ENTREPRENEURSHIP & NEGOTIATION  LECTURE 7: INTRODUCTION TO THE ACCOUNTS  This lecture is an introduction to the final accounts of the Partnership Business. Over the next 8 weeks we will consider the basic financial statements of this type of business organisation. The statements are usually produced once a year and will include the Trading and Profit & Loss account plus the Appropriation account and the Balance Sheet.

ENTREPRENEURSHIP & NEGOTIATION  INTRODUCTION TO THE ACCOUNTS (cont)  We will also give consideration to the Cash Flow forecast that does not form part of the final accounts, though it is an essential financial statement that could be produced periodically through out the business year. Cash Flow forecasting will commence our series of lectures which will focus on the mechanics of compiling these statements.  The Partnership accounts are designed specifically for that type of business and any other format of these accounts will be rejected for the assessment for this module ?

ENTREPRENEURSHIP & NEGOTIATION – Before considering the financial requirement of a Partnership business a basic understanding is required of what a Partnership is: – The Partnership Act of 1890 defines a business Partnership as: – The relationship that subsists between persons carrying on a business in common, with a view to profit.

ENTREPRENEURSHIP & NEGOTIATION  A Partnership normally consists of between 2 and 20 people, lthough some professional Partnerships may exceed this. The most common examples of a Partnership are: Solicitors, Accountants, Dentists and Doctors.  As the definition states, a Partnership is a group of people working together; they contribute capital, expertise and experience and expect a share in any profits made.

ENTREPRENEURSHIP & NEGOTIATION  Accounting requirements of the Partnership Act of 1890:  Partnership Agreement (none written)  The Act sets out the following rules:  Profits and Losses are to be shared equally  No Partner is entitled to a salary  Partners are not expected to receive interest on the capital they have invested in the Partnership  Interest is not to be charged on any Partners drawings  When a Partner invests additional sums of capital they are entitled to receive 5% per annum interest on this extra amount.

ENTREPRENEURSHIP & NEGOTIATION  Partnership Agreement (written)  If the Partners agree amongst themselves to enter into a written Partnership Agreement they will need to follow different accounting rules. In particular a Partnership Agreement will often cover the following:  Division of Profits and Losses between Partners  Partners Salaries  If interest is to be paid on capital and at what rate  Whether interest is to be paid charged on Partners drawings

ENTREPRENEURSHIP & NEGOTIATION  FINANCIAL STATEMENT OF A PARTNERSHIP:  A Partnership prepares the same type of statements as a Sole Trader business:  Trading and Profit & Loss account:  Balance Sheet:  One main difference is that, immediately after the Profit & Loss account follows an Appropriation Account. The reason for this account is to show how the profit/loss is divided between the Partners. A second difference is that the Capital section of the Balance Sheet need to be presented in a way that shows the Capital invested by each Partner. Therefore a separate Capital account is essential for each Partner. In addition Partners usually have a separate Current account, which also should be shown on the Balance Sheet (see examples)

ENTREPRENEURSHIP & NEGOTIATION  APPROPRIATION OF PROFITS:  As mentioned previously the Appropriation account follows the completion of the Profit & Loss account and shows how Net Profit has been divided between the Partners.  Example: Able, Baker and Cox are Partners sharing profits and losses equally. Their Profit & Loss account for the current year shows a net profit of £30,000. The appropriation of profits need to appear as such:  £  Net Profit  Appropriation of Profits:  Able 10,000  Baker 10,000  Cox 10,000  30,000

ENTREPRENEURSHIP & NEGOTIATION  The appropriation of profits on the earlier slide was very simple. A more complex Appropriation account would show:  A salary paid to a Partner (not to be shown in the Profit & Loss account).  Interest allowed on Partners Capital  Interest charged on Partners drawings.  The Appropriation account for Davis & Eady provides a more practical example

ENTREPRENEURSHIP & NEGOTIATION  DAVIS & EADY’S APPROPRIATION ACCOUNT  £ £  Net Profit: 25,000  Add interest charged on Partners Drawings:  Davis1,000  Eady1,500 2,500  27,500  Less Appropriation of Profits:  Salary:Eady ( 9,000)  Interest allowed on Partners Capital:  Davis2,500  Eady1,000 (3,500)  15,000  Share of remaining Profits:  Davis (60%)9,000  Eady (40%)6,000(15,000)  N.B. that all of the available profit, after allowing for any salary, and interest charged and allowed, is shared by the Partners, to the ratio in which they have stated in the Partnership Agreement.

ENTREPRENEURSHIP & NEGOTIATION  CAPITAL & CURRENT ACCOUNTS:  Most Partnerships keep a Capital and Current account for each Partner.  The Capital account is fixed and only alters if a permanent increase or decrease in capital contributed by a Partner takes place. The Current account fluctuates and it is this account that:  Shares of profits are credited and share of losses are debited  Salary if any is credited  Interest allowed on Partners capital is credited  Drawings are debited  Interest charged on drawings is debited  Thus, the Current account is treated as a working account, while the Capital account remains fixed, except for Capital introduced or withdrawn

ENTREPRENEURSHIP & NEGOTIATION  CAPITAL & CURRENT ACCOUNTS (cont)  The Balance Sheet must show the year end balances on each Partners Capital and Current accounts. However it is usual to show the transactions that have taken place on each account in summary form, in the same way that in a Sole Traders Balance Sheet, Net Profit is added and Drawings are deducted (see example).

ENTREPRENEURSHIP & NEGOTIATION  Extract from Fox & Guns accounts in their Partnership Balance Sheet:  £ £ £  Capital accounts:  Fox 20,000  Gun 15,000 35,000  Current accounts: FOXGUN  Opening Balance 1,  Add: Salary 08,000  Interest on Capital 1,6001,200  Share of Profit6,7504,500 9,350 13,900  Less Drawings (9,000) (12,000) – Interest on Drawings (450) (600) – (9,450) (12,600) – (100) 1,300 1,200 – 36,200 –

ENTREPRENEURSHIP & NEGOTIATION  INTRODUCTION TO CASH FLOW STATEMENTS  A Balance Sheet shows the financial state of the business at a particular date and is usually only prepared once a year. Whilst it is possible to obtain a great deal of information on the progress of the business by comparing one years Balance Sheet with that of the next years, it is more difficult to see what has gone on in the period between the two Balance Sheet dates.

ENTREPRENEURSHIP & NEGOTIATION  INTRODUCTION TO CASH FLOW STATEMENTS (cont)  A Cash Flow Statement uses information from the accounting records (including that from the Profit & Loss Account and the Balance Sheet), and shows an overall view of money flowing in and out of the business during an accounting period.  Such a statement concentrates on the liquidity of the business and explains to the owners why, after a year of good profits for example there is a reduced balance at the bank or a larger bank Overdraft, at the year end than there was at the beginning of the year 