How Cindy’s Café became

Cindy’s & Fiona’s Delightful Diner

An Accounting Tale

F r o m a S o l e T r a d e r t o a P a r t n e r s h i p

By

C i n d y Lak h r am

TITLE Copyright © 2013 by Author Name. All rights reserved. Printed in the United States of America. No part of this book may be used or reproduced in any manner whatsoever without written permission except in the case of brief quotations em- bodied in critical articles or reviews. This book is a work of fiction. Names, characters, businesses, organiza- tions, places, events and incidents either are the product of the author’s imagination or are used fictitiously. Any resemblance to actual persons, living or dead, events, or locales is entirely coincidental. For information contact; address www.website.com Book and Cover design by Designer ISBN: 123456789 First Edition: Month 2013 10 9 8 7 6 5 4 3 2 1

CONTENTS

INTRODUCTION ........................................................................ 2

CHAPTER ONE .......................................................................... 6

CHAPTER TWO.......................................................................... 9

CHAPTER THREE .................................................................... 11

CHAPTER FOUR ...................................................................... 17

THE FINAL CHAPTER............................................................. 18

Acknowledgments .................................................................... 329

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I N T R O D U C T I O N

T all started as a simple as a dream to market my tasty cakes and desert. A place where my customers

can relax and share their experiences of the day. A place where everyone left feeling satisfied and

happy. I was the owner of my business contributing all the capital, took all the risk and collected the

handsome profits. In accounting language this is called a sole trader. Business was good. You know

how they say love what you do and you wont have to work a day in your life. Well I did not feel like I

was working. Everyone at my café felt like my family and I was happy to serve my family.

Here are some of the features of a sole trader.

I

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My business was located in the heart of the borough of Point Fortin. A town know for its major

contribution to our country’ Gross Domestic Product. The year 2009 was the year that brough a huge change

to my business. During this time there was an increase in industrial development in the area and my clientele

increase by almost double. I know had trouble remembering my customers’ names and my book keeping skills

fell drasctically but it seems as though my profits increased. Yet I had no control. This was bittersweet as my

small restaurant was insufficient to accommodate my clientele, who sometimes had to seek parking and

seating accommodation at my neighbor and close friend’s front porch. Fiona didn’t mind at all as she often

waited patiently for leftovers on a daily basis and I was grateful to for her accommodation to my customers

and the delightful evening coversation.

Eventually, some customers started going to the main competitor. Thankfully, my products were one of a

kind so most of my customers were loyal. This was a great concern to me. One night Fiona suggested if we

can pool our resources together and my problem would be alleviated. Are you serious? I asked Fiona. But I

could tell she was by the glimmer in her eyes. Yes think about it Fiona said I have the extra financial resources

that you need and you already have the expertise. This type of business is called a partnership business. That

weekend I spent hours at the library learning as much as I can about Partnership businesses. I knew I could

trust Fiona but was I capable of running a Partnership business? Would I have to work harder? Woud it mean

less profits for me? Can I still have contact with my customers?

And so this was the beginning of a new era for Cindy’s café.

Why don’t we

merge our

resources?

I wonder if she

means a

Partnership

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This book is a narrative story that seeks to provide the form four and five 5 student with a more

practical accounting understanding of the following key points of the type of business known as

Partnership. Highlighted in this book are the following:

1. Features of a partnership

2. Partnership agreements

3. Accounting for the formation of a partnership

4. Appropriation of Profit and Loss.

5. The balance sheet.

5

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CHAPTER ONE

WELCOME TO CINDY’S AND FIONA’S

Feactures of a partnership

One month later Fiona and I pooled our resources and became co-owners of Cindy & Fiona’s Delightful

Diner. Things change obviously. Besides the name I now shared ownership of the business with Fiona. We

were able to extend the size of the café thanks to Fiona contribution of extra land and finance. Together Fiona

and I agreed to pool our assets and liabilities and were dedicated to sharing high profits. This quite fits the

description of a partnership, which is a form of organization where two to twenty persons are associated to

operate a business entity with a view to earn profit. Each member of such a group is individually known as

‘partner’ and collectively the members are known as a ‘partnership firm’.

O

7

Three months later and business was good. For us this meant that our customers expressed how happy they

were with the service and the safe and comfortable environment. It was late one rainy Friday afternoon and

Lindsay one of my loyal customers and I were reminiscing on the early days of the restaurant. She said she

had loved the cosy feeling of the small café. Then she asked, “Why did you enter into this partnership?” Well,

I said, to me my customers are most important and it was impossible to accommodate everyone in the small

structure. Lindsay laughed loudly, No no I meant couldn’t you have made these changes as a single owner?

