Financial Accounting - Assessment Item 2 — Written Component

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drawings and the current status of the partnership ie profits or losses.

I firmly believe in the use of a Capital Account to give the necessary “big picture” needed to assess the success or failure of the venture so far.

15.5 Accounting for the formation of a partnership

Partnership formations are super critical to get right because not only do the partners have to take into account the tangible assets of the business such as cash holdings and vehicles but also the intangible assets such as Goodwill. This means that if one partner has a good name in the industry that they are going into, this “asset” can be assigned a monetary value. This also takes into account if one or more of the partners will have loyal customers and the like. Seems incredible wishy washy to me. How is this proven, much less valued? By the financial fairies?

15.6 Allocation of partnership profits and losses

Profit/loss allocations are achieved in the following manner:

• Fixed Ratio – makes sense that there is a finite way to divide up profits/losses. Does not allow for salaries or interest earnt though. Not sure why anyone would choose this unless they did not intend to actually work the business.

• Fixed ratio after allowing for interest and salaries – Again a consistent way of dividing up profits or losses but now after allowing for salaries and other associated deductions. Partners get their stated salary plus interest before distributions are made. A fairly complex calculation that ensure fairness

• Ratio Based on Capital Balances – again a fair method which allows for those partners who have contributed the most to receive the most. Could be another area for conflict though as each partner’s personal circumstances change.

As to which I would be the most comfortable recommending to my clients, the short answer is none of the above. Partnerships are not a great way to ensure success in business, just like marriage is not a good way to ensure a lifelong friendship. But if I had no choice then it would be Fixed ratio allowing for interest and salaries. This is because while it might not be the most equitable, it is quite straight forward which given the complex minefield that is a partnership agreement, is a good thing.

15.7 Drawings and loans made by the partners

As I mentioned earlier, a partner’s personal finances can change and the partnership needs to allow for when the individual partner needs to draw against future profits (sounds a bit like gambling to me) or withdrawing of capital already contributed (seems a bit more sensible). Partners of course, like any loan can be charged interest on these drawings and vice versa can advance more funds to the partnership and therefore receive interest on these monies. This type of flexibility regarding liquidity and other assets would be essential if the partnership had any chance of success.

15.8 Financial statements for a partnership

As per a Sole Trader, there needs to be Financial Reports are prepared in a similar manner for Partnerships as for other types of entities. The key point of difference is that there must be a reporting of each partners’ equity separately in the balance sheet detailing the partners’ equity.

2. MYOB: Pages 312-317 of your set textbook, Accounting 9e

“Mind Your Own Business” is a type of application which is designed to be an accounting software system. It allows for the recording of and the processing required for accounting transactions. It compartmentalises these into functional and practical modules such as payroll, accounts payable, accounts receivable and of course trial balance. Therefore, it acts as an information system for accounting.

Of course like most modern applications, the interface is based on a graphical layout with icons designed to help promote the beginner user as to what should go where. There is even this lovely “ting” if the user is trying to click on or enter data in a which is does not follow the required system. That said, it would be a foolish individual who tried to use this without any knowledge of accounting or at least the basic business principles behind double entry.

Overall, I find this information system to be useful if a little tedious at times. But then I found a manual system of accounting to be truly hideous so I think I had best not complain overly much.

3. Pages 1 - 2 of your MYOB Practice Set, Prickly Pines (accounting program)

Prickly Pines was a good introduction to what MYOB can do. A full month of transactions and a range of assets, liabilities to account for. It was interesting on how the transactions were worded but according to my trail balance at least every debit has a corresponding credit. No guarantee that I have not done something wrong but a trial balance that balances always make me feel a sense of achievement.