Financial Statements with Changes in the Year (Cambridge International A-Level Accounting)

Spec point — how to prepare the partnership appropriation account, statement of profit or loss and statement of financial position including changes in a partnership occurring part-way through an accounting year

Financial statements with changes in the year

How does a change in a partnership affect the financial statements?

• A change in the structure of a partnership can cause changes to:

  • the balance of each partner's capital account
  • the profit-sharing ratio
  • the partners' salaries

• It would be unfair to use one set of terms for the whole year

• The year is split into two time periods using the date the change occurs

• The statement of profit or loss and the appropriation account usually have two columns presented side by side

  • Each column represents one time period

How do I split the profit?

• You need to apportion the profit for the whole year between the two periods

• If you are given the data for each period separately, then you can use those figures directly

• If you are given the data for the full year, you need to split the amounts using a time basis

  • e.g. if one time period is 3 months, then multiply the whole figure by $\frac{3}{12}$

How do I prepare the financial statements with a change in the year?

• STEP 1 Identify the split date and the two sets of terms

  • Identify the profit-sharing ratios, salaries and interest rates

• STEP 2 Calculate the profit for each period

  • If necessary, apportion the profit for the full year

• STEP 3 Adjust the capital accounts at the split date

  • Update the capital accounts to take the effects of goodwill and revaluation into account

• STEP 4 Prepare the two-column appropriation account

  • Apportion the interest and salaries for each period

• STEP 5 Update the current accounts at the end of the year

  • Include amounts from both periods

• STEP 6 Prepare the statement of financial position

  • Make sure you use the updated balances for the capital and current accounts

Worked Example Rosa and Sam are in partnership. They maintain both current and capital accounts. Their financial year ends 31 December.

On 1 July 2025, the partnership agreement was changed. The details are summarised below.

	1 Jan 2025 to 30 Jun 2025	1 Jul 2025 to 31 Dec 2025
Profit-sharing ratio	1:1	3:2
Interest on capital	10%	10%
Salaries
Rosa	$15 000	$15 000
Sam	-	$10 000

The following information was available

1. Balances at 1 January 2025 were:

	$
Capital account
Rosa	60 000
Sam	50 000
Equipment (at cost)	80 000
Provision for depreciation of equipment	20 000

1. The equipment is being depreciated at the rate of 25% per annum using the reducing balance method.
2. Profit and loss data for the year ended 31 December 2025 included:

	1 Jan 2025 to 30 Jun 2025	1 Jul 2025 to 31 Dec 2025
	$	$
Revenue	100 000	120 000
Cost of sales	65 000	70 000
Wages and salaries (including partners' salaries)	27 000	36 000
Other operating costs (excluding depreciation)	21 000	23 000

1. On 30 June 2025, the equipment was revalued at $56 000. Depreciation continues to be calculated at the same rate.
2. Goodwill on 1 July 2025 was valued at $25 500 although it was not to be retained in the books of account.

(a) Calculate the loss for the period for both the six months ended 30 June 2025 and the six months ended 31 December 2025.

(b) Prepare appropriation accounts for both the six months ended 30 June 2025 and the six months ended 31 December 2025.

Answer:

(a)

Subtract the partners' salaries from the wages and salaries figures

• Remember to halve the partners' salaries for each of the six-month periods

		$
Jan - Jun	$27000-\frac{6}{12}\times15000$	19 500
Jul - Dec	$36000-\frac{6}{12}\times15000-\frac{6}{12}\times10000$	23 500

Calculate the depreciation charge for the equipment

• Remember to halve the depreciation for each of the six-month periods

		$
Jan - Jun	$6 / 12×25 \%×(80 000−20 000)$	7 500
Jul - Dec	$6 / 12×25 \%×56 000$	7 000

Calculate the loss for each period

	1 Jan 2025 to 30 Jun 2025	1 Jul 2025 to 31 Dec 2025
	$	$	$	$
Revenue		100 000		120 000
Cost of sales		(65 000)		(70 000)
Gross profit		35 000		50 000
Less: Expenses
Wages and salaries	19 500		23 500
Depreciation of equipment	7 500		7 000
Other operating costs	21 000	(48 000)	23 000	(53 500)
Loss for the period		Final answer: (13 000)		Final answer: (3 500)

(b)

Calculate the interest on capital for the first six months

		$
Rosa	$6 / 12×10 \%×60 000$	3 000
Sam	$6 / 12×10 \%×50 000$	2 500

Calculate the profit on revaluation

$56 000 - ($80 000 - $20 000 - $7 500) = $3 500

Calculate the revised capital and interest on capital for the last six months

	Rosa	Sam
		$		$
Original capital		60 000		50 000
Revaluation	$\frac{1}{2}\times3500$	1 750	$\frac{1}{2}\times3500$	1 750
Goodwill raised	$\frac{1}{2}\times25500$	12 750	$\frac{1}{2}\times25500$	12 750
Goodwill eliminated	$\frac{3}{5}\times25500$	(15 300)	$\frac{2}{5}\times25500$	(10 200)
Revised capital		59 200		54 300
Interest on capital	$6 / 12×10 \%×59 200$	2 960		2 715

Prepare the appropriation accounts

• Use the ratio 1:1 to share the residual loss for the first six months
• Use the ratio 3:2 to share the residual loss for the last six months

	1 Jan 2025 to 30 Jun 2025	1 Jul 2025 to 31 Dec 2025
	$	$	$	$
Loss for the period		(13 000)		(3 500)
Less interest on capital
Rosa	3 000		2 960
Sam	2 500	(5 500)	2 715	(5 675)
Less salary
Rosa	7 500		7 500
Sam	0	(7 500)	5 000	(12 500)
Residual loss		(26 000)		(21 675)
Share of loss
Rosa	Final answer: (13 000)		Final answer: (13 005)
Sam	Final answer: (13 000)	(26 000)	Final answer: (8670)	(21 675)