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,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,Terms Associated with Partnership Accounts,Unlimited Liability,Current Account,Capital Account,Profit Sharing Ratio,Appropriation Account,Limited Liability,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,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,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.,Procedure for Creating Partnership Accounts,Complete notes for TPL & Balance sheet Work down to RESIDUAL PROFIT in TPL Acc Work out share of profits for each partner Complete appropriation account Complete partners current accounts Create balance sheet,Template for Partnership,PROFIT AND LOSS APPROPRIATED SECTION FOR Partner 1 AND Partner 2 FOR YEAR ENDED (Enter Date) NET PROFIT x ADD Interest on Drawings Partner 1 x Partner 2 x x x LESS Salary (insert name) x Interest on Capital Partner 1 x Partner 2 x x RESIDUAL PROFIT x SHARE OF RESIDUAL PROFIT Partner 1 x Partner 2 x x,Template for Partnership,CURRENT ACCOUNT PARTNER 1 Details DR CR BAL Opening Bank Balance X cr +Interest in Capital X X cr +Salary X X cr +Share of Profit X X cr -Drawings X X cr X - Interest in Drawings X X cr X (Closing Bank Balances get carried forward to Balance Sheet- Financed By Section),Template for Partnership,CURRENT ACCOUNT PARTNER 2 Details DR CR BAL Opening Overdraft X dr +Interest in Capital X X dr +Salary X X cr +Share of Profit X X cr -Drawings X X cr - Interest in Drawings X X cr (Closing Bank Balances get carried forward to Balance Sheet- Financed By Section),Template for Partnership,BALANCE SHEET OF (PARTNER 1 AND PARTNER 2) AS AT (Enter Date) Cost Dep NBV FIXED ASSETS Equipment x x x Premises x x x x CURRENT ASSETS Stock x Debtors x Prepayments etc x x CURRENT LIABILITIES Creditors x Accruals x Bank Overdraft x VAT (Cr) x -x WORKING CAPITAL + x NET ASSETS x,Template for Partnership,BALANCE SHEET OF (PARTNER 1 AND PARTNER 2) AS AT (Enter Date) FINANCED BY CAPITAL ACCOUNT BALANCES Partner 1 x Partner 2 x x CURRENT ACCOUNT BALANCES Partner 1 x Partner 2 x x NET WORTH x,IF BALANCE SHEET BALANCES THEN NET ASSETS (FROM PREVIOUS PAGE) = NET WORTH,Procedure for Creating Partnership Accounts,Complete notes for TPL & Balance sheet Work down to RESIDUAL PROFIT in TPL Acc,Exercise 1 Stewart & Kinsey,Notes,Interest on Capital 20% P Stewart Capital 20,000 Bal Sheet / Cap Acc Interest 4,000 App Acc/ Current Acc S Kinsey Capital 15,000 Bal Sheet / Cap Acc Interest 3,000 App Acc/ Current Acc Interest on Drawings 10% P Stewart Drawings 9,000 Current Acc Interest charged 900 App Acc/ Current Acc S Kinsey Drawings 10,000 Current Acc Interest Charged 1,000 App Acc/ Current Acc,EX 1,Profit & Loss Appropriation Acc of P Stewart & S Kinsey for the year ended 31 Mar 2011 NET PROFIT 16,790 ADD Interest on Drawings P Stewart 900 S Kinsey 1,000 1,900 18,690