Financial Reporting
Partnerships
A Level partnership questions go well beyond AS level — they require full mastery of admission and retirement of partners, changes in profit-sharing ratios, goodwill adjustments, revaluation of assets, dissolution via realisation accounts, and conversion to a limited company.
The most marks are lost on goodwill and revaluation. Always prepare a Revaluation Account first, then use the resulting profit/loss to update Capital Accounts before dealing with goodwill. For goodwill: write it up in old ratio, then write it back in new ratio — do not net the two entries. On dissolution, prepare the Realisation Account, then settle loan accounts before capital accounts. If converting to a limited company, any profit on realisation is shared in the old profit-sharing ratio.
Key Concepts to Revise
Appropriation Account
Profit for year − Salaries − Interest on capital = Residual profit shared in PSR
Interest on drawings is added back to profit before distribution
Admission of a Partner
1. Revaluation Account (old PSR) → Capital Accounts
2. Goodwill: credit old partners in old PSR, debit all partners in new PSR. No goodwill account is retained if instructed.
Retirement of a Partner
Revalue assets → adjust goodwill → calculate retiring partner’s total entitlement
Settlement: lump sum, loan account (interest-bearing), or annuity. Loan account stays on SoFP until repaid.
Change in PSR (mid-year)
Split the year: time-apportion profit to date of change, then apply old PSR; apportion remainder and apply new PSR
Treat salary, interest, and residual separately for each period — don’t average them
Dissolution — Realisation A/c
Dr: all assets at book value + dissolution costs
Cr: liabilities taken over + proceeds from asset sales
Balance = profit or loss on realisation → split in final PSR to Capital Accounts
Conversion to Ltd Company
Company takes over assets/liabilities at agreed values → journals in both sets of books
Partners receive shares and/or cash. Calculate purchase consideration = agreed net assets. Any excess = goodwill in company’s books.