Partnership Accounts Final Accounts for Sole Traders and Partnerships (FSTP)

Partnership Accounts By the end of the session all learners will be able to : 1. Describe Goodwill 2. Identify the accounting entries for changes to partnerships including Introduction of a new partner Partner leaving 3. Accurately determine the allocation of profit to partners after allowing for interest on capital, interest on drawings and any salary paid to partner(s) 4. Prepare the capital and current accounts for each partner Calculate the closing balances on each partner’s capital and current accounts, including drawings

A Question.. What is one of the main DIS-ADVANTAGES of a partnership? How to share out the ‘value or benefit’ of the partnership if a partner joins or leaves

Goodwill Normally only created when a business is sold and/or acquired by new owner(s) Difference between value of business as a whole and the net value of its assets and liabilities Intangible non-current asset In partnership accounting, goodwill is created temporarily whenever a new partner joins, or an existing partner leaves, and is then written off. (This is due to the accounting concept of prudence which says that items should not be overstated)

Goodwill Admission of a new partner to the partnership 2 step process: 1. Create goodwill in the existing profit share ratio Dr GoodwillCr Partner capital a/c’s 2. Clear goodwill in the new profit share ratio Dr Partner capital a/c’sCr Goodwill

Worked Example – Kate & Ed Step ONE Create the Goodwill Estimated at £35,000 Kate & Ed share 50% of Goodwill each

Worked Example – Kate & Ed Capital KateEdRob KateEdRob Bal b/d Goodwill Step ONE Create the Goodwill Estimated at £35,000 Kate & Ed share 50% of Goodwill each

Worked Example – Kate & Ed Capital KateEdRob KateEdRob Bal b/d Goodwill Bank Rob invests £30,000 capital into the partnership

Worked Example – Kate & Ed Capital KateEdRob KateEdRob Goodwill Bal b/d Goodwill Bank Step TWO Clear the Goodwill in the NEW ratios

Worked Example – Kate & Ed Capital KateEdRob KateEdRob Goodwill Bal b/d Bal c/d Goodwill Bank Bal b/d Balance the Capital Account and carry down the balances

Worked Example – Kate & Ed Capital KateEdRob KateEdRob Goodwill Bal b/d Bal c/d Goodwill Bank Bal b/d

Goodwill Admission of a new partner to the partnership Summary 2 step process: 1. Create goodwill in the existing profit share ratio Dr GoodwillCr Partner capital a/c’s 2. Clear goodwill in the new profit share ratio Dr Partner capital a/c’sCr Goodwill

Leaving..... The effect is to credit the leaving partner with the amount of the goodwill built up whilst he or she was a partner. This amount plus the capital and current accounts can be paid from the partnerships bank account. The Current Account balance is transferred to the leaving partners Capital Account If there are insufficient amount to pay this it may be left as a loan by the leaving partner

Goodwill Existing partner leaves the partnership 2 step process: 1. Create goodwill for all partners in the existing profit share ratio Dr GoodwillCr Partner capital a/c’s 2. Clear goodwill in the new profit share ratio (leaving partner should have zero balance c/d) Dr Partner capital a/c’sCr Goodwill

Worked Example – Liam, Sam & Fred Partner Retiring Enter the opening balances in the Capital accounts Capital LiamSamFred LiamSamFred Goodwill09000 Bal b/d Bank Goodwill Loan Current a/c Bal c/d Bal b/d

Worked Example – Liam, Sam & Fred Partner Retiring Capital LiamSamFred LiamSamFred Goodwill09000 Bal b/d Bank Goodwill Loan Current a/c Bal c/d Bal b/d STEP 1 Create goodwill for all partners in the existing profit share ratio Dr GoodwillCr Partner Capital a/c’s

Worked Example – Liam, Sam & Fred Partner Retiring Capital LiamSamFred LiamSamFred Goodwill09000 Bal b/d Bank Goodwill Loan Current a/c Bal c/d Bal b/d STEP 2 Transfer the balance of the retiring partners current account

Worked Example – Liam, Sam & Fred Partner Retiring Capital LiamSamFred LiamSamFred Goodwill09000 Bal b/d Bank Goodwill Loan Current a/c Bal c/d Bal b/d STEP Write of the Goodwill using the NEW ratios i.e. 1:1

Worked Example – Liam, Sam & Fred Partner Retiring Capital LiamSamFred LiamSamFred Goodwill09000 Bal b/d Bank Goodwill Loan Current a/c Bal c/d Bal b/d STEP Pay Liam £20,000 and show the loan to the partnership

Worked Example – Liam, Sam & Fred Partner Retiring Capital LiamSamFred LiamSamFred Goodwill09000 Bal b/d Bank Goodwill Loan Current a/c Bal c/d Bal b/d STEP Balance off the account to determine the Capital Account balances for the remaining partners

Worked Example – Liam, Sam & Fred Partner Retiring Capital LiamSamFred LiamSamFred Goodwill09000 Bal b/d Bank Goodwill Loan Current a/c Bal c/d Bal b/d STEP Balance off the account to determine the Capital Account balances for the remaining partners

Goodwill Existing partner leaves the partnership Review 2 step process: 1. Create goodwill for all partners in the existing profit share ratio Dr GoodwillCr Partner capital a/c’s 2. Clear goodwill in the new profit share ratio (leaving partner should have zero balance c/d) Dr Partner capital a/c’sCr Goodwill

Now try... Question 3 Peter & Paul

Practice Questions 4 - 6

Goodwill Partner Joins Partner Leaves Change in Ratio 1. Create goodwill for all partners in the existing profit share ratio 2. Clear goodwill in the new profit share ratio 3. Draw up appropriation account apportioning the transactions for time periods before change and after change

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