-
- Figure 1: profit and loss appropriation account
-
|
A £ |
B £ |
C £ |
Total £ |
Salaries |
20,000 |
15,000 |
- |
35,000 |
Interest on capital |
4,000 |
3,000 |
2,000 |
9,000 |
Share of balance 3:2:1 |
90,000 |
60,000 |
30,000 |
180,000 |
|
114,000 |
78,000 |
32,000 |
224,000 | |
Try this multiple-choice question from the December 2003 exam:
P, after having been a sole trader for some years, entered into partnership with Q on 1 July 2002, sharing profits equally. The business profit for the year ended 31 December 2002 was £340,000, accruing evenly over the year apart from a charge of £20,000 for a bad debt relating to trading before 1 July 2002, which it was agreed P should bear entirely.
How is the profit for the year to be divided between P and Q?
|
P £000 |
Q £000 |
A |
245 |
95 |
B |
250 |
90 |
C |
270 |
90 |
D |
255 |
85 |
Decide what you think the answer should be, and then read on.
Discussion A little clear thinking is required. The profit excluding the £20,000 is to be used, then £20,000 deducted from P's share.Thus we have:
|
P £000 |
Q £000 |
6 months to 30 June 2002 |
180 |
|
6 months to 31 December 2002 |
90 |
90 |
|
270 |
90 |
less: bad debt |
20 |
|
|
250 |
90 |
The answer is B. If you didn't get it right, re-read note (c).
d the question states that there is no partnership agreement and tells you nothing about profit shares. In this case, the Partnership Act 1890 applies (UK only). This means:
- no partnership salaries
- no interest on capital
- profit shared equally among the partners
but
- if any partner has loaned money to the partnership (as opposed to introducing capital), the loan carries interest at 5 per cent per year, charged in the profit and loss account. Questions rarely bring in this point, because it makes the question easier.
e Interest on drawings - partners sometimes agree that interest should be charged on drawings made. In reality, partners will agree the amount of drawings the business can stand rather than charge interest. If the point should come up, calculate the total interest due from all partners and add that to the net profit in the appropriation account. Then deduct each partner's interest charge from the individual shares at the end of the appropriation account.
Balance sheet Each partner has to have a capital account and, probably, a current account in the balance sheet. The easiest way to present these is to use columns. See Figure 2 (figures invented).
Capital accounts |
A £ |
B £ |
C £ |
|
Balance at 1 January |
40,000 |
30,000 |
20,000 |
|
Capital introduced |
20,000 |
10,000 |
- |
|
Balance at 31 December |
60,000 |
40,000 |
20,000 |
120,000 |
|
|
|
|
|
Capital accounts |
A £ |
B £ |
C £ |
|
Balance at 1 January |
14,800 |
16,100 |
12,400 |
|
Profit share (the total from the appropriation account) |
68,000 |
49,000 |
46,000 |
|
|
82,800 |
65,100 |
58,400 |
|
Drawings |
(70,000) |
(60,000) |
(60,000) |
|
Balance at 31 December |
12,800 |
5,100 |
(1,600) |
16,300 |
If a partner has a debit balance, as C does here, it is easy to include it in the tabulation as shown. There's no need to complicate matters by putting C's account on the assets side of the balance sheet.figure 2: balance sheet |
Important point If the question asks you to prepare the partners' capital accounts and current accounts as they would appear in the ledger, do them first, before completing the balance sheet. Then you can enter the final balances into the balance sheet. You obviously don't want to waste time copying all the details again into the balance sheet.
A practice question Here is a question from the June 2003 Paper 1.1 exam. Try to complete it for yourself, then take a look at the discussion and answer below.
Alamute and Brador have been in partnership for several years, compiling their financial statements for the year ended 31 March and sharing profits in the ratio 60:40 after allowing for interest on capital account balances at 5 per cent per year. Extracts from their trial balance at 31 March 2003 are given in Figure 3.
Figure 3: extract from alamute and brador trial balance
|
Reference to notes |
£ |
|
Capital accounts: |
Alamute |
|
50,000 |
|
|
Brador |
|
50,000 |
|
Current accounts: |
Alamute |
|
3,800 |
credit |
|
Brador |
|
2,600 |
debit |
Drawings: |
Alamute |
|
48,400 |
|
|
Brador |
|
36,900 |
|
Office equipment: |
cost |
1 |
48,300 |
|
|
accumulated depreciation, 1 April 2002 |
|
12,800 |
|
Stock, 1 April 2002 |
2 |
15,600 |
|
Trade debtors |
3 |
68,400 |
|
Provision for doubtful debts, 1 April 2002 |
3 |
3,800 |
|
Sales revenue |
|
448,700 |
|
Purchases |
|
184,600 |
|
Rent paid |
4 |
30,000 |
|
Salaries |
|
88,000 |
|
Insurance |
5 |
4,000 |
|
Sundry expenses |
|
39,400 |
| |
Notes to Figure 3
- Office equipment should be depreciated at 20 per cent per year on the reducing balance basis.
- Closing stock amounted to £21,400.
- Debts of £2,400 are to be written off, and the provision for doubtful debts is to be adjusted to 5 per cent of trade debtors.
- Rent paid of £30,000 is the amount for the nine months to 31 December 2002. From that date the rent was increased by 10 per cent.
- Insurance paid in advance amounted to £1,500.
Required:
- Prepare the partnership's trading and profit and loss account and appropriation account for the year ended 31 March 2003 (9 marks)
- Write up the partners' current accounts for the year ended 31 March 2003
(3 marks) (12 marks in total).
Discussion This is quite a simple question, but care is needed on several points:
- The drawings figures are given. They go into the current accounts and do not appear in the profit and loss account or appropriation account.
- Note 3 gives details of bad and doubtful debts. The charge in the profit and loss account is:
|
£ |
£ |
Debts written off |
|
2,400 |
Movement in provision / allowance |
|
|
|
Original provision |
3,800 |
|
|
New provision required 5% x (68,400 - 2,400) |
3,300 |
(500) |
|
|
1,900 |
- Note 4 explains the rent. £30,000 is the cost for nine months. That means £10,000 per quarter. The fourth quarter must therefore be £11,000, giving a total of £41,000.
Neil Stein is examiner for Paper 1.1 |