewart Capital20,000Bal Sheet / Cap Acc Interest4,000App Acc/ Current Acc S Kinsey Capital15,000Bal Sheet / Cap Acc Interest3,000 App Acc/ Current Acc Interest on Drawings 10% P Stewart Drawings9,000Current Acc Interest charged900App Acc/ Current Acc S Kinsey Drawings 10,000Current Acc Interest Charged1,000 App Acc/ Current Acc

15 EX 1 Profit & Loss Appropriation Acc of P Stewart & S Kinsey for the year ended 31 Mar 2011 ££ NET PROFIT16,790 ADD Interest on Drawings P Stewart900 S Kinsey1,000 1,900 18,690 LESS Salary Kinsey8,000 Interest on Capital Stewart4,000 Kinsey3,00015,000 RESIDUAL PROFIT 3,690

16 Procedure for Creating Partnership Accounts 3Work out share of profits for each partner

17 Exercise 1 – Stewart & Kinsey Notes Share of Residual Profit 3:2 P Stewart Residual profit3,690 Profit 3/52,214App Acc/ Current Acc P Kinsey Residual profit3,690 Profit 2/51,476App Acc/ Current Acc

18 Procedure for Creating Partnership Accounts 4Complete appropriation account

19 EX 1 Profit & Loss Appropriation Acc of P Stewart & S Kinsey for the year ended 31 Mar 2011 ££ RESIDUAL PROFIT3,690 SHARE OF RESIDUAL PROFIT P Stewart 2,214 S Kinsey 1,4763,690

20 Exercise 2 Glynn and Maloy PROCEDURE Complete notes for TPL & Balance sheet Work down to RESIDUAL PROFIT in TPL Acc NOTES None at moment No interest on capital or drawings

21 EX 2 Profit & Loss Appropriation Acc of Glynn & Maloy for the year ended 31 Dec 2010 £ NET PROFIT7,000 LESS Salary Glynn1.0001,000 RESIDUAL PROFIT6,000

22 Procedure for Creating Partnership Accounts 3Work out share of profits for each partner

23 Exercise 2 – Glynn & Maloy Notes Share of Residual Profit 2:1 Glynn Residual profit6,000 Profit 2/34,000App Acc/ Current Acc Maloy Residual profit6,000 Profit 1/32,000App Acc/ Current Acc

24 Procedure for Creating Partnership Accounts 4Complete appropriation account

25 EX 2 Profit & Loss Appropriation Acc of Glynn & Maloy for the year ended 31 Dec 2010£ RESIDUAL PROFIT6,000 SHARE OF RESIDUAL PROFIT Glynn 4,000 Maloy 2,0006,000

26 Exercise 2 b) – Current Acc - Glynn DateDetailsDrCrBal 30 DecOpening Bal200200 Cr 30 Dec Salary 1,000 1,200 cr 30 Dec Share of Profit 4,000 5,200 cr 30 Dec Drawings 1,500 3,700 cr

27 Exercise 2 – Theory a)Explain the term Capital Expenditure This is the money spent on buying assets b)Give 2 examples of Capital Exenditure Machinery, Vehicles, Fixtures & Fittings c)Explain the term Revenue Expenditure This is money spent on the running of the business – eg paying bills d)Give 2 examples of Revenue Expenditure Rent, Rates, Telephone, Heating etc

28 EX 3 Cagney & Lacey Profit & Loss Appropriation Acc of Cagney & Lacey for the year ended 30 Apr 11£ NET PROFIT33,000 LESS Salary – Cagney10,000 Salary - Lacey8,00018,000 RESIDUAL PROFIT 15,000

29 Exercise 3 – Cagney & Lacey Notes Share of Residual Profit 2:1 Cagney Residual profit15,000 Profit 2/310,000App Acc/ Current Acc Lacey Residual profit15,000 Profit 1/35,000App Acc/ Current Acc

