5.2 Partnerships (3)
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1.
ABC Partnership has the following balances at 31st December 2023:
- John: Capital - £25,000
- Sarah: Capital - £30,000
- David: Capital - £15,000
- John: Current Account - £2,000 (Debtors)
- Sarah: Current Account - £1,500 (Creditors)
Draw up the Partners' Capital and Current Accounts in ledger account form.
Partners' Capital Accounts
John
| Date | Particulars | Debit (£) | Credit (£) |
| 1st Jan 2023 | Balance b/f | 25,000 | |
| 31 Dec 2023 | | | 25,000 |
Sarah
| Date | Particulars | Debit (£) | Credit (£) |
| 1st Jan 2023 | Balance b/f | 30,000 | |
| 31 Dec 2023 | | | 30,000 |
David
| Date | Particulars | Debit (£) | Credit (£) |
| 1st Jan 2023 | Balance b/f | 15,000 | |
| 31 Dec 2023 | | | 15,000 |
Note: The current account balances are not directly linked to the capital accounts in this scenario. They would be dealt with separately in the ledger.
2.
John is a sole trader. He has the following balances at 31st December 2023:
- Cash: £2,000
- Debtors: £3,500
- Creditors: £1,200
- Capital: £5,000
- Equipment: £4,000
- Accumulated Depreciation: £1,000
- Provision for Doubtful Debts: £200
Prepare the adjustments to the financial statements for John's sole trader business.
Adjustments to Financial Statements - John's Business
The following adjustments are required:
- Provision for Doubtful Debts: The £200 provision for doubtful debts is an income statement adjustment and will be deducted from the total credit control balance.
Table of Adjustments:
| Adjustment | Impact on Financial Statements |
| Provision for Doubtful Debts | Reduce Debtors |
3.
Describe the advantages and disadvantages of using a capital account for a business. Consider the information it provides and its limitations.
Advantages of using a Capital Account:
- Provides a clear picture of owner's investment: The capital account clearly shows the initial investment made by the owner(s) and any subsequent additions or withdrawals.
- Tracks profitability: It reflects the accumulated profit or loss of the business over time, providing a measure of financial performance.
- Simple to understand: The concept of a capital account is relatively straightforward and easy to understand, even for those with limited accounting knowledge.
- Legal and regulatory requirements: In some jurisdictions, maintaining a capital account is a legal requirement for certain types of businesses.
Disadvantages of using a Capital Account:
- Limited information on current financial position: It doesn't provide a detailed breakdown of the business's current assets, liabilities, or recent transactions.
- Doesn't reflect changes in equity structure: It doesn't easily show changes in the ownership structure of the business (e.g., new investors).
- Can be misleading if not properly maintained: If transactions are not accurately recorded, the capital account can provide a misleading picture of the business's financial health.
- Doesn't offer detailed analysis: It doesn't provide the detailed analytical information available from a full set of financial statements (e.g., profit and loss account, balance sheet).
In summary, while the capital account provides valuable information about the owner's investment and profitability, it has limitations in terms of providing a comprehensive view of the business's financial position. It is often used in conjunction with other financial statements to get a complete picture.