Partnership accounting
WELCOME BACK. This week’s presentation is the partnership accounting. Below is a worked example:
WORKED EXAMPLE QUESTION
Clarence and Leroy are in partnership providing book-keeping and general administration services to small businesses. They shared profit and losses in the ratio 3:2, respectively. Interest on drawings is charged at 4%, while interest on capital is allowed at the rate of5% per annum. Leroy receives an annual salary of $48,000.
The following balances were extracted from their books on September 30, 2013:
ADDITIONAL INFORMATION
1. Commission received, $7,200, had been credited to the communication expenses account in error.
2. Heat and light, $450, were outstanding, and general expenses, $3,030, was prepaid on September 30, 2013.
3. Bank charges, $369, had not been recorded in the books.
4. Motor vehicle expense, $6,000, had been recorded in the motor vehicles account.
5. The provision for doubtful debts is to be maintained at 5% of trade receivables.
6. Depreciation is charged on premises and office equipment at the rate of 5% and 12%, respectively, using the straight-line method.
7. Motor vehicles are depreciated at the rate of 20% per annum using the diminishing/reducing balance method.
8. On October 1, 2012, Clarence reduced his capital account balance by $30,000. This sum was to be left in the business as an interest free loan, to be repaid on March 31, 2018.
You are required to prepare the: a. Income statement and appropriation account for the year ended September 30, 2013. b. Current accounts for the year ended September 30, 2013. c. Balance sheet at September 30, 2013.
WORKINGS
General Heat & light expenses expenses = $70,380 = $14,280 - 3,030 + 450 = $67,350 = $14730 Communication expenses = $23,040 + $7,200 = $30,240 Motor vehicle expenses = $10,950 + 6,000 = $16,950 Bank loan interest = $120,000 x 8% = $96,00 for year Provision for doubtful debts = $32,160 x 5% = $1,608 Increase = $1,608 - b/d $1,560 = $48 Premises depreciation = $354000 x 6% = $21240 Office equipment = $180,000 x 12% = $21,600
Motor vehicles = $66,000 -6,000 = $60,000 -21,600 = $38,400 x 20%= $7,680
Accumulated depreciation premises = $21,240 + 21,240 = $42,480
Accumulated depreciation office equipment = $64,800 + 21,600 = $86,400
Accumulated depreciation motor vehicle = $21,600 +7,680 = $29,280
Bank = $62,667-369 = $62,298 Capital Clarence = $270,000 -30,000 = $240,000
SOLUTION
a. Clarence & Leroy
Income statement for the year ended September 30, 2013
This is where we will end for this week. Join me again next week as we continue to complete the syllabus. Grasp the concepts and retain them. You will need them as you progress to excellence. See you next week.