![]() The double entry is completed by a credit entry in the current account of the partner to whom the salary is paid.Ĭharging interest on drawings is a means of discouraging partners from withdrawing excessive amounts from the business. This means that a debit entry is needed in the appropriation account. As such, it reduces the amount of profit available for sharing in the profit or loss sharing ratio. Paying interest on capital is a means of rewarding partners for investing funds in the partnership as opposed to alternative investments. The double entry is completed by a debit entry in the appropriation account.Īlmost always, interest on capital will be paid on partners’ capital balances only – although the balances on the current accounts are actually part of the total capital balance, it is normal to exclude them from the value of capital on which interest is paid. As the amount is guaranteed, it must be dealt with through a credit entry in the partner’s account (usually the current account) before the residual profit is shared. However, as partners are the owners of the business, any amounts that are paid to them under the partnership agreement are part of their share of the profit. The salaries of employees are business expenses that are written off to the statement of profit or loss, thereby reducing profit for the year. In some ways, the term ‘salaries’ is a misleading description. As each appropriation is dealt with, the double entry is completed through entries in both the appropriation account and the partner’s current account (if current accounts are not maintained by the partnership, the entries will be made in the capital accounts). In the case of a partnership, the statement of profit or loss will still be debited, but the profit will be credited to the appropriation account, rather than the capital account. For a sole trader, the profit for the year is simply transferred to the credit side of the proprietor’s capital account (the double entry is completed by a debit entry in the statement of profit or loss, resulting in a nil balance on that statement). That means that you only need to deal with the appropriations referred to in the question.Īnother point to remember is that the ‘appropriation account’ is an additional accounting statement that is required for a partnership. ![]() It is worth pointing out that when a question states the profit or loss sharing ratio, that the proportions are always applied to the residual profit – not the profit for the year.Īs there is no requirement for all of the appropriations considered below to be included by a specific partnership, exam questions may only include some of them. Therefore, candidates need to be aware that there is a distinction to be made between the profit for the year (income minus expenses), which is calculated in exactly the same way as for a sole trader and residual profit (the remaining profit after profit for the year has been adjusted by the appropriations in accordance with the partnership agreement). The profit or loss sharing ratio is sometimes simply called the ‘profit sharing ratio’ or ‘PSR’. This is the amount of profit available to be shared between the partners in the profit or loss sharing ratio, after all other appropriations have been made. As a formal agreement is not mandatory, there is no definitive list of what it should contain, but FA2 exams will not go beyond the following: While this is not mandatory, it can reduce the possibility of expensive and acrimonious disputes in the future. It is good practice to set out the terms agreed by the partners in a partnership agreement. if the partnership is unable to pay its liabilities, the partners may be called upon to use their personal assets to settle unpaid liabilities of the partnership.the partners have unlimited liability and.the reporting entity (business entity) principle applies to a partnership, so for accounting purposes, the partnership is a separate entity from the partners.In FA2, a partnership will always be an unincorporated business entity. In certain jurisdictions, there may be an upper limit to the number of partners but, as that is a legal point, it is not part of the FA2 syllabus.Ī partnership exists to carry on a business.Īs it is a business, the partners seek to generate a profit. There are a number of ways in which a partnership may be defined, but there are four key elements.Ī partnership includes at least two individuals (partners). As such, it covers all of the learning outcomes in Section H of the detailed Study Guide for FA2. The purpose of this article is to assist candidates to develop their understanding of the topic of accounting for partnerships. An introduction to professional insights.Virtual classroom support for learning partners.Becoming an ACCA Approved Learning Partner.
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