I use bpp final accounts preparation book. At the beginning it is stated that sole traders and partnerships are not legally required to produce or file annual accounts but will need to keep records in order to complete tax returns. If sole traders and partnerships are not legally required to produce or file annual accounts why in the same book on next pages they teach you how to prepair financial statements for sole traders and partnerships ? If there is no legal obligation, why aat students have to learn how to prepair financial statements for sole traders and partnerships ?
This is second part of my earlier post. In every businness expenses are incurred and profits earned. If you incur expenses company's capital decreases. If you earn profits company's capital increases. When partnership has three partners for example and due to daily activities business incures expenses, which capital account do those expenses decrease ? Do expenses decrease capital that belongs to partner 1, partner 2 or partner 3 ?
Re your first question. It is good practice to prepare accounts for sole traders and partnerships as they might need them for the bank (say applying for a loan or overdraft) It also gives the business owner an overview of their years income and expenditure, and assets and liabilities.
Sorry but I don't really understand your second question. Could you post the question from the book please.
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
This is second part of my earlier post. In every businness expenses are incurred and profits earned. If you incur expenses company's capital decreases. If you earn profits company's capital increases. When partnership has three partners for example and due to daily activities business incures expenses, which capital account do those expenses decrease ? Do expenses decrease capital that belongs to partner 1, partner 2 or partner 3 ?
As John says be handy if you can post the question or is this just something that you are confused with
If I am understanding what you are asking correctly then what happens is that all income and expenses are posted which will create the Profit & Loss for the business, it is from this that the profit is allocated to each partner at the agreed profit sharing ratio
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Doug
These are only my opinions of how I see things and therefore should not be taken as advice
thanks guys for replies. As far as second part of my post is concerned this is something I am confused with. In coursebooks they don't show you how double entry works as far as accounting for partnerships. Let's say business is supposed to give interest on capital to two partners. This transaction is recorded on credit side on partners current account . What about corresponding entry ? Profit is recorded as increase in capital . Does it mean that in order to account for interest on capital for partners you have to decrease capital (debit ) and increase liabilities to partners (credit entry on current account ) ?
-- Edited by rafapak on Saturday 28th of March 2020 02:49:29 PM
I googled accounting for partnership and I found interesting site where they show double entry for partnerships. Now I have better understanding of double entry in relation to partnerships.
Interest on capital introduced is treated the same as a partner receiving a salary, all it is saying is that one partner is entitled to a certain amount before the allocation of the profit at then agreed ratios, it is not interest as we know it it is just a bit of advance profit based on the balances the partners hold on their capital accounts, just a priority allocation of trading income
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Doug
These are only my opinions of how I see things and therefore should not be taken as advice
thanks Doug for reply. I have one more question if you don't mind. When new partner is admitted goodwill must be accounted for . What is the reason why we have to account for goodwill as the new partner enters partnership ? Why we have to ' cancel' goodwill soon after new partner comes ? My book says that because goodwill is subjective we have to get rid of it after new partner comes. I don't know what is meant here.
-- Edited by rafapak on Saturday 28th of March 2020 05:11:16 PM
Usually when a new partner is admitted they will be charged a sum which will be for goodwill this is because they will be joining an already established business and start to share in the profits, this will be a figure that all the partners agree on and after admission of the new partner the goodwill will be written off, when there is a future change in the partnership then a new goodwill valuation will be needed which will include the previously admitted partner
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Doug
These are only my opinions of how I see things and therefore should not be taken as advice