Maybe it was possible to achieve as a sole trader but there were several reasons why I chose to enter into this

agreement. Here are four main reasons:

Combined Capital-

As a sole trader I did not have the required amount of capital that was needed to expand my my café. Fiona

provided the additional capital that was needed. Though I had the money to purchase a larger building I did

not want to change my location.

Combined Skills- While I am an excellent chef I was falling behind in my Managegrial and Bookeepig Skills.

In a matter of weeks Fiona was able to develop a computerized inventory and accounting system.

Social Reason – entering into this partnership arrangement also meant that I did not have to be at the diner all

day, all night . Some days Fiona would manage things all by herself and with the extra capital, we were able to

hire extra employees.

As I explained these reasons to Lindsay I also remembered to remind her of another key element of the any

partnership type business. That is the partnership agreement. Now Fiona and I were very close friends for

many years. We share common interests, she was also there for me through heartbreaks from old boyfriends at

high school, even shared happy moments at partying together and riding our bicycle to the beach on

afternoons. If anyone understood what this business meant to me it was her. I trusted her, this made her a good

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candidate to enter into a partnership with. However the stress and strains of business life things can go crazy

sometimes and in the business world there is the need for legal documentation. This brings us to another

important aspect known as the Partnership Agreement.

9

C H A P T E R T W O

THE PARTNERSHIP AGREEMENT

FIONA AND I CHERISHED OUR FRIENDSHIP and so in order to avoid misunderstandings about how

profits/losses are shared, the responsibilities of each partner, and other ownership, management, and operating

decisions we decided to have a formal legal partnership agreement which spelt out the rights and obligations of

each partner.

This agreement contained information regarding the terms and conditions of our partnership agreement. For

example the amount of capital both Fiona and myself contributed to the business. The amount of interest we

would receive on our capital, loans, drawing i.e withdrawals from the business for personal use, loans to and from

partners. The ratio or proportion of how profit or losses are to be shared amongst oversleves as business partners

and the amount of salaries we should be paid.

Lindsay asked, “Was this agreement necessary?” To me it was just a measure to avoid conflict but in the

event that there wasn’t any we would have to abide by the Partnership Act of Trinidad and Tobago.

Terms in the Partnership Agreement may include:

Amount of capital to be contributed by each partners

Ratio in which profits and loss to be shared between partners

Rate of interest, if any to be allowed on partners’ capital

Rate of interest, if any, to be charged on partners’ drawings

Rate of interest, if any, to be allowed on partners’ loans to firm

Salaries to be paid to the partners

In the absence of partnership agreement, the Partnership Ordinance applies which states:

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All partners may contribute capital equally

Profits and losses are to be share by partners equally

No interest is to be paid on capital

No interest is to be charged on partners’ drawings

Partners are entitled to interest of 5% per annum on loans to the firm

No salaries are allowed to partners

Lindsay seemed quite interested in kowing about the partnership agreement so I found a sample of an

agreement and showed it to her. By this time the rain subsided and we greeting each other good night. And I

turned off the lights in the restaurant and called it a day. Oh! How have my business operations changed?

Here is a sample of an agreement.

O u r p a r t n e r s h i p a g r e e m e n t s t a t e d :

Cindy and Fiona hereby agree to start a partnership to be called Cindy and Fiona’s

Delightful Diner agree on the following terms.

1. Each partner will subscribe capital in the form of assets and liabilities.

2. Profits and losses will be shared in the ratio Cindy: 3 and Fiona 2.

3. Interest on Capital at the rate of 10 % per year will be credited.

4. Each partner will receive a monthly salary .

5. Any partner who makes withdrawals of cash, stock or other asset of the partnership will pay interest on

drawings .

6. The partnership will maintain separate Capital and Current Accounts as well as Drawings Account for

each Partnership.

7. Procedures for the entry and exit for partners will be decided on at the end of the first year of the

operations.

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C H A P T E R T H R E E - P A R T N E R S H I P A C C O U N T S

Everyday is a new experience in the world of business I thought to myself as I sat at my office desk entering

invoices into the perpetual computerized accounting system. My thoughts was interrupted by a strange gentlemen

who said he was my new Accountant. He was here to help me understand the accounting procedure for my

partnership business. That day I learnt alot!

