How to prepare partners' Capital and Current Accounts

Accounting for Partnerships

What you need

• Net profit or net loss from the Income Statement, plus the figures from the Profit and Loss Appropriation Account.
• The partnership agreement terms: each partner's opening capital, the rate of interest on capital, salaries, the rate or amount of interest on drawings and the profit-sharing ratio.
• A record of each partner's drawings (cash or stock) during the year.
• Opening balances of the Capital and Current Accounts (if any) brought forward from the previous year.

Step by step

1. 1

   Choose the method and gather information

   Perniagaan Setia is owned by Aiman and Bala. Aiman's capital is RM60,000 and Bala's is RM40,000. Agreement terms: interest on capital 5% per year, Bala's salary RM6,000, interest on drawings Aiman RM300 and Bala RM200, drawings Aiman RM8,000 and Bala RM5,000, profit-sharing ratio 3:2. Net profit for the year is RM50,000. Decide whether to use the fixed or fluctuating capital method, because this determines how many accounts you open.

2. 2

   Prepare the Profit and Loss Appropriation Account

   Work out each appropriation first. Interest on capital: Aiman 5% x RM60,000 = RM3,000, Bala 5% x RM40,000 = RM2,000. Bala's salary RM6,000. Interest on drawings Aiman RM300 + Bala RM200 = RM500 (credited back to this account). Profit available for distribution = RM50,000 - RM5,000 - RM6,000 + RM500 = RM39,500. Aiman's share 3/5 x RM39,500 = RM23,700, Bala's 2/5 x RM39,500 = RM15,800. These figures are what you post to the Current or Capital Accounts.

3. 3

   Prepare the Capital Account (fixed capital method)

   Under the fixed capital method the Capital Account records only the original capital and permanent changes (additional capital or capital withdrawn). Credit Aiman's Capital Account RM60,000 and Bala's Capital Account RM40,000 as the balance b/d. If a partner injects more capital, the entry is Debit Bank; Credit the partner's Capital Account. In this example there is no change, so the balances stay at RM60,000 and RM40,000.

4. 4

   Enter the credit side of the Current Account

   Post the appropriations that increase a partner's balance. Aiman's Current Account: Credit Interest on capital RM3,000 and Credit Share of profit RM23,700. Bala's Current Account: Credit Interest on capital RM2,000, Credit Salary RM6,000 and Credit Share of profit RM15,800. The double entry for each item is Debit Profit and Loss Appropriation Account; Credit that partner's Current Account.

5. 5

   Enter the debit side of the Current Account

   Post the items that reduce a partner's balance. Aiman's Current Account: Debit Drawings RM8,000 and Debit Interest on drawings RM300. Bala's Current Account: Debit Drawings RM5,000 and Debit Interest on drawings RM200. The double entry for drawings is Debit Current Account, Credit Drawings Account; for interest on drawings it is Debit Current Account, Credit Profit and Loss Appropriation Account.

6. 6

   Balance the Current Account and bring down the balance

   Total both sides. Aiman's Current Account: credit total RM26,700 less debit total RM8,300, so the balance c/d of RM18,400 is entered on the debit side to balance, then brought down as balance b/d RM18,400 (credit). Bala's Current Account: credit total RM23,800 less debit total RM5,200, so the balance c/d is RM18,600 (credit). A credit balance means the partnership owes that amount to the partner.

7. 7

   Compare with the fluctuating method and present the accounts

   Under the fluctuating capital method there is no Current Account; every item is posted straight into the Capital Account. Aiman's Capital Account = RM60,000 + RM3,000 + RM23,700 - RM8,000 - RM300 = RM78,400; Bala = RM40,000 + RM2,000 + RM6,000 + RM15,800 - RM5,000 - RM200 = RM58,600. In the Statement of Financial Position (fixed method), show Capital (RM60,000 + RM40,000 = RM100,000) and Current Accounts (RM18,400 + RM18,600 = RM37,000) under the owners' equity section.

Second example

Kedai Harmoni, owned by Chong and Devi, uses the fixed capital method. Chong's capital is RM50,000 and Devi's is RM30,000. Terms: interest on capital 4% per year, Chong's salary RM4,000, no interest on drawings, equal profit-sharing (1:1). Drawings: Chong RM3,000, Devi RM9,000. Net profit: RM12,000. Interest on capital: Chong RM2,000, Devi RM1,200. Profit available = RM12,000 - RM3,200 - RM4,000 = RM4,800, so RM2,400 each.

Chong's Current Account: credits RM2,000 + RM4,000 + RM2,400 = RM8,400 less drawings RM3,000, giving a balance b/d of RM5,400 (credit). Devi's Current Account: credits RM1,200 + RM2,400 = RM3,600 less drawings RM9,000, giving a balance b/d of RM5,400 on the debit side (a debit balance). A debit balance means Devi has drawn more than her share, so in the Statement of Financial Position this balance is deducted from her capital rather than added to it.

Common mistakes

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