30 EX 3 Profit & Loss Appropriation Acc of Cagney & Lacey for the year ended 30 April 2011£ RESIDUAL PROFIT15,000 SHARE OF RESIDUAL PROFIT Cagney 10,000 Lacey 5.00015,000

31 Exercise 3 – Current Accounts DateDetailsDrCrBal 30 AprOpening Bal 10,000 750 Cr 30 AprSalary 10,000 10,750 Cr 30 Apr Share of Profit 750 20,750 Cr 5,000 30 Apr Drawings 15,750 Cr Cagney DateDetailsDrCrBal 30 AprOpening Bal 8,000 125 Dr 30 AprSalary 5000 7,875 Cr 30 Apr Share of Profit 125 12,875 Cr 10,000 30 Apr Drawings 2,875 Cr Lacey

32 EX 3 Balance Sheet of Cagney & Lacey as at 30 April 2004 £££ Fixed AssetsCostDepNBV Current Assets Less Current Liabilities Equipment12,1281,00011,128 Premises31,2440 42,372 Stock8,900 Debtors3,678 12,578 Bank Overdraft6,200 Vat125 -6,325 Working Capital +6,253 NET ASSETS 48,625

33 EX 3 Balance Sheet of Cagney & Lacey as at 30 April 2004 (Continued) £££ Financed by Capital Acc Cagney20,000 Lacey10,00030,000 Current Acc Cagney 15,750 Lacey2,87518,625 NET WORTH48,625

34 Introducing a New Partner When a new partner is introduced to a company AT THAT POINT the final accounts of the company are drawn up and the profit appropriated A NEW Partnership Agreement is then drawn up Any further Accounts drawn up should take the conditions in the new agreement into account

35 Exercise 6 – Williams & Stewart Notes Interest on Capital Williams Capital45,000 Interst 5%2,250 per year Divide by 2 1,125 6 months Stewart Capital30,000 Interst 5%1,500 per year Divide by 2 750 6 months

36 EX 6 Profit & Loss Appropriation Acc of Williams & Stewart for the 6 months ending 30 June 2010£ NET PROFIT8,200 LESS Salary – Stewart2,500 Interest on Capital Williams1,125 Stewart7504,375 RESIDUAL PROFIT3,825

37 Exercise 6 – Williams & Stewart Notes Share of Profit Williams Residual Profit3,825 3/52295 Stewart Residual Profit3,825 2/51,530

38 EX 6 Profit & Loss Appropriation Acc of Williams & Stewart for the 6 months ending 30 June 2010£ RESIDUAL PROFIT3,825 Share of residual profit Stewart2,295 Williams1,5303,825

39 Exercise 6 – Current Accounts DateDetailsDrCrBal 30 JunOpening Bal 2,500 800 Dr 30 JunSalary 750 1,700 Cr 30 Jun Interest on Cap 2,450 Cr 1,530 30 Jun Share of profit 3,980 Cr Stewart 2,400 30 Jun Drawings * 1,580 Cr *Drawings - £400 per month x 6 months

40 Exercise 6 Part B – Williams, Stewart & Dennis Notes Interest on Capital Williams Capital60,000 (45,000 + 15,000) Interst 10%6,000 per year Divide by 2 3,000 6 months Stewart Capital30,000 Interst 10%3,000 per year Divide by 2 1,500 6 months Dennis Capital15,000 Interst 10%1,500 per year Divide by 2 750 6 months

41 EX 6 – Part B Profit & Loss Appropriation Acc of Williams Stewart & Dennis for the 6 months ending 31 Dec 2010£ NET PROFIT22,250 LESS Salary – Williams3,000 Interest on Capital Williams3,000 Stewart1,500 Dennis7508,250 RESIDUAL PROFIT14,000