Partnership accounts were similar to my as sole trader accounts I practiced. In that the partnership business

does follow the accounting cycle. This means that it was similar in the steps in which I used to enter transactions.

Here are key features to note:

INTEREST ON PARTNERS’ CAPTIAL:

The partners may also agree to reward the partners at a fixed rate, in relation to the amount of capital Fiona and I

brought to the business. This is called interest on capital.

SHARE IF RESIDUAL PROFIT / LOSS:

After fulfilling these terms if their agreement, Fiona and I will enjoy a share or appropriation of any remaining or

residual profit of the partnership. We will also bear a share of loss. The proportion of profit or loss was agreed by

the both of us.

DRAWING AND INTEREST ON DRAWINGS:

This highly productive café was the result of hardwork and dedication on both partners. So we both agreed that

each of us will be able to withdraw money or stock from the business in order to receive our benefit of the

business. Either partner may take money out of the bank that may be needed to pay our creditors. However if

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there is the need for early withdrawals then we agreed that a fixed percentage rate for early withdrawal of his

benefits. This may help or discourage us from doing so, this is called interest on drawings.

PARTNERS’ LOAN TO THE PARTNERSHIP:

There may be occasions where either partner will need to lend money or other assets to the partnership business.

This is any asset lent to the business outside of the asset we agreed to contribute. As with any other loan the

business must pay interest. We agreed that the interest on loans would be 5%. This represents an expense to the

business in the Profit and Loss Account and not as an appropriation of profit.

So if we think about it these benefits, withdrawals and charges will have an effect on the amount we contributed

to the business which our capital is owned to us the partner by the partnership business and should be recorded

accordingly.

ACCOUNTING PROCEDURES

It is quite clear that as partners both member maintains a relationship with the business and all the transactions

between the partner and the business must be recorded. There are two ways in which this can be done:

THE FLUCTUATING CAPITAL ACCOUNT:

Each partner will have two accounts in the general ledger:

A Capital Account

A Drawings Account

All changes in the amount owed to the partners is recorded in the Capital Account, hence the balance will

fluctuate or change after every appropriation.

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THE FIXED CAPITAL ACCOUNT:

We were advised to use this method. All changes in the amount owed to the partner will be recorded in the current

account i.e. interest on loans on loans from partners. The CAPITAL account will remain unchanged hence the

term “ fixed capital account”

Each partner will have three accounts in the general ledger:

A Capital Account

A Drawings Account

A Current Account

15

STEPS IN PARTNERSHIP ACCOUNTING:

1. OPEN JOURNAL ENTRIES LISTING ALL ASSETS & LIABILITES BROUGHT

BY THE PARTNERS

2. POSTING TO THE LEDGERS- CAPITAL & DRAWINGS ACCOUNT.

3. PREPARATION OF FINAL ACCOUNTS

The Partnership final accounts included the :

Trading and Profit & Loss Account

The Approriation Account

The Current Account of Partner

The Balance Sheet

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17

C H A P T E R F O U R

THE TRADING AND PROFIT AND LOSS ACCOUNT FOR PARTNERSHIP

THE TRADING AND PROFIT AND LOSS FOR THE PARNERSHIP IS SIMILAR TO THE SOLE

TRADER’S EXCEPT FOR THE SECTION UNDER THE PROFIT AND LOSS KNOWN AS THE

APPROPRIATION ACCOUNT. Hearing the term Appropriation Account made me quite nervous. So I decided

to aks Mr. Smart the Accountant who I felt was more of a food critic than an accountant as he sampled every type

of pastry I had to offer on that day.

I realized that completing final entries for my business as a partnership is not so difficult.

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T H E P A R T N E R S H I P F I N A L A C C O U N T S

The Profit and Loss Appropriation Account is drawn under the trading and profit and loss account. It shows the

distribution of profits between Fiona and myself. The Capital Accounts on the other hand these accounts record the

amount of capital by each partners.

Whereas the Current Account can be simply explained as when the partnership makes profit/loss, and the

partners take the firm’s resources for private uses and sometimes there maybe a fluctuation in the partners’

capital balances. A current account is set up to maintain constant capital balances of the partners as stated in the

agreement.

