Partnerships

Question 1

Define a partnership

Answer 1

A business in which two or more people work together as owners with the goal of making a profit

Question 2

Suggest why one would want to form a partnership

Answer 2

• Capital required exceeds what one person can provide
• Experience and management skills required is more than what is found in one person
• Sharing management tasks
• Partners are often family

Question 3

Name the characteristics of a partnership

Answer 3

• Formed to make a profit
• Must obey partnership law
• 2-20 partners
• Each partner must pay a share of debts
• Unlimited liability

Question 4

Name the advantages of a partnership

Answer 4

• Additional finance available
• Each partner’s knowledge, skill and experience can be used to the advantage of the business
• Management responsibilities can be shared
• Owners can stand in for each other in times of illness or when one goes on holiday
• Risks involved are shared

Question 5

In which business is a partnership a good form of ownership?

Answer 5

Trading businesses. A partnership is not a good form of ownership for a trading business

Question 6

Name the disadvantages of a partnership

Answer 6

• Profits are shared
• All partners must follow joint policy decisions
• An action by one parters affects all the others
• Decisions take longer
• Disagreements can occur

Question 7

Explain what a limited parter is

Answer 7

• Not liable for debts
• Liability limited to capital invested
• No part in management
• NB Not all partners can be limited, because then there would be no business…

Question 8

Explain the importance of an appropriation account

Answer 8

• Shows how the net profit is shared between partners

- Shows all appropriations required by the partnership agreement

Question 9

Explain the importance of a current account

Answer 9

• Partners’ personal account

- Anything to which the partner is entitled to is credited in this account

Question 10

What is a fixed capital account?

Answer 10

• Capital & current accounts kept seperately
• Capital account fixed with money invested by partner
• Current account consists of pofits, interests, salary & bonus

Question 11

What is a fluctuating capital account?

Answer 11

• Profits, salaries, bonusses, etc will be credited in the capital account
• Drawings & interest on drawings will be debited

Question 12

What does the Partnership Act state when no partnership agreement is made?

Answer 12

• Profits & losses shared equally
• No interest on capital & drawings
• No salaries allowed
• Money which is in excess = 5% interest per annum

Question 13

Define interest on capital

Answer 13

Where partners share the work equally but invest different amounts of capital, they may decide to pay interest to compensate the partners for a loss of interest that they could otherwise earn on the money now tied up in the business

Question 14

Define interest on drawings

Answer 14

Used to discourage partners from making drawings early in the financial year

Question 15

What is the effect of interest on drawings & capital on a partner’s account?

Answer 15

Interest on drawings: Decreases

Interest on capital: Increases