I'd like to once more dip my toe into this great pool of knowledge.
Can any one tell me, if, when working out the liquidity ratio/ acid test ratio of a partnership, are the partners current accounts classed as current liabilities (assuming credit balances) and included in the current liabilities part of the formula?
sorry took some time getting back but not one that I've got any practical knowledge of... However, According to the Open University course material for B680 and Business Accounts 3rd edition by David Cox (the only places that I could find anything relevant) the partner current accounts are NOT part of the current liabilities.
Hope this helps,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
got me thinking as I'm in Birmingham and no access to books!
I would say that partner accounts are part of the capital section of the BS and as such not classed as liabilities? I guess I'm right in saying it does not matter if a debit or credit balance.
Actually, in this case my answer came straight out of text books so can't really claim that it was ingrained knowledge that I was using.
In Brum the best bookshop that I've found for accountancy is the Waterstones at the bottom of the ramp as you come out of the Pallasades (Where New Street station is).
They stock BPP & Kaplan text books as well as the usual selection.
Many a happy hour I've spent trying to work out whether I would be able to carry all of the books that I "Needed!" to the car.
Off to Wolverhampton on a job today so won't be posting much. Talk later,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
What I was trying to get my head round was that, although it appears in the financed by section effectively the Capital is a long term liability of the partnership to the partners would the current accounts as they are accessible to the partners at any time, be considered a current liability and included in the calculation for liquidity.
Wella, the partner's current accounts would be classified as current assets if they are expected to be used or paid within 12 months or 1 year. Therefore you would include it. The formula for quick test ratio is: Acid-Test Ratio= (Cash + Short Term Investments + Accounts Receivable) / Current Liabilities
Inventory is not included in the acid-test ratio calculation because of the length of time needed to convert inventory to cash by making sales. However, there may be some types of inventories such as groceries, milk, eggs & meat that are more liquid than accounts receivable, however according to accounting standards; they may not be included in the acid-test ratio. Also, prepaid expenses are not included in the acid-test ratio because they cannot be converted in to cash and are not capable of covering current liabilities.
Assuming that the partners hadn't emptied or overdrawn their current accounts, wouldn't it be a liability not an asset? As with Capital, the partnership will owe the partners their capital introduced and the appropriated profits remaining in the current accounts.
Hello Bill The Partners current accounts would not be included in the currents liabilites of the partnership accounts balance sheet. Although being show seperately they would be show after the Capital Accounts on the Balance Sheet. If a partner has a debit balance then it will be shown in brackets.
What I was trying to understand was the Acid Test Ratio treatment of the current account. Although it appears on the balance sheet in the Financed By section, I was interested to know (being the nerdy type I am) if it was applied in the formula for calculating the ratio.
My logic for this was that as each partner has access to their current account and instant access to their own funds (which would affect the liquidity of the business) and as the title suggests, that it's status is current. I concluded that for the purposes of the formula, each partners account could be either a current liability or a current asset , depending on the balance on the account.
The nearest confirmed answer has been from Shaun with two quoted sources but still not sure what context they apply to.
Bill
Hope that all made sense? It sounded OK in my head when I wrote it
-- Edited by Wella on Wednesday 10th of February 2010 02:52:47 PM
-- Edited by Wella on Wednesday 10th of February 2010 02:55:16 PM
