Journal and ledger account entries for recording partnerships

Section 8 Objective 5prepare journal entries and

ledger accounts to record the capital of partnership

Journal and ledger account entries

An essential feature of doing records for a partnership company is that• Each partner contributes capital• The amount of capital invested into the

company by each partner need not be equal however, the amounts must be agreed to by all the partners

Journal and ledger account entries • Entries to record the capital introduced by

partners• Partners on starting a company may invest cash

or non cash resource to start a business• For recording the investment made by each

partner, there are two options that can be used to record capital introduced by partners in the general ledger. The options are

• To operate a fixed capital plus separate current accounts or in columnar form

• Or operate separate fluctuating capital accounts or columnar form

• The fixed capital account for each partner shows the yearly amount of capital invested into the business.

• A separate current account is opened for each partner. The current account for each partner show the

• Each partner drawings• Interest charged on drawings for each partner• Salaries for active partners• Profits or losses made or absorbed by each partner• Interest on capital each partner is entitled to

Capital accounts Fixed and current

Capital accountsfluctuating

• In this format, the amount invested is shown as well as– Distribution of profits– Drawings– Interest on drawings

• Using this method, the capital accounts will change each year

Implications using fixed and fluctuating capital accounts

• The use of separate fixed capital and current accounts is preferred to fluctuating capital accounts because

• When a partner(s) are taking out greater amounts than the share of profits that they are entitled to. It is shown in records as a debit balance on the current account.

• The debit balance acts a warning to the partnership

Format of a partner fixed capital account

Year $

Date Bank/non cash resource xxx

Format of apartner current account

Year $ Year $

Interest on drawings xxx Balance b/d xxx

Drawings xxx Interest on capital xxx

Balance c/d xxx Share of profit xxx

• Capital accounts opened are shown as fixed entries in the separate capital account

• If desired the capital account can be shown in columnar form as well

• The appropriation account entries are transferred to each partner current accounts

Format of a partnerfluctuating capital account

Year $ Year $

Interest on drawings xxx Bank xxx

Balance c/d xxx Share of profits xxx

Interest on capital xxx

Journal entry to record capital

Dr cashDr non cash item (if any for example building)

Cr (each partner capital account for the sum total of the debit entries)

Sample journal entryto record capital invested

Sample columnar ledger account entry to record fluctuating capital account