Financial Statements for Partnerships

Aims of the Session Partnership financial statements. Definition of a partnership. Accounting requirement for partnerships. Capital and current accounts. Appropriation of profits. The capital section of the financial position. Not LLPs as these are more like limited companies opposed to

Partnerships People who run their own businesses, but larger than sole traders. May be ‘next step’ after being a sole trader Rules set out in Partnership Act 1890 or a Partnership Agreement (written or oral) Advantages Disadvantages Possibility of increased capital. Decisions may take longer. Individual partners may be able to specialise. May be disagreement between partners. Cover for illness and holidays. Each partner is liable in law for the dealings and business debts. Retirement or death of a partner may adversely affect the business.

The Legal Stuff The Partnership Act of 1890 defines a partnership as: The relationship which subsists between persons carrying on a business in common with a view of a profit. Partnership either: Follow the rules in the Partnership Act Have a partnership agreement. Unless agreed otherwise the Partnership Act states the following rules: Profits and losses are shared equally between partners No partner is entitled to a salary Partners are not entitled to receive interest on their capital Interest is not to be charged on drawings When a partner contributes more capital than agreed they are entitled to receive 5% interest per annum on the excess. You will not need to know these for assessment, but be aware of their existence.

Financial Statements of Partnerships Statement of profit or loss. Statement of financial position. There is no: Definite format Specific legislation Accounting rules in the form of accounting standards No annual returns to Companies House The partnership is responsible for: Annual tax returns, stating the business’ profit. VAT if applicable. Same as sole traders, each partner is responsible to HMRC for their own tax return, stating the share of the partnership.

Profit Sharing – Simple Appropriation Jan, Kay and Lil are partners sharing profits and losses equally. Their statement of profit and loss for 20X1 shows a profit of £60,000 A simple appropriation account would be: Jan, Kay and Lil Partnership Appropriation Account £ Profit for the year 60,000 Profit share: Jan 20,000 Kay Lil Losses would be allocated in the same way.

Partnership Agreements Not always formal. Main points covered: Division of profits and losses. Partner’s salaries or commission. Interest on capital and what rate. Interest on drawings and what rate.

Profit Sharing –Appropriation Romeo and Juliet are partners sharing profits and losses 40%, 60% respectively. Their statement of profit and loss for 20X1 shows a profit of £60,000. Romeo takes an annual salary of £12,000. They have both been charged £400 interest on drawings Profit for the year 60,000 Add any interest on drawings: 800 60,800 Less appropriation of profit : Salary Romeo (12,000) Profit available for distribution 48,800 Romeo (48,800 x 0.4) £19,520 Juliet (48,800 x 0.6) £29,280

Profits and Losses Partnership Act states equal share. Often done on a percentage of capital basis. In tasks you will be told of the % share, if none is given assume an equal share to each partner.

Salaries & Commission Partnership Act doesn’t allow salaries. Salaries can be paid though as part of the partnership agreement. NOT shown as an expense on the statement of profit or loss. Recorded in the appropriation account. May happen if partners have not contributed capital. If allowed by agreement, deducted from profit in the appropriation account. Junior partners in particular who work full time in an established partnership may not have already contributed capital A partner may also get commission on sales, and again this is recorded in the appropriation account.

Interest on Capital & Drawings Not allowed in the Partnership Act. Refer to Partnership Agreement. Recompenses partner for loss of use of capital. Penalises partners for taking too much money from the business. Interest on capital is deducted from the profit. Interest on drawings is added to profit. Often happens when where profits and losses are shared equally, but can be used to help adjust for difference in capital contribution Discourages partners from taking out money too early in the FY, the interest will increase profit to be shared amongst the partners.

The Current Account - LID SIP Debit: Losses Interest on drawings Drawings Credit: Salaries Interest on capital Profit

Current Accounts Current Account Partner A Partner B Partner C Drawings Salary Interest on drawings Interest on capital Loss share Profit share The ‘normal’ balance on a partner’s current account should be a credit, but if they’ve taken out more than their share of the profit it will be a debit. Current accounts are used and capital remains static – unlike in sole trader where capital will be reduced by drawings and increased by profit.

Thom and Harry - Tutor Led Thom and Harry have set up a partnership selling stones. with healing properties. They have agreed to at 40%, 60% profit share respectively. Profit for the year ended 31 Mar X4 is £42,000. Draw up the appropriation account and then the current account. Hand out with work on.

ETB Style Layout Then shown on statement of profit or loss and the statement of financial position. On SoPL debit: salaries, interest on capital, profit share (credit a loss). On SOFP credit: salaries, interest on capital, profit share. Doubt it will turn up, but have a look just in case!

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