Partnership Accounts Final Accounts for Sole Traders and Partnerships (FSTP)
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Transcript of Partnership Accounts Final Accounts for Sole Traders and Partnerships (FSTP)
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Partnership Accounts
Final Accounts for Sole Traders and Partnerships
(FSTP)
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Partnership AccountsBy the end of the session all learners will be able to :1. Describe Goodwill 2. Identify the accounting entries for changes to partnerships includingIntroduction of a new partnerPartner leaving3. Accurately determine the allocation of profit to partners after allowing for interest on capital, interest on drawings and any salary paid to partner(s) 4. Prepare the capital and current accounts for each partner Calculate the closing balances on each partner’s capital and current accounts, including drawings
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A Question . .
What is one of the main DIS-ADVANTAGES of a partnership?
How to share out the ‘value or benefit’ of the partnership if a partner joins or leaves
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Goodwill
Normally only created when a business is sold and/or acquired by new owner(s)
Difference between value of business as a whole and the net value of its assets and liabilities
Intangible non-current asset
In partnership accounting, goodwill is created temporarily whenever a new partner joins, or an existing partner leaves, and is then written off. (This is due to the accounting concept of prudence which says that items should not be overstated)
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GoodwillAdmission of a new partner to the partnership
2 step process:1. Create goodwill in the existing profit share ratio
Dr Goodwill Cr Partner capital a/c’s
2. Clear goodwill in the new profit share ratio
Dr Partner capital a/c’s Cr Goodwill
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Worked Example – Kate & Ed
Step ONECreate the Goodwill
Estimated at £35,000
Kate & Ed share 50% of Goodwill each
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Worked Example – Kate & EdCapital
Kate Ed Rob Kate Ed Rob
Bal b/d 50000 40000 0
Goodwill 17500 17500 0
Step ONECreate the Goodwill
Estimated at £35,000Kate & Ed share 50% of Goodwill each
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Worked Example – Kate & EdCapital
Kate Ed Rob Kate Ed Rob
Bal b/d 50000 40000 0
Goodwill 17500 17500 0
Bank 0 0 30000
Rob invests £30,000 capital into the partnership
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Worked Example – Kate & EdCapital
Kate Ed Rob Kate Ed Rob
Goodwill 14000 14000 7000Bal b/d 50000 40000 0
Goodwill 17500 17500 0
Bank 0 0 30000
Step TWOClear the Goodwill in the NEW ratios
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Worked Example – Kate & EdCapital
Kate Ed Rob Kate Ed Rob
Goodwill 14000 14000 7000Bal b/d 50000 40000 0
Bal c/d 53500 43500 23000Goodwill 17500 17500 0
Bank 0 0 30000
67500 57500 30000 67500 57500 30000
Bal b/d 53500 43500 23000
Balance the Capital Account and carry down the balances
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Worked Example – Kate & EdCapital
Kate Ed Rob Kate Ed Rob
Goodwill 14000 14000 7000Bal b/d 50000 40000 0
Bal c/d 53500 43500 23000Goodwill 17500 17500 0
Bank 0 0 30000
67500 57500 30000 67500 57500 30000
Bal b/d 53500 43500 23000
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GoodwillAdmission of a new partner to the partnership
Summary2 step process:1. Create goodwill in the existing profit share ratio
Dr Goodwill Cr Partner capital a/c’s
2. Clear goodwill in the new profit share ratio
Dr Partner capital a/c’s Cr Goodwill
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Leaving . . . . .
The effect is to credit the leaving partner with the amount of the goodwill built up whilst he or she was a partner.
This amount plus the capital and current accounts can be paid from the partnerships bank account.
