IGCSE Accounting 0452 - 5.2 Partnerships

This section covers the preparation of financial statements for partnerships, including the income statement, appropriation account, and statement of financial position.

Understanding Partnerships

A partnership is a business owned and run by two or more people who agree to share the profits or losses of the business. Unlike companies, partnerships do not have separate legal existence from their owners.

Key Features of Partnerships

• Shared Profits and Losses
• Unlimited Liability (partners are personally liable for business debts)
• Partnership Agreement (outlines terms of the partnership)

Financial Statements for Partnerships

Partnerships prepare similar financial statements to limited companies, but with some key differences. The main statements are:

• Income Statement: Shows the partnership's profitability over a period.
• Appropriation Account: Distributes profits or losses to the partners according to their profit-sharing ratio.
• Statement of Financial Position: Shows the partnership's assets, liabilities, and capital at a specific point in time.

Income Statement

The income statement follows the same format as for a sole trader or limited company. It shows revenues and expenses over a period.

Item	Amount (£)
Revenue	$Revenue$
Cost of Goods Sold (if applicable)	$COGS$
Gross Profit	$Gross Profit = Revenue - COGS$
Operating Expenses	$Operating Expenses$
Operating Profit	$Operating Profit = Gross Profit - Operating Expenses$
Interest Expense	$Interest Expense$
Profit Before Tax	$Profit Before Tax = Operating Profit - Interest Expense$
Tax Expense	$Tax Expense$
Profit After Tax	$Profit After Tax = Profit Before Tax - Tax Expense$

Appropriation Account

The appropriation account takes the profit or loss from the income statement and distributes it to the partners according to their agreed profit-sharing ratio.

Profit-Sharing Ratio: This is the percentage of profits or losses each partner receives. It's usually agreed upon in the partnership agreement.

Calculation: The profit or loss is multiplied by each partner's profit-sharing ratio to determine their share.

Partner	Profit-Sharing Ratio	Amount (£)
Partner A	$Ratio_A$	$Amount_A = Profit \times Ratio_A$
Partner B	$Ratio_B$	$Amount_B = Profit \times Ratio_B$
Partner C	$Ratio_C$	$Amount_C = Profit \times Ratio_C$

Statement of Financial Position

The statement of financial position shows the partnership's assets, liabilities, and capital at a specific date.

Assets	Amount (£)
Cash at Bank	$Cash$
Debtors (Accounts Receivable)	$Debtors$
Inventory (Stock)	$Inventory$
Fixtures, Fittings, and Equipment	$Fixtures$
Total Assets	$Total Assets = Sum of all Assets$

Liabilities	Amount (£)
Creditors (Accounts Payable)	$Creditors$
Loan from Bank	$Loan$
Total Liabilities	$Total Liabilities = Sum of all Liabilities$

Capital	Amount (£)
Partner A's Capital	$Capital_A$
Partner B's Capital	$Capital_B$
Partner C's Capital	$Capital_C$
Total Capital	$Total Capital = Sum of all Capitals$

Accounting Equation: Assets = Liabilities + Capital

Example Calculation

Partnership Name: Smith & Jones

Profit-Sharing Ratio: Smith 2:3, Jones 3:5

Profit Before Tax: £20,000

1. Calculate the total ratio: 2 + 3 = 5, 3 + 5 = 8

2. Calculate Smith's share: ($20,000 \times \frac{2}{5}) = £8,000$

3. Calculate Jones' share: ($20,000 \times \frac{3}{8}) = £7,500$

Important Considerations

• Partnership Agreement: A well-drafted partnership agreement is crucial to avoid disputes.
• Liability: Partners have unlimited liability, meaning they are personally responsible for the debts of the partnership.
• Accounting Software: Using accounting software can simplify the preparation of financial statements.