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F3 question

  • 04-02-2011 8:26pm
    #1
    Registered Users, Registered Users 2 Posts: 18


    Hi everyone,
    Question- Partnership- Interest on Capital- where does it go- to Partner Current Account or to Partner Capital Account? In F3 Study Book it says – to Current a\c, but in Revision Book-to Capital a\c. What will be right answer for the exam? Thanks!:confused:


Comments

  • Registered Users, Registered Users 2 Posts: 1,163 ✭✭✭hivizman


    In a partnership, interest on capital is regarded as an appropriation of profit - it is one of the ways in which the profit of the business is shared out among the partners, reflecting their respective contributions to the capital of the partnership. Another appropriation of profits may be described as "salaries", reflecting the partners' respective contributions in terms of their "labour", and the other standard appropriation is the division of the residual profit after allowing for interest on capital and salaries, according to the agreed profit-sharing ratio.

    The partners' capital accounts are credited with any capital introduced into the partnership and debited with any capital withdrawn. Other transactions involving the partners affect the current account, so interest on partners' capital accounts will be credited to partners' current accounts. Some textbooks make use of a profit and loss appropriation account, which is credited with the partnership profit and debited with the various appropriations.

    It is fairly standard to keep a drawings account for each partner. At the end of each accounting period, the balance on the drawings account is debited to the partner's current account. So the current account is: opening balance plus appropriation of profit less drawings equals closing balance (consisting of profits not yet withdrawn). In an examination question, you may be given just the total drawings for each partner for the accounting period, in which case you can debit these directly to the respective current accounts.

    Exceptionally, the partnership agreement will specify that the balances on the partners' current accounts are transferred to the partners' capital accounts at the end of each accounting period, but this is not standard practice, and if there is no specific reference to this in a question, it's best to assume that the examiners are expecting to see separate capital and current accounts.


  • Registered Users, Registered Users 2 Posts: 18 SvetaMega


    :)Thanks for the wonderfully detailed answer! It might be crusial for pass/not pass.


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