42 Exercise 6 – Williams & Stewart Notes Share of Profit Total Capital = £105,000 Williams = 60/105 = 4/7 Residual Profit14,000 4/78,000 Stewart = 30/105 = 2/7 Residual Profit14,000 2/74,000 Dennis = 15/105 = 1/7 Residual Profit14,000 1/72,000

43 EX 6 Part B Profit & Loss Appropriation Acc of Williams Stewart & Dennis for the 6 months ending 31 Dec 2010£ RESIDUAL PROFIT14,000 Share of residual profit Stewart8,000 Williams4,000 Dennis2,00014,000

44 Exercise 8 – a) Correcting Net Profit Lawson & Johnston£ Net Profit24000 Add Wages3000 Depreciation (£1500-£1000)500 Discount Received500 4000 28000 Less Sales Returns300 Office Stationery100400 Corrected Profit£27600

45 GOODWILL  Successful business build a reputation over a number of years  This reputation is linked to their name  Example Marks & Spencer is associated with good quality products at a reasonable price They also have lots of loyal customers.  This reputation and loyalty associated with a business is called Goodwill  Goodwill is a an asset to the company and is acquired through time but it is not specifically bought like other assets  It is also difficult to quantify in money terms  Goodwill therefore is known as an Intangible Asset (cannot be seen or touched)

46 GOODWILL HOW TO TREAT GOODWILL IN THE FINAL ACCOUNTS:  It is entered just below the fixed assets in the Balance Sheet under a new heading – Intangible Assets WRITING OFF GOODWILL In this instance the value of Goodwill should be  Entered as Zero in the balance sheet

47 GOODWILL Calculating goodwill  Calculated by taking the average weekly, monthly or annual sales over a period of time  Goodwill is A DEBIT balance in the ledger  No Guarantee that a purchaser or an incoming partner will agree to the value of goodwill.  This is the main reason that goodwill very rarely appears in the balance sheet  If goodwill is introduced, when a new partner joins, it is normally shared between the original partners based on their PROFIT SHARE RATIO.  This amount is then CREDITED to each partners CAPITAL ACCOUNT

48 REVALUATION OF ASSETS  Fixed and current Assets of any Partnership Account are normally REVALUED with the introduction of a new partner RISE IN VALUE  Split the rise between the partners according to their profit sharing ratio.  Credit (Add) the amount for each partner in his/her CAPITAL ACCOUNT DROP IN VALUE  Split the decrease between each partner according to their profit sharing ratio  Debit (subtract) the amount for each partner from the value in his/her CAPITAL ACCOUNT

49 Exercise 9– Bendix & Chan Question ai)  Chan has paid a premium for goodwill because the business –is a going concern –Has a large number of customers will continue to use the business –Has a good reputation –Has experienced and efficient staff –Situated in a good location –It has established links with suppliers

50 Exercise 9 – Bendix & Chan Question aii)  Calculate the initial amount of capital for each partner Bendix Original capital £53,000 Add good will£10,000 £63,000 Less Loss in Revaluation £ 3,000 £60,000 Chan Original capital £40,000

51 Exercise 9 – Bendix & Chan Notes General Reserve Net profit30,000 Gen Res 20%6,000 Interest on Capital Bendix Capital60,000 Interest 5%3,000 Chan Capital40,000 Interest 5%2,000

52 Exercise 9 – Bendix & Chan Notes Interest on Drawings Bendix Drawings10,000 Interest 20%2,000 Chan Drawings5,000 Interest 20%1,000

53 Ex 9 Bendix & Chan Profit & Loss Appropriation Acc of Bendix & Chan for the year ending 31 May 2011£ NET PROFIT30,000 Less Transfer to Gen Reserve6,000 24,000 ADD Interest on Drawings Bendix2,000 Chan1,0003,000 27,000 LESS Salary – Chan2,000 Interest on Capital Bendix3,000 Chan2,0007,000 RESIDUAL PROFIT20,000

