IGCSE Accounting 0452 - 5.2 Partnerships

This section details the adjustments required to financial statements when preparing the accounts of a partnership. It builds upon the concepts learned in 5.1 (Sole Traders).

5.2.1 Profit and Loss Account Adjustments

The Profit and Loss Account for a partnership requires adjustments to reflect the specific nature of the business and the partnership agreement. These adjustments are similar to those made for sole traders but with added considerations for profit sharing.

Common Adjustments

• Depreciation: Depreciation on assets needs to be calculated and included.
• Bad Debts: Any uncollectible debts should be written off.
• Provision for Doubtful Debts: A provision is created to estimate future bad debts.
• Revaluation of Assets: If assets have been revalued during the accounting period, the changes should be reflected.
• Accruals: Expenses incurred but not yet paid (e.g., salaries, rent) need to be accrued.
• Prepayments: Income received in advance (e.g., rent) needs to be adjusted.
• Inventory: The value of closing inventory should be determined.
• Interest Expense: Interest on loans should be included.

Partnership Profit Sharing

The profit and loss is typically divided between the partners according to their agreed profit-sharing ratio. This ratio is usually outlined in the partnership agreement.

Example Calculation

Suppose a partnership has a profit of $10,000 and the profit-sharing ratio is 2:1 (Partner A: Partner B).

Partner A's share: $$ \frac{2}{3} \times 10,000 = $6,666.67 $$

Partner B's share: $$ \frac{1}{3} \times 10,000 = $3,333.33 $$

5.2.2 Balance Sheet Adjustments

The Balance Sheet for a partnership follows similar principles to those for sole traders, but with the addition of a partner's capital accounts.

Key Balance Sheet Items

Item	Calculation
Capital Accounts (Partner A & Partner B)	Beginning Capital + Profit/Loss - Drawings
Current Assets	e.g., Cash, Debtors, Inventory
Fixed Assets	e.g., Buildings, Equipment, Vehicles - Less Depreciation
Current Liabilities	e.g., Creditors, Accruals, Loans Payable
Loans Payable	The outstanding balance of any loans taken by the partnership.

Partner's Capital Accounts

Each partner has a capital account which reflects their initial capital investment, any profit or loss they have made, and any drawings they have taken.

Capital Account Calculation: Beginning Capital + Net Profit/Loss - Drawings = Ending Capital

Example Calculation

Partner A's Beginning Capital: $20,000

Partner A's Net Profit: $3,000

Partner A's Drawings: $1,000

Partner A's Ending Capital: $$ 20,000 + 3,000 - 1,000 = $22,000 $$

5.2.3 Preparing the Partnership Accounts

The preparation of partnership accounts involves preparing the Profit and Loss Account and the Balance Sheet. The format is similar to that used for sole traders, but the profit is divided between the partners.

1. Prepare the Profit and Loss Account, including all necessary adjustments.
2. Calculate the profit or loss for each partner based on the profit-sharing ratio.
3. Prepare the Balance Sheet, including the capital accounts of each partner.

Suggested diagram: A flowchart showing the flow of information from the ledger accounts to the Profit & Loss Account and Balance Sheet.