Capital & Current Accounts (Cambridge (CIE) IGCSE Accounting)

Revision Note

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
Layout of the partners' current accounts

Examiner Tips and Tricks

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

Account to be debited

Account to be credited

Awarding interest on partners' capital

Appropriation account

Partners' current account

Transferring a partner's drawings to the current account at the end of the year

Partner's current account

Partner's drawings account

Awarding interest on partners' drawings

Partners' current account

Appropriation account

Paying a partner's salary

Appropriation account

Partners' current account

Awarding interest on a partner's loan

Income statement

Partners' current account

Transferring shares of the residual profit to the current account

Appropriation account

Partners' current account

Transferring shares of the residual loss to the current account

Partners' current account

Appropriation account

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

Lydia and Moses

Current Accounts

Date

Details

Lydia

$

Moses

$

Date

Details

Lydia

$

Moses

$

2023

Jan 1

 

Drawings

6 000

5 000

2023

Jan 1

 

Balance b/d

 

3 420

 

1 780

Dec 31

Interest on drawings

600

500

Dec 31

Interest on capital

2 500

2 000

Dec 31

Balance c/d

12 820

6 280

Dec 31

Salary

1 500

Dec 31

Profit share

12 