Financial Statements Financial Statements for Partnerships for Partnerships Chapter Chapter 10 10 Best viewed with Office 2010
In order to prevent conflicts, partners need to agree on important issues before starting a business and put them into a partnership agreement . Partnership agreement 1 Capital contribution by each partner The partners should agree among themselves on the amount of capital to be contributed by each partner, which must be / is not necessarily equal.
Partnership agreement 3 Rate of interest on capital Interest may be allowed on partners’ capital as a maximum / minimum return on their capital contributions. Given a fixed rate of interest, a partner who has contributed more / less capital than others will be entitled to more interest. 2 Profit and loss sharing ratio This is the ratio in which partners share the profits or losses of a partnership. It may be linked to the amount of capital contributed or the workload borne by each partner.
Partnership agreement 4 Rate of interest on drawings Given a fixed rate of interest, a partner who has made more drawings than others will be charged more / less interest in order to discourage partners from taking resources out of the partnership. 5 Salaries to partners If the profit and loss sharing ratio does not reflect the unequal workloads of partners, salaries may be paid to partners who contribute more time and effort.
Partnership agreement When there is no partnership agreement Profits and losses are shared equally by all partners No interest on the capital contributed No remuneration for services for the partnership If a partner pays more into the partnership than the agreed capital contribution, he is entitled to interest at an annual rate of 8% on any such advance. No interest should be charged on drawings If there is no agreement of any type (verbal or written), the provisions of the Hong Kong Partnership Ordinance (Chapter 38) apply.
The balance in the profit and loss account represents the net profit made or net loss incurred during that period. However, it is not the net profit or loss that will be shared by the partners. The net profit or net loss should be shared by the partners after the following appropriations: Profit and loss appropriation account Interest on capital Interest on drawings Salaries to partners
The balance of the profit and loss account will first be transferred to an account called the profit and loss appropriation account. Profit and loss appropriation account Or simply called ‘ the appropriation account ’ which records all the appropriation adjustments required for the accounting period. Finally, the balance (i.e., net profit or net loss after appropriations) in the profit and loss appropriation account will be shared by the partners according to the agreed profit and loss sharing ratio.
For a partnership, a capital account is opened for each partner to record the amount of capital contributed , the profit or loss shared, the amount of drawings made, as well as appropriations.
- Spring '07
- partner, current account