Capital-And-Current-Accounts Igcse Edexcel

Partners’ capital accounts

What is a partner’s capital account?

• The capital account shows the amounts that were originally invested in the partnership by each partner

  • Plus any amounts of money they may put in at a later date

  • Loans to the business from a partner are not entered into the capital account

• The capital account of each partner is only used for recording the partners’ capital contribution and partners’ withdrawal of capital

  • Withdrawal of capital is different to taking drawings

  • Drawings are not entered into the capital account

What is the layout of a partner’s capital account?

• Each partner might have a separate capital account or there might be one combined capital account for the partnership

  • If a combined account is used then there are columns for each partner on both sides

• The capital account has a credit balance and shows the amount owed by the business to the partner(s)

• Entries are only made when the amount of capital invested by the partners changes

  • The entry is on the credit side if it is an increase

  • The entry is on the debit side if it is a decrease

Partners’ current accounts

What is a partner’s current account?

• The current accounts are prepared after the appropriation account

• The current accounts are treated as working accounts to show the change in the amount owed to each partner by the business

  • Permanent changes go into the capital accounts

    • Such as further investments into the business

  • Temporary changes go into the current accounts

    • Such as profit shares, salaries and interest on capital, drawings and loans

What is the layout of a partner’s current account?

• Each partner might have a separate current account or there might be one combined current account for the partnership

  • This is same as for a capital account

• Entries are made on the debit side if the amount the business owes the partner(s) decreases

  • Loss for the year

  • Partner’s drawings

  • Interest on a partner’s drawings

• Entries are made on the credit side if the amount the business owes the partner(s) increases

  • Profit for the year

  • Interest on a partner’s capital

  • Interest on a partner’s loan

  • A partner’s salary

• The closing balance of the current account shows how much undrawn or overdrawn profits the partner has

  • A debit balance indicates that the partner has taken too much money from the partnership in anticipation of profits

    • The partner owes the business money

  • A credit balance indicates that the partner has not taken all of their share of the profits

    • The business still owes the partner money

Why do partnerships use both a current account and a capital account?

• Partnerships use both a current account and a capital account to keep different types of entries separate

• The capital account only contains the amounts invested by each partner

  • This means that partners can easily see how much everyone has invested

  • This makes it easier to calculate the interest on capital

• The current account shows annual changes made to the amounts owed to the partners by the business

  • This allows the partners to see which partners are withdrawing more money than their profit share

How are loans from partners treated in the accounts of a partnership?

• Loans from partners are treated in a similar way to other loans

• They are not treated as part of the partner’s capital account

  • A loan account is created

• The loan is a liability on the statement of financial position

• The interest is added to the partner’s current account

  • The partner can withdraw the interest from the business bank account as drawings

What are the journal entries for the partners’ current account?

• At the end of the year journal entries are made for the items in the partner’s current accounts

• To remember the journal entries:

  • Identify whether the entry is on the debit or credit side of the partner’s current account

  • Identify where the amount has come from