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Lecture

ACCT 301 Lecture Notes - Capital Account


Department
Accounting
Course Code
ACCT 301
Professor
All

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Chapter 26
Capital Accounts
When a partnership is formed each partner puts in some capital to the business, and
each is recorded separately in a series of capital accounts, so that a record I skept of
how much is owed to whom.
Current Accounts
each partner will also have a current account, which is used to record the profits
retained in the business by the partner and it differs from the capital account in that
the later remains ‘static’ from year to year whereas a current account is continually
changing due to the making of profits and drawings.
Basically any income transferred to the current account, is a credit entry, and any
expense charged to the current account is a debit entry.
Interest on Capital
a partnership agreement also provides for interest on the balance of the partner’s
capital account NOT the current account. The interest received by each partner is
transferred to the current account.
Drawings
whenever a partner makes any drawings, the transaction is recorded in a drawings
account as with sole traders. Yet, in addition, at the year end the drawings will be
cleared to the current accounts.
Loan to the Partnerships
Partners may loan the business some money, whilst earning interest from the
business too. This loan is treated as a current or long term liability rather than a
partners’ fund.
The interest received by each partner on the loan is transferred to their current
account and it is treated as an expense in the profit and loss account. In addition, if
there’s no interest rate specified, the Partnership’s Act 1890 provides for interest to
be paid at 5% p.a.
Appropriation of Net Profits
In preparing the final accounts of the business, we would normally arrive at the net
profit of the business at the end of the profit and loss account. Since each partner
may share a different amount of profit in what is known as a profit sharing ratio, the
net profit should be appropriated to each of the partner’s current account. This
process is done as follows:
Step 1 Arriving at the Net Profit figure.
Operating Profit
Less: Drawings
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