Hello everyone. My name is Karen I am new to the forum. And currently studying bookkeeping and accounting. And I need some help from you.
I am doing a section on Partnership accounts and for some reason it is just not sinking in so I hope you can help.
I have done my questions in numerical order so it is easier for you:
1. If a partner brings in extra capital to the business what entries do I make in the accounts to show this adjustment? In other words what do I debit and what do I credit?
2. When it says about profit sharing between partners how do you actually do that. I had a question that said to share profits out equally to 3 partners 2 with a capital of £40000 and the last with capital of £20000. I thought you shared the profits out based on a ratio. But there was no ratio given with this question. So how do I share the profits equally without no ratio?
3. What is meant by Limited Liability of Incorporation and how would it help someones business?
4. And if a partnership company did incorporate would there be a transaction needed to issue new shares and if so how would I do that? Again what would I debit and what would I credit?
a few basic answers to your queries, but I would certainly get another opinion.
1) How was the extra capital introduced and what form. Assuming the capital was paid into the bank account, you would need to debit the Bank and Credit the Partners Capital Introduced account.
2) As Standard I would split the profit based on Ratio. In this case you would need to work it out. Add the Capital figures together to give you 100% ie £40k + £40K + £20k = £100k. The Ratio is then 40% 40% and 20% as 100% = £100k
3) Limited Liability of Incorporation means setting up a Limited Company. The Limited Liability basically means that the Limited Company is now treated as a separate legal entity and should the Company fail, ie become insolvent and owe lots of money to creditors, The Directors of the Company would not be personally liable for the debts. Thus it protects the individuals, whilst of they were in a partnership or sole trader, they could potentially lose their home should the business fail and owe a lot of money. This is not the only answer as there is a lot more to Limited Company legislation, but its a basic idea.
4) I guess the shares would be issued based on the same ratio as in point 2. now depending on the type and value of the share depends on what is needed to be posted, but for arguments sake, lets say they are £1 ordinary shares and fully paid up. I would DR Bank and CR Share Capital as the shares are paid up the directors have to pay the money into the company from the partnership monies. Therefore you would have £100k in the bank and 100k shares in the share capital account.
hope that points you in the right direction, but please do some further research or get a second opinion as there are different scenarios to most accounting situations and without knowing the full facts I cannot give 100% correct advice, just guidance only.
Point 2, could see this differently. You can have a capital account balance in the partnership as well as a current account balance. The capital account can reflect the ownership of the heritable property etc and the current account will represent the profits/losses, drawings and capital introduced. It does not always follow through that you will distribute the the profits on the basis of the capital account balances. In your question you say the profits should be distributed equally, so this is what i would do. If it said to pro rata the profits on the capital account balances then I would follow Merlions basis.
point 3 - agreed
point 4 - if there was an incorporation the partnership would cease to exist (or continue running in the background). A new company would be set up, shares would be issues and paid for in line with an initial agreement, probably based on the winding up or value of the old partnership. Monies and assets would be introduced into the new company. This would be a whole new enterprise. You would be starting a brand new set of books from day one.
And as merlion says, answers are only based on what you have written in your initial post
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Forgive the typo's I generally do not proof read. Just lazy I guess!
On Point 2, if it does not state what the ratio is, then according to the Partnership Act 1890?, you should take it as being an equal split on the profits.
Point 3 - agree
Point 4 - agree with Adi on this one, it all depends on what the agreement is for the new co, nothing to do with the partnership at all.
