Accounting Records and Financial Statements for partinership


Accounting Records and Financial Statements for partinership

In accounting for partnership the aim is recording transactions in order to produce information on the following events:

1. The formation of a partnership,
2. The admission of new partners,
3. The appropriation of partnership profits among partners and updating of equity relating to each partner, and
4. Retirement of partners and other changes.

The accounting system and books of original entries in partnerships are similar to those of other forms of business entities. Financial statements prepared differ from those of other forms of business organizations in two aspects:

1. The Appropriation Section of the Statement of Comprehensive Income
In contrast to other business organizations a Statement of Comprehensive Income of a partnership is extended to show how profit or loss for the year is distributed among the partners. This extension is known as an appropriation account or statement.

Appropriation of profits is effected through distribution of shares of profit among partners, salary entitlements and interest on capital balances. These are treated as a means of distributing partnership profits. Interest on Loans from partners is not an appropriation of profit and it is therefore not dealt with through the appropriation account. It is treated as a financial expense and charged to the statement of comprehensive income.

Where partners' drawings are charged interest it adds to the profits of the firm available for distribution. Interest on drawings is also dealt with through the appropriation account.

2. Statement of Financial Position
In the statement of financial position the capital section is broken down to distinguish the following elements:

·        the original capital contributed into the partnership by each partner,
·        the share of profits accruing to each partner reduced by any drawings and interest on drawings, and
·        Any loans extended by a partner to the partnership over and above the agreed capital contributions.

In order to generate information in capital, current, drawings and loans specific accounts are normally kept for each of these items.

Capital account
This account is credited with the capital contributed as per the partnership agreement.

Current account
This account records appropriations of profits and losses. Therefore, it is credited with profit shares, salaries and interest on capital. It is debited with interest on drawings charged to partners. The balance in this account represents retained profits attributable to each partner which could be drawn for personal use depending on the partnership agreement. Drawings therefore, are ultimately closed to this account.

Drawings account
This account records any cash or other business assets appropriated by partners. The final balance in this account is closed to the current account at the end of the year. Sometimes drawings, if made infrequently, are debited directly to the current account in which case there is no need for a drawings account to be maintained.

Loan Account
This account records loans or advances to the partnership. Such loans normally attract interest set at the time they are made available. In the absence of agreement on loan interest a rate of 5 percent per annum is fixed.

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