by Neil Stein
16 Jan 2000
| This article concentrates on the preparation of partnership financial statements. |
There are no material differences between UK and international practice in partnership accounts apart from minor variations in terminology and format. This article uses international terminology. For students taking the UK paper the conversion is:
Differences between sole traders' accounts and partnership accountsIf you can handle the financial statements of sole traders, with adjustments for accruals, prepayments, depreciation and the like, it is an easy matter to add the requirements for partnership accounts. The differences are:
Preparing partnership financial statements
Income statementThe main part of the income statement is prepared exactly as for a sole trader.
Points to watch:
Statement of division of profitThe easiest format to adopt here is a simple columnar presentation. See Figure 1 below (figures invented). Points to watch:
How is the profit for the year to be divided between P and Q?
A little clear thinking is required. The profit excluding the $20,000 is to be used, then $20,000 deducted from P's share.Thus we have:
d the question states that there is no partnership agreement and tells you nothing about profit shares. In this case, assume the following (Partnership Act 1890 provisions):
Each partner has to have a capital account and, probably, a current account in the balance sheet. The easiest way to present these is to use columns. See Figure 2 (figures invented).
A practice question
Here is a practice question to test your understanding. Try to complete it for yourself, then take a look at the discussion and answer below.
Alamute and Brador have been in partnership for several years, compiling their financial statements for the year ended 31 March and sharing profits in the ratio 60:40 after allowing for interest on capital account balances at 5 per cent per year. Extracts from their trial balance at 31 March 20X3 are given in Figure 3.
Figure 3: extract from Alamute and Brador trial balance
Notes to Figure 3
This is quite a simple question, but care is needed on several points:
Income statement for the year ended 31 March 20X3