Current account is to record:

Share of profit /loss

Interest on capital

Interest on drawings

Interest on loans

Drawings

Partners’ salaries

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H E R E I S A S I M P L E T A B L E T O H E L P Y O U R E M E M B E R

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H E R E I S A S A M P L E O F T H E P R O F I T & L O S S A P P R O P R I A T I O N

21

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T H E CA P IT A L A ND

C U R R E N T A C C O UN T

23

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C I N D Y D E C L A R E S T H A T S H E O W N S T H E F O L L O W I N G

A S S E T S :

TOOLS AND EQUIPMENT $

56000

DEBTORS 12600

STOCK 25100

CASH 7100

CREDITORS 7800

BANK LOAN 6000

25

F I O N A D E C L A R E S T H A T S H E O W N S T H E F O L L O W I N G A S S E T S :

PROPERTY $

63400

TOOLS AND EQUIPMENT 10500

STOCK 3100

BANK 1100

A F T E R D R A W I N G U P T H E A G R E E M E N T W E T H E N D R E W U P T H E

J O U R N A L E N T R I E S .

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THE OPENING JOURNAL ENTRY FOR

Cindy’s & Fiona’s Delightful Diner

27

Cindy’s & Fiona’s Delightful Diner T R I A L B A L A N C E A S A T 3 1 D E C , 2 0 1 5

DETAILS DEBIT

$

CREDIT

$

CAPITAL: CINDY 87000

CAPITAL: FIONA 79000

PROPERTY 64300

TOOLS & EQUIPMENT 66500

OPENING AND STOCK 28200

SALES 310000

PURCHASES 239000

RETURN OUTWARDS 6200

DISCOUNT RECEIVED 3800

WAGES 32000

DEBTORS 25600

CREDITORS 20700

DRAWINGS:CINDY 17000

DRAWINGS: FIONA 15000

BANK LOAN 6000

BANK 24300

BALANCES 512700 512700

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CINDY AND FIONA’S DELIGHTFUL DINER

PROFIT AND LOSS APPROPPRIATION ACCOUNT

FOR THE YEAR ENDED 31 DEC, 2015.

Interest On Capital:

Cindy(10% Of 87000)

Fiona (10% Of 79000)

87000

79000

Net profit b/d

Interest on Drawings:

Cindy (5% x 17000)

Fiona (5% x 15000)

47100

850

750

Salary :

Cindy

Fiona

12000

12000

48700

Share of Residual

Profit

Cindy (3/5)

Fiona (2/5)

4860

3240

48700 48700

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If the firm had made a loss instead of a profit, the net loss would have been brought down on the debit side.

CINDY AND FIONA’S DELIGHTFUL DINER

C U R R E N T A C C O U N T S

CINDY FIONA CINDY FIONA

Interest on

drawings

Balance c/d

850

17000

7710

750

15000

7390

Interest on

Capital

Salary

Share of

profit

8700

12000

4860

7900

12000

3240

25560 25560 25560 25560

Balance b/d 7710 7710

T h e B a l a n c e R e p r e s e n t s T h e A m o u n t s T h a t B o t h C i n d y A n d

F i o n a C o u l d W i t h d r a w F r o m T h e B s u i n e s s

`

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Cindy And Fiona’s Delightful Diner

Balance Sheet As At 31st Dec, 2015 (Capital Section only)

CINDY

$

FIONA

$

TOTAL

S

CAPITAL ACCOUNTS 87000 79000 166000

CURRENT ACCOUNTS:

Opening Balances

Interest on Capital

Salaries

Share of profits

7710

8700

12000

4860

7390

7900

12000

3240

15100

16600

24000

8100

Less: Drawings

255560

(17000)

(850)

23140

(15000)

(750)

48700

(32000)

(1600)

7710 7390 15100

T h e A s s e t s A n d T h e L i a b i l t i e s S e c t i o n O f T h e B a l a n c e i s Q u i t e

S i m i l a r T o T h e S o l e T r a d e r

31

T h e F i n a l C h a p t e r

As I mingle with other business owners I realise that partnerships are a popular means of organizing small

businesses. I suppose it’s because of several advantages of more capital and specilisation amoung others.

But you must first decide on the type of partnership that suits your company whether a general, limited and

limited liability partnership. This should be followed by a legally sanctioned partnership agreement. I

would recommend a partnership type business for a small business. Tomorrow is another day @ the diner

and i look for to it! This business would not have been successful without my partner without the combined

resources my business would not be a successful as it is today.

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A c k n o w l e d g m e n t s

I would like to thank my mother for all her support, encouragement thorugh this editing process.My esteemed

lecturer Ms. Lisa Perez for all her expert advice in the field of Accounting.