Learner Notes

SUBJECT: ACCOUNTING GRADE 11 CHAPTER: PARTNERSHIPS LESSON: FINAL ACCOUNTS

LESSON OVERVIEW (KNOWLEDGE AREAS)

1. Introduction 2. Partnership entries

LESSON
INTRODUCTION

The following year-end procedures relating to sole proprietorships are followed with regard to partnerships (Assumption entries are limited to the perpetual inventory system): DEBIT 1. 2. 3. 4. 5. 6. Sales Trading account
Sales

Trading account *Each revenue item Profit and loss account

CREDIT Debtors Allowances Cost of Sales Trading account Profit and loss account Profit and loss account *Each expense item

From this point on, the closing transfers of sole proprietorships and partnerships differ. After the closing transfers listed above, the balance on the Profit and Loss account represents the net income (or net loss) for the year. In the case of a sole proprietorship, this accrues to only one owner; therefore the Profit and Loss account is closed off to the Capital account. However, in the case of a partnership, the profit (or loss) has to be shared between two or more partners. An Appropriation Account is created in the final accounts section in order to facilitate the splitting of the net income (or net loss) between the partners. In the case of a partnership, the Profit and Loss account will be debited (with the net

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Learner Notes income) and the Appropriation account will be credited. This credit balance on the Appropriation account is then allocated to each partner according to the profit-sharing ratio stipulated in the partnership agreement. The Appropriation account is debited with the amounts applicable to the partners, and the Current accounts of the partners are credited with their share of the profit (in the case of a net loss, the entries will be the other way around). Remember that we cannot transfer the share of profit to the Capital accounts of the partners, because these accounts must be maintained at the amounts stipulated in the partnership agreement. At this point, assuming the partnership has made a profit, the Current Accounts will represent the amounts owed to the partners in respect of their portions of the net income. Their Drawings accounts however, have debit balances and represent the amounts that have been withdrawn by the partners during the year. It is therefore necessary to offset the Drawings against the amounts owed to the partners in accordance with their respective shares in the net income. The Drawings accounts will therefore be closed off to the Current Accounts of the partners. The following example illustrates these points. In order to highlight the special entries relating to partnerships, the usual closing transfers to the Trading and Profit and Loss accounts have been omitted
GENERAL LEDGER OF FT TRADERS

DR.

BALANCE SHEET ACCOUNTS SECTION CURRENT ACCOUNT: FERNANDO

2010 40 000 Feb 28 Salary: Fernando Interest on capital Appropriation Balance 40 000

B3
GJ2 GJ2 GJ2 c/d

CR
24 000 6 000 3 000 7 000 40 000

2010 Feb 28 Drawings: Fernanado GJ2

2010 Mar 1 Balance

b/d

7 000

DR.

B4

CR

CURRENT ACCOUNT: TORRES

2010 Feb 28 Drawings : Torres Balance GJ2 c/d 2010 27 000 Feb 28 Salary : Torres 6 000 Interest on capital Appropriation 33 000 2010 Mar 1 Balance GJ2 GJ2 GJ2 24 000 6 000 3 000 33 000 6 000

b/d

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DR.

FINAL ACCOUNTS SECTION APPROPRIATION ACCOUNT

GJ2 GJ2 GJ2 GJ2 GJ2 20.2 24 000 Feb 28 Profit and loss 24 000 12 000 3 000 3 000 66 000

F3
GJ2

CR
66 000

20.2 Feb 28 Salary: Fernando Salary : Torres Interest on capital Current account : Fernando Current account : Torres

66 000

Exercise 1
The partners approach you for assistance to complete the following accounts on 28 February 2010 , the end of the financial year Current account: Had Current account: Lee Appropriation account

INFORMATION: Capital: Had Capital: Lee Current account: Had (1 March 2009) Current account: Lee (1 March 2009) Drawings: Had Drawings: Lee The profit for the year is R92 000. The partnership agreement stipulates the following: (a) Salary allowance to Had, R30 000 (b) Salary allowance to Lee, R15 000 (c) Interest on capital at 12% p.a. (d) Remaining profits or losses to be shared between Had and Lee in the ratio 3: 2. R75 000 25 000 4 500 3 700 25 000 23 000

Cr Dr

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Homework
The following balances were extracted from the ledger of BH TRADERS on 28 February 2010, the end of the accounting period. There are two partners, Brian and Habana. INSTRUCTION The partners approach you for assistance to complete the following accounts: Current account: Brian Current account: Habana Appropriation account INFORMATION: Capital: Brian Capital: Habana Current account : Brian (1 March 2009) Current account: Habana (1 March 2009) Drawings: Brian Drawings: Habana The profit for the year is R125 000. The partnership agreement stipulates the following: . Salary allowance to Brian, R40 000 p.a. Salary allowance to Habana, R40 000 p.a Interest on capital at 15% p.a. Remaining profit and losses to be shared between Brian and Habana in the ratio 2: 1. R300 000 200 000 10 000 Dr 12 500 Cr 60 000 72 000

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