Capital & Current Accounts (Cambridge International IGCSE Accounting)

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

Layout of the partners' current accounts

Exam Hint If you use a combined current account then remember to balance each column separately, similar to how you balance the cash and bank columns in the cash book.

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

Why are there no entries made in the cash or bank account for salaries and interest?

• A partner does not receive cash when they are awarded interest on their capital or a salary

  • Interest and salaries are a way of sharing the profit

• They are added to the partners' current accounts

  • The balances that the business owes them increases

• The partners may choose to withdraw these amounts as drawings

  • The cash and bank accounts are used at this stage

Worked Example Lydia and Moses are in partnership and own a business which specialises in selling clothing to young people called Top Trends. The following information was extracted from their accounts for the year ended 31 December 2023:

Capital accounts at 1 January 2023
Lydia	50 000
Moses	40 000
Current accounts at 1 January 2023
Lydia	3 420 credit balance
Moses	1 780 credit balance
Drawings for the year ended 31 December 2023
Lydia	6 000
Moses	5 000
Share of profits for the year ended 31 December 2023
Lydia	12 000
Moses	8 000

The partnership agreement provides for

• 5% interest on capital
• 10% interest on drawings
• $1 500 salary for Lydia

Prepare the current accounts for Lydia and Moses for the year ended 31 December 2023. Balance the accounts and bring down the balance at 1 January 2024.

Answer:

• Calculate the interest on capital by multiplying the capital by 5%

Lydia: 5% × $50 000 = $2 500

Moses: 5% × $40 000 = $2 000

• Calculate the interest on drawings by multiplying the drawings by 10%

Lydia: 10% × $6 000 = $ 600

Moses: 10% × $5 000 = $500

• Enter the amounts into a combined current account

  • Enter the opening balances on the credit side

  • Enter the following on the debit side:

    • drawings
    • interest on drawings

  • Enter the following on the credit side:

    • interest on capital
    • salary
    • profit share

  • Balance the accounts

Final answer: Lydia and Moses Final answer: Current Accounts
Final answer: Date	Final answer: Details	Final answer: Lydia Final answer: $**	Final answer: Moses Final answer: $	Final answer: Date	Final answer: Details	Final answer: Lydia Final answer:****$	Final answer: Moses Final answer: $
Final answer: 2023 Final answer: Jan 1	Final answer:** ** Final answer: Drawings	Final answer: 6 000	Final answer: 5 000	Final answer: 2023 Final answer: Jan 1	Final answer:** ** Final answer: Balance b/d	Final answer:** ** Final answer: 3 420	Final answer:** ** Final answer: 1 780
Final answer: Dec 31	Final answer: Interest on drawings	Final answer: 600	Final answer: 500	Final answer: Dec 31	Final answer: Interest on capital	Final answer: 2 500	Final answer: 2 000
Final answer: Dec 31	Final answer: Balance c/d	Final answer: 12 820	Final answer: 6 280	Final answer: Dec 31	Final answer: Salary	Final answer: 1 500
				Final answer: Dec 31	Final answer: Profit share	Final answer: 12 000	Final answer: 8 000
		Final answer: 19 420	Final answer: 11 780			Final answer: 19 420	Final answer: 11 780
				Final answer: 2024 Final answer: Jan 1	Final answer:** ** Final answer: Balance b/d	Final answer:** ** Final answer: 12 820	Final answer:** Final answer: 6 280