Principles of Accounting: Partnerships: Capital and Current Accounts

////Principles of Accounting: Partnerships: Capital and Current Accounts

Principles of Accounting: Partnerships: Capital and Current Accounts

ZIMSEC O Level Principles of Accounting: Accounting for Partnerships: Capital and Current Accounts

  • Like a normal business partnerships are formed when their owners (partners) inject capital into the business
  • While the principles of recording capital are the same as those of a Sole Trader business
  • There are certain differences that need to be borne in mind
  • One of these is the fact that the capital contribution of each member has to be clearly shown
  • One way to do this is to create a capital account for each partner and showing the appropriate entries therein
  • However another more common technique is to create a single capital account with columns showing the entries pertaining to each partner
  • Both methods are identical in nature and you can settle on either
  • Where space allows the column method is used in our examples and solutions
  • Please note this is just a way of displaying the accounts it does not affect entries
  • For example: K Rombe and B Choto formed a partnership by contributing $25 000 and $50 000 respectively
  • This can be shown as below

Capital Accounts shown seperately

B Choto:
Capital Account
DetailsAmount($)DetailsAmount ($)
Balance c/d

50 000

Bank

50 000

K Rombe:
Capital Account
DetailsAmount($)DetailsAmount($)
Balance c/d

25 000

Bank

25 000

Capital Accounts shown in columnar form

Capital Accounts
DetailsK RombeB ChotoDetailsK RombeB Choto
$$$$
Balance c/d

25 000

50 000

Bank

25 000

50 000

Fixed Capital and Fluctuating Capital Accounts

  • Remember that the amount of capital (Equity) within the business is:
    • Increased by profits every year or decreased by net losses each year
    • Affected by further injections or withdrawals of capital
    • Reduced by drawings
  • To show these changes there are two options:
    1. A fixed capital account and current accounts to record fluctuations throughout the duration of the partnership
    2. Fluctuating capital accounts

1 Fixed capital accounts plus current accounts

  • The capital account of each partner only shows the capital contributions of the relevant partner for the duration of the partnership and nothing else
  • The profits, interest on capital and salaries to which partner a partner is entitled are credited to that partner’s current account
  • Drawings and interest on drawings are debited this same current account
  • The balance at the end of each financial period represents the amount of drawn/undrawn profits
  • A credit balance will shows the amount of undrawn profits while
  • A debit balance shows the drawings in excess of profits to which a partner was entitled i.e. a partner took more in drawings that they were entitled
  • Again the current account partner can be shown desperately as with capital accounts shown above or
  • As we prefer, the can be shown as columns in one Current Accounts Account
ChotoRombeCapital AccountsChotoRombe
Details$$Details$$
Balance c/d

20 000

60 000

Bank

20 000

60 000

ChotoRombeCurrent AccountsChotoRombe
Details$$Details$$
Cash: Drawings15 00026 000Salary19 50015 000
Interest on Drawings5001 000Interest on capital1 0003 000
Balance c/d5 0004 000Share of profits13 000

20 500

31 000

20 500

31 000

  • You are required to draw guidance on how to compute the figures from the question and your knowledge of partnerships
  • We have created a set of guidelines shown here

 

2 Fluctuating capital accounts

  • Here all entries that would normally be shown in the current account are recorded in the capital accounts of each partner and no current account are mantained
  • For this reason the capital accounts balances will change each financial period
  • Hence the name of the method fluctuating (changing) account balances
  • Each partner’s share of profit and drawings and interest on drawings are debited to the relevant partner’s capital account
ChotoRombeCapital AccountsChotoRombe
Details$$Details$$
Cash: Drawings15 00026 000Bank20 00060 000
Appropriation account: Interest on drawings5001 000Appropriation account: Interest on capital1 0003 000
Balance c/d25 00064 000Share of profits19 50013 000

40 500

91 000

40 500

91 000

NB:

  • The above example is different from the one showing current accounts. The two are just illustrations

Always prefer the Fixed Account and Current Account balances

  • You are to always use current accounts as shown in method one
  • Never ever use the fluctuating capital balance method unless the question explicitly asks you to do so
  • We will however contend you will never be asked to do this
  • As a result always use method 1, indeed in these notes we will only ever use method 1

To access more topics go to the Principles of Accounts Notes.

 

By |2018-03-02T10:35:27+00:00March 2nd, 2018|Notes, Ordinary Level Notes, Principles of Accounts Notes|Comments Off on Principles of Accounting: Partnerships: Capital and Current Accounts

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He holds an Honours in Accountancy degree from the University of Zimbabwe. He is passionate about technology and its practical application in today's world.
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