The Current Account balance is transferred to the leaving partners Capital Account
If there are insufficient amount to pay this it may be left as a loan by the leaving partner
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GoodwillExisting partner leaves the partnership
2 step process:
1. Create goodwill for all partners in the existing profit share ratio
Dr Goodwill Cr Partner capital a/c’s
2. Clear goodwill in the new profit share ratio (leaving partner should have zero balance c/d)
Dr Partner capital a/c’s Cr Goodwill
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Worked Example – Liam, Sam & FredPartner Retiring
Enter the opening balances in the Capital accounts
Capital
Liam Sam Fred Liam Sam Fred
Goodwill 0 9000 9000 Bal b/d 50000 40000 30000
Bank 20000 0 0 Goodwill 9000 6000 3000
Loan 43000 0 0 Current a/c 4000 0 0
Bal c/d 0 37000 24000
63000 46000 33000 63000 46000 33000
Bal b/d 0 37000 24000
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Worked Example – Liam, Sam & FredPartner Retiring
Capital
Liam Sam Fred Liam Sam Fred
Goodwill 0 9000 9000 Bal b/d 50000 40000 30000
Bank 20000 0 0 Goodwill 9000 6000 3000
Loan 43000 0 0 Current a/c 4000 0 0
Bal c/d 0 37000 24000
63000 46000 33000 63000 46000 33000
Bal b/d 0 37000 24000
STEP 1Create goodwill for all partners in the existing profit share ratioDr Goodwill Cr Partner Capital a/c’s
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Worked Example – Liam, Sam & FredPartner Retiring
Capital
Liam Sam Fred Liam Sam Fred
Goodwill 0 9000 9000 Bal b/d 50000 40000 30000
Bank 20000 0 0 Goodwill 9000 6000 3000
Loan 43000 0 0 Current a/c 4000 0 0
Bal c/d 0 37000 24000
63000 46000 33000 63000 46000 33000
Bal b/d 0 37000 24000
STEP 2Transfer the balance of the retiring partners current account
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Worked Example – Liam, Sam & FredPartner Retiring
Capital
Liam Sam Fred Liam Sam Fred
Goodwill 0 9000 9000 Bal b/d 50000 40000 30000
Bank 20000 0 0 Goodwill 9000 6000 3000
Loan 43000 0 0 Current a/c 4000 0 0
Bal c/d 0 37000 24000
63000 46000 33000 63000 46000 33000
Bal b/d 0 37000 24000
STEPWrite of the Goodwill using the NEW ratios i.e. 1:1
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Worked Example – Liam, Sam & FredPartner Retiring
Capital
Liam Sam Fred Liam Sam Fred
Goodwill 0 9000 9000 Bal b/d 50000 40000 30000
Bank 20000 0 0 Goodwill 9000 6000 3000
Loan 43000 0 0 Current a/c 4000 0 0
Bal c/d 0 37000 24000
63000 46000 33000 63000 46000 33000
Bal b/d 0 37000 24000
STEPPay Liam £20,000 and show the loan to the partnership
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Worked Example – Liam, Sam & FredPartner Retiring
Capital
Liam Sam Fred Liam Sam Fred
Goodwill 0 9000 9000 Bal b/d 50000 40000 30000
Bank 20000 0 0 Goodwill 9000 6000 3000
Loan 43000 0 0 Current a/c 4000 0 0
Bal c/d 0 37000 24000
63000 46000 33000 63000 46000 33000
Bal b/d 0 37000 24000
STEPBalance off the account to determine the Capital Account balances for the remaining partners
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Worked Example – Liam, Sam & FredPartner Retiring
Capital
Liam Sam Fred Liam Sam Fred
Goodwill 0 9000 9000 Bal b/d 50000 40000 30000
Bank 20000 0 0 Goodwill 9000 6000 3000
Loan 43000 0 0 Current a/c 4000 0 0
Bal c/d 0 37000 24000
63000 46000 33000 63000 46000 33000
Bal b/d 0 37000 24000
STEPBalance off the account to determine the Capital Account balances for the remaining partners
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GoodwillExisting partner leaves the partnership
Review2 step process:
1. Create goodwill for all partners in the existing profit share ratio
Dr Goodwill Cr Partner capital a/c’s
2. Clear goodwill in the new profit share ratio (leaving partner should have zero balance c/d)
Dr Partner capital a/c’s Cr Goodwill
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Now try . . . Question 3 Peter & Paul
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Practice Questions 4 - 6
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Goodwill
Partner Joins
Partner Leaves
Change in Ratio
1. Create goodwill for all partners in the existing profit share ratio2. Clear goodwill in the new profit share ratio3. Draw up appropriation account apportioning the transactions for time periods before change and after change
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Complete remaining questions