Paper 2 Answering Technique
Paper 2 Answering Technique: Accounting for Partnerships
This guide shows how to answer Paper 2 structured questions for the Partnership Accounting chapter systematically, from reading the question to preparing the accounts and financial statements and handling dissolution, while securing the method marks.
Book a Trial Class
One-hour paid trial · Same-day reply · from RM50/hr
Read and decode the question before writing
- Identify the required format: whether the account is in 'T' form or statement format, because presentation marks depend on the correct layout.
- Mark all given data: each partner's opening capital, profit-sharing ratio, salary/allowance/bonus, rates of interest on capital, on drawings and on partners' loans, and the net profit.
- Determine the method used: the Fixed Capital Method needs a Capital Account and a Current Account, while the Fluctuating Capital Method uses only a Capital Account.
- Check whether a Partnership Agreement exists; if none, apply Section 26 of the Partnership Act 1961 (no interest on capital, no salary, profits/losses shared equally, 8% per annum interest on partners' loans).
- Note the dates of drawings for time-apportioned interest on drawings when stated.
Plan the working order and show computations
- Follow a logical order: the Profit and Loss Appropriation Account first, then the Current Accounts (if any), followed by the Capital Accounts and finally the Statement of Financial Position.
- Write labelled workings for every figure (interest on capital, salary, interest on drawings, share of profit) so that method marks are still earned even if the final answer is wrong.
- Remember that interest on a partner's loan is an expense in the Profit and Loss Account (deducted before net profit), not an appropriation, and is credited to that partner's Current Account.
- Compute interest on drawings first and add it to the distributable profit before deducting interest on capital and salaries.
Prepare the Profit and Loss Appropriation Account correctly
- In 'T' form: the debit side records interest on capital, salaries/allowances/bonuses and shares of profit; the credit side records net profit b/d and interest on drawings.
- In statement format: start with net profit, add interest on drawings, deduct interest on capital, salaries and bonuses, then divide the residual profit by the ratio.
- Show each partner's breakdown for interest on capital and salaries, not just the aggregate total, so the examiner can see the basis of computation.
- The share of profit may be computed equally, by the ratio of opening capital balances, or by a fixed ratio as stated in the question.
Handle the Capital and Current Accounts
- Fixed Capital Method: the Capital Account records only capital contributed or permanently withdrawn; all other items go into the Current Account.
- In the Current Account, credit interest on capital, salary, share of profit and interest on the partner's loan; debit drawings, interest on drawings and share of loss.
- Fluctuating Capital Method: all appropriation items flow directly through the Capital Account and no Current Account is prepared.
- A debit balance in the Current Account means the partner owes the firm (shown as an asset), while a credit balance is shown under owner's equity.
Answer partnership dissolution questions systematically
- Follow the procedure: transfer assets (except bank/cash) to the debit of the Realisation Account, transfer related liabilities and provisions to the credit, record disposal proceeds, pay liabilities and dissolution expenses.
- Record each step in the General Journal first, then build the Realisation Account, Bank Account and partners' Capital Accounts from those entries.
- The profit or loss on realisation is shared among the partners according to their profit-and-loss-sharing ratio.
- If a partner's Capital Account has a debit balance at the end, discuss the resolution: that partner pays in the deficiency in cash, or if unable, the deficiency is borne by the remaining partners with credit balances.
Manage time and secure the method marks
- Do the parts you are most confident about first and allocate time according to the size of each part of the question.
- Always show the computation workings because method marks are still awarded even when the final total is wrong.
- Complete every account with its heading, dates and the correct 'Balance b/d' and 'Balance c/d' entries.
- Cross-check that the Statement of Financial Position balances and that the owner's equity section combines the Capital Account with the Current Account balances.
| Item | RM |
|---|---|
| Net profit | 30,000 |
| Add: Interest on drawings | 800 |
| 30,800 | |
| Less: Interest on capital | 3,500 |
| Less: Partners' salaries | 6,000 |
| Residual profit to be shared | 21,300 |
| Share of profit: Partner A | 10,650 |
| Share of profit: Partner B | 10,650 |
Figures are illustrative only to show the layout; the profit-sharing ratio is assumed equal.
What happens to the computations if there is no Partnership Agreement?
Section 26 of the Partnership Act 1961 applies: no interest on capital, no partner salary or bonus, profits and losses are shared equally, and a partner's loan or advance beyond capital earns interest of 8% per annum.
Where is interest on a partner's loan recorded?
It is a business expense deducted in the Profit and Loss Account before net profit is arrived at, not in the Appropriation Account, and it is credited to that partner's Current Account.
What is the main difference between the Fixed Capital Method and the Fluctuating Capital Method?
The Fixed Capital Method keeps two accounts per partner (a permanent Capital Account and a Current Account for all other items), whereas the Fluctuating Capital Method uses a single Capital Account that absorbs all appropriation and drawings items.
Other resources for this chapter
Need help with Accounting for Partnerships?
One-hour paid trial · Same-day reply · from RM50/hr
Book a Trial Class