Partnership Accounts Step By Step
Peter Marshall Bsc (Econ) BA MBIM is a Fellow of the Society of Business Teachers, and an experienced educator in business subjects. He is also a prolific author and his books have been translated and sold worldwide. He lives in London, UK.
Step by step
- 1.Make another heading under the completed profit and loss account in the ledger: ‘Profit and loss appropriation account.’
- 2.Bring down the net profit from the profit and loss account.
- 3.In the credit column record: ‘Interest payable on drawings’ for each partner, marking it accordingly.
- 4.In the debit column enter: ‘Interest on capitals’ for each partner, marking each entry accordingly.
- 5.In the debit column record the value of individual partners’ salaries, marking each one accordingly.
- 6.Again in the debit column, record the individual profit shares of each partner, marking each one accordingly. Show the proportion, e.g. ½ or a percentage e.g. 50%.
- 7.Total up and balance this ‘account’ (the balance c/d will be zero).
Converting final accounts into vertical format
You can now rewrite your final accounts in a more useful vertical format. If you do, change the appropriation account in the same way. The figure opposite (bottom) shows how this is done.
The figure opposite (top) shows an alternative, horizontal layout, but remember that vertical formats are much more popular in Britain and you should use them in exams and in business unless told otherwise.
Example: Frazer and Baines
Frazer and Baines are partners. Frazer initially invested £20,000 in the business and Baines £50,000. Frazer took drawings of £2,000 during the year and Baines £2,500. It had been agreed at the onset that 10% interest would be paid on capitals, interest of 12% would be payable on drawings and that Frazer, because he, alone, would be working full-time in the business, would receive a salary of £8,000. Suppose, also, that the net profit shown in the profit and loss account at the end of the current year is £21,000. Following the step-by-step instruction given here, the examples opposite show what the appropriation account might look like.