CHAPTER 15

SOLE TRADER AND PARTNERSHIP

FINANCIAL STATEMENTS UNDER
UK GAAP

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 LEARNING OBJECTIVES
 Record and account for transactions and events resulting in income,
expenses, assets, liabilities and equity in accordance with the
appropriate basis of accounting and the laws, regulations and
accounting standards applicable to the financial statements

 Record and account for changes in the ownership structure and

ownership interests in an entity

 Identify the main components of a set of financial statements and

specify their purpose and interrelationship

 Prepare and present a statement of financial position, statement of

profit or loss, statement of changes in equity and statement of cash
flows (or extracts) from the accounting records and trial balance in a
format which satisfies the information requirements of the entity

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TOPIC LIST
15.1. Sole trader financial statement
15.2. Partnerships
15.3. Preparing partnership accounts
15.4. Accounting for changes in partnership
structure

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15.1. SOLE TRADER FINANCIAL STATEMENTS
 Sole trader F/Ss are similar in terminology and format
to those of companies prepared under UK GAAP, but
there are important differences.
 Tax is not included in sole trader accounts.
 Format: no formal requirements as to headings in
the profit and loss account.
 The ownership interest half of BS shows opening
capital, plus capital introduced, less drawings, plus
profits/less losses to arrive at the closing net assets.
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15.2. PARTNERSHIPS
15.2.1. The partnership agreement
 Capital. Each partner puts in a share of the capital.
 Interest on capital. treated as a profit appropriation.
 Partners' salaries. appropriation of profit. Paying
salaries gives each partner an income before the
residual profits are shared out in PSR.
 Profit-sharing ratio (PSR). Partners can agree to
share residual profits and losses after interest and
salaries in any PSR
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15.2. PARTNERSHIPS
15.2.1. The partnership agreement
 Guaranteed minimum profit shares. Partners can
agree that one or more partners should get a
guaranteed minimum profit share (interest on capital,
salaries and the profit-sharing ratio (PSR)) - the
remaining profits are shared between the other
partners in the PSR. Occasionally, one partner will
guarantee another partner's minimum profit share.

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15.2. PARTNERSHIPS
15.2.1. The partnership agreement
 Drawings. Partners can withdraw profits from the
business just like sole traders. They can agree to put a
limit on how much they should draw out in any period,
and they can be charged interest on their drawings
during the year. Interest on drawings is treated as
a negative appropriation of profit

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15.2. PARTNERSHIPS
15.2.2. Appropriating partnerships profit
 Allocate interest on capital, interest on drawings and
partners’ salaries
 Share out residual profit in PSR

Worked example/Interactive question (LN)

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15.2. PARTNERSHIPS
15.2.3. Guaranteed minimum profit share
Worked example/Interactive question (LN)

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15.3. PREPARING PARTNERSHIP ACCOUNTS
 Each partner's interest in the PNS is shown in a
capital account and a current account.
 If a partner has made a loan to the PNS, this is treated
the same as a third party loan, with interest deducted
before arriving at net profit. Interest may be credited to
current account rather than being paid in cash.
A profit appropriation statement is used to
appropriate salaries, interest on capital, interest on
drawings and residual profit share
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 15.3. PREPARING PARTNERSHIP ACCOUNTS
15. 3.2 Accounting for each partner's ownership interest
 Current account: A record of the profits retained in the
business by the partner
 Differences between capital and current accounts are as
follows.
The balance on the capital account remains static (*)
The balance on the current account is continually
fluctuating up and down (profits and losses; drawings).

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15.3. PREPARING PARTNERSHIP ACCOUNTS

15.3.2 Accounting for each partner's ownership interest

 The ownership interest side of the partnership balance
sheet will therefore consist of:
capital accounts for each partner
current accounts for each partner

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15.3. PREPARING PARTNERSHIP ACCOUNTS

15.3.3 Accounting for loans by partners

 A partner making a loan to the partnership becomes its
creditor. On the balance sheet the loan is shown
separately. Interest on the loan is a deduction from profit
to arrive at net profit, not an appropriation of profit.
Interest is payable at 5%. Interest on partners' loans is
usually credited to the partner's current account

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15.3. PREPARING PARTNERSHIP ACCOUNTS
15.3.4 Accounting for appropriation of net profit/loss
 The net profit of a partnership is shared out in the PSR
(a) DEBIT P & L ledger account with net profit c/d
CREDIT P & L appropriation account with net profit b/d
(b) DEBIT P & L appropriation account
CREDIT The current accounts of each partner

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 15.3. PREPARING PARTNERSHIP ACCOUNTS
15.3.4 Accounting for appropriation of net profit/loss
Step 1
Establish the net profit, after deducting interest on loans from partners.
Step 2
Appropriate interest on capital and salaries first. These items are appropriations
of profit and do not appear in the P & L account.
Step 3
Charge partners interest on their drawings where relevant.
Step 4
Residual profits are shared out between partners in the PSR.
Step 5
Each partner's share of profits is credited to his/her current account. The
calculations involved in steps 2 to 4 are made in a PAS 16
15.3. PREPARING PARTNERSHIP ACCOUNTS

15.3.5. Partnership accounts and the TB

 Accrued interest on a partner's loan
DEBIT Interest expense £X
CREDIT Current account £X
 Partner's drawings
DEBIT Current accounts £X
CREDIT Drawings accounts £X
 Each partner's total profit share
DEBIT Profit and loss account £X
CREDIT Current accounts (balance sheet) £X
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15.4. CHANGES IN PNS STRUCTURE

15.4.1. Retirement or death of a partner

15.4.2. Goodwill in the PNS accounts
15.4.3. Admission of a partner

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End of Chapter 15
Thank you!

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