54 Exercise 9 – Bendix & Chan Notes Profit Sharing Ratio Capital Bendix60,0003 Chan40,0002 = 3:2 Bendix Residual Profit20,000 3/512,000 Chan Residual Profit20,000 2/58,000

55 Ex 9 Bendix & Chan Profit & Loss Appropriation Acc of Bendix & Chan for the year ending 31 May 2011£ RESIDUAL PROFIT20,000 SHARE OF RESIDUAL PROFIT Bendix12,000 Chan8,00020,000

56 Exercise 9 – Q1(iv) DateDetailsDrCrBal 31 MayOpening Bal 2,000 0 Cr 31 MaySalary 2,000 2,000 Cr 31 May Interest on Cap 4,000 Cr 8,000 31 May Share of profit 12,000 Cr Current Account - Chan 5,000 31 May Drawings 7,000 Cr 1,000 31 May Int on Drawings 6,000 Cr

57 Error / OmissionEffect on Profit Amount Exercise 9 – Q2(i) Sales understatedIncrease +450 Bendix & Chan Purchases Overstated Increase +2,700 Wrong type of account Decrease -70 Wages understated Decrease -180 Omission of VAT Nil 0 Wrong type of account Decrease -100 Loss on asset Decrease -800 Change on profit +2,000 Increase

58 Ex 9 Bendix & Chan Additional Appropriation Acc of Bendix & Chan for the year ending 31 May 2011£ Change to profit2,000 Less Transfer to Gen Reserve (20%)400 RESIDUAL PROFIT1,600 SHARE OF ADDITIONAL RESIDUAL PROFIT Bendix960 Chan6401,600

59 (H) Partnership revision Bogart & Bacall Notes Bacall Interest on Capital Bacall Interest 10%3,000 Capital = 3,000 x 10 = 30,000 Drawings Capital30,000 Drawings 25%7,500

60 (H) Partnership revision Bogart & Bacall DetailsDrCrBal Opening bal0 Int on Capital 3,000 8,000 3,000 Cr Salary 7,500 11,000 Cr Drawings 3,500 Cr 1,500 Int on Drawings 2,000 Cr a)Current Account - Bacall 4,000Share of profit 6,000 Cr

61 (H) Partnership revision Bogart & Bacall b) Bogart i)Capital Invested (twice as much as Bacall) = 30,000 x 2 = £60,000 ii)Bogart Annual Drawings Capital60,000 Drawings 25%£15,000 iii) Bogart Share of Profit 3:2 = Bacall’s profit = £4,000 (2/5) Bogart = 3/5 so (£4,000 / 2) = £2,000 (1/5) = £2000 x 3 = £6,000 = 3/5

62 (H) Partnership revision Bogart & Bacall Profit & Loss Appropriation Acc of Bogart & Bacall for the end of Year 1££ NET PROFITx ADD Interest on Drawings Bacall Bogartl LESS Salary – Bacall Interest on Capital Bogart Bacall RESIDUAL PROFIT SHARE OF PROFIT Bogart Bacall 1,500 3,0004,500 8,000 6,000 3,000 17,000 6,000 4,000 10,000 Reverse workings = 10,000 + 17,000 – 4,500 22,500

63 (H) Partnership revision Bogart & Bacall di ) Introduction of a new partner Bacall Share of Goodwill = 15,000 x 2/5 = 6,000 Share of deficit = 20,000 x 2/5 = 8,000 CAPITAL ACCOUNT -BACALL DetailsDrCrBal Balance 30,000 6,000 30,000 Cr Share of premium 8,000 36,000 Cr Share of deficit 28,000 Cr

64 (H) Partnership revision Bogart & Bacall d) ii) Profit Sharing Ratio New partners share = 25% = 1/4 Left over = 3/4 (to be split in a ratio of 3:2) Bacall – Share of profit = 2/5 x 3/4 = 6/20 = 3/10= 30% To Check Bogart = 3/5 x 3/4 = 9/20= 45% Cagney= 25% 100%


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