Lecture Notes: Partnership Appropriation and Current Accounts

Introduction

• Presenter: Chris from Adaptation
• Focus: Solution for Question 4, Jan 2023 POA Episode 2
• Additional resources available: Links and cards for other questions

Partnership Agreement

• Partners: Timmy and Gertie
• Terms:
  1. Interest on capital at 6% per annum
  2. Gertie's salary: $75,000
  3. Interest on drawings: 3% per annum
  4. Profit and loss sharing ratio: 3 to 2 (Timmy:Gertie)

Current and Capital Accounts

• Current Accounts:

  • Start balances (1 Jan 2022): Timmy $14,000 credit; Gertie $5,000 debit
  • Current accounts track earnings and withdrawals, not capital unless specified

• Capital Accounts Start Balances (1 Jan 2022):

  • Timmy: $90,000
  • Gertie: $60,000

• Drawings for Year End (31 Dec 2022):

  • Timmy: $2,500
  • Gertie: $5,600

• Net Income for Year End (31 Dec 2022): $156,757

Appropriation Account

• Objective: Prepare the appropriation account for the year ending 31st Dec 2022
• Steps:
  1. Start with net income: $156,757
  2. Add interest on drawings (Timmy & Gertie): Calculate 3% of $2,500 and $5,600 respectively
  3. Total appropriations include interest on capital and salary:
     • Interest on capital: 6% of $90,000 (Timmy) and $60,000 (Gertie)
     • Total interest on capital: $9,000
     • Gertie's salary: $75,000
     • Total appropriations: $84,000
  4. Subtract appropriations from net income for remaining profit
  5. Share remaining profit in 3:2 ratio (Timmy:Gertie)

Current Accounts Preparation

• Timmy's Account:

  • Opening balance: $14,000 credit
  • Drawings and interest: $2,500, $75
  • Earnings: Appropriation details (interest on capital and profit)
  • Balancing figure: $60,625 credit

• Gertie's Account:

  • Opening balance: $5,000 debit
  • Drawings and interest: $5,600, $168
  • Earnings: Appropriation details
  • Balancing figure: $97,032 credit

Partnership Agreement Details

• Components to include:
  • Names of partnership and partners
  • Titles and responsibilities of each partner
  • Permissible business activities
  • Capital contributions
  • Interest rates on drawings and capital
  • Salaries, drawings limits, and procedures for changes in partnership

Benefits of Partnership

• Larger capital base
• Access to diverse skills
• Wider knowledge base
• Division of labor and specialization

Conclusion

• Solution summary for Question 4
• Invitation for further questions and resources available
• Thank you note and farewell