Fundamentals of Partnership Lecture Notes

Introduction

• This session focuses on the Capital Account and revisits the P&L Appropriation Account in partnerships.
• Key topics include interest on capital, appropriations, and charges against profits.

P&L Appropriation Account

• Purpose: Distribution of profits among partners.
  • Profit sources: From P&L account.
  • Interest on Drawings: Money received from partners due to withdrawals.
• Distribution: Money is distributed to partners as:
  • Interest on Capital
  • Partner's Salary, Bonus, Commission
  • Reserve
  • Divisible Profit
• Key Concept: Appropriation reflects money given to partners, while the firm earns profits and collects interest on drawings.

Charges Against Profits vs. Appropriation Out of Profits

• Appropriation of Profits
  • Refers to distribution out of profits (e.g., IOC, salaries, commissions for partners).
  • Only applies if the firm makes a profit.
• Charge Against Profits
  • Items that must be paid regardless of profit or loss.
  • Examples include:
    • Interest on loan
    • Rent
    • Manager's commission
    • Employee's salary
  • Recorded in the P&L account before calculating profit, indicating priority payment even in losses.

Charge vs. Appropriation

• Charge Items: Paid irrespective of firm's financial status (profit or loss).
  • Recorded in the P&L account before net profit calculation.
• Appropriation Items: Dependent on profit availability, recorded in P&L appropriation account.

Handling Appropriations Greater than Profits

• Scenario: When the required appropriation exceeds available profits.
• Solution: Distribute available profits in the ratio of appropriations.
  • Example: If appropriations exceed, distribute the available profit proportionately to appropriation expectations.

Next Steps

• Focus on Interest on Drawings in the next session.
  • In-depth exploration and problem-solving.

Closing Remarks

• Basic classes are crucial for strong foundational knowledge.
• Upcoming session will delve into interest on drawings.
• Reminder to revisit and review previous classes for continuity.
• Encouragement to share and engage with the content.

Note

• A playlist will be created for easy access to all sessions.
• Keep a lookout for next classes to solidify understanding of partnership accounts.