Topic 2 of 6 · Form 5
Partnerships
Appropriation accounts (interest on capital and drawings, salaries, shares of residual profit); capital and current accounts.
Notes for this topic 1 file, in order
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Partnership accounts
Appropriation accounts (interest on capital and drawings, salaries, shares of residual profit); capital and current accounts.
Changes in partnerships
- Admission and retirement of partners: goodwill (valued and written off), revaluation of assets (revaluation account), changes in profit-sharing ratios.
- Dissolution: realisation account, sale of assets, payment of liabilities, settlement with partners; Garner v Murray rule where a partner's capital is in deficit.
Worked example: A and B share profits 3 : 2. C is admitted; new ratio A : B : C = 2 : 2 : 1. Goodwill is valued at US$30 000 and not retained. Show the capital adjustments.
Create goodwill (old ratio): A +18 000; B +12 000. Write off (new ratio): A −12 000; B −12 000; C −6 000.
Net effect: A +6 000; B 0; C −6 000
Conversion to a limited company
Transfer of assets and liabilities; purchase consideration in shares and debentures.
Check yourself
- What is a realisation account used for?
- In which account are partners' salaries recorded?
- What is a revaluation account?
Show answers
- To record the sale of assets and settlement of liabilities when a partnership is dissolved.
- The appropriation account (credited to current accounts).
- An account recording gains or losses when assets are revalued on a change in partnership, shared in the old ratio.
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