2 thoughts on “Introduction to Partnership Account”

  1. Interest on capital and drawings
    Tom nd John are partnership sharing profits equally..Provision exists in the partnership agreement gor charging interest on capital at the rate of 4% per annum and interest on drawings at 6% p.a. Capital and account balance are:
    Tom capital $36 000
    John capital $26 400
    Tom drawings $12 000
    John drawings $9 600
    Prepare journal entries account for interest on capital and drawing.

    Please i am confused her me with this.

    1. Provision for Capital for Tom will be $1440 and whilst for John will be $1056. This is an incentive from business to reward how much you have invested to the business, the more you invest, the more return you earned. Since the business is paying out, it’s an expense to the business (debit entry).
      Profit & Loss Appropriation Account 2496
      Tom’s Current Account 1440
      John’s Current Account 1056

      Provision for Interest on Drawing for Tom will be $720 and whilst for John will be $576. Interest drawing is what both Tom and John will have to pay to the business (it’s a form of penalty for business owner(s) to withdraw lesser from the business). Since you are paying to the business, it’s an income to the business (credit entry).
      Tom’s Current Account 720
      John’s Current Account 576
      Profit & Loss Appropriation Account 1296

      If no current account is supposed to be opened, you can replaced the “Current Account” above to “Capital Account”.

      Hope this helps.

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