What is a partnership?
A business that has more than one owner but is not a limited liability company
If there is a deed of partnership it must have:
Capital from each partner Interest on drawings Interest on Capital Any salaries to partners Ratio for profit/loss shared
If there isn’t a deed of partnership:
No interest on Capital/Drawings
No salaries to partners
Profit/loss shared equally
Partners get 5% interest per annum on loans made to partnership
State 5 advantages of a partnership
- More owners leads to access to more capital
- Banks will be more willing to lend as there is more security for repayment of loan
- decisions are able to be discussed
- some partners may have special skills
- Suppliers more willing to sell on credit as there more owners to turn to if business can’t pay
Give 4 disadvantages of Partnerships
- Profits will be shared with others
- unlimited liability
- Any agreement made by one partner binds them all (Except LLPs)
- if partnership fails and a partner can’t pay their debts, other partners will have to pay it off
How does an appropriation account work
Profit for the year
Then add interest on Drawings
Less salary
Less interest on Capitals
This produces the value of residual profit
Which you use the profit ratio on residual value to work out profit share
What are the advantages of keeping Capital + Current A/C seperate
- Easy to identify when a partner is overdrawn
- Reduces risk to other partners
- Easy to calculate interest on Capitals
- Capital accounts only changed when there is a change in the partnership agreement
What are the disadvantages of keeping Capital + Current A/C seperate
Extra work - as there is another account to prepare
Only worth doing if there’s interest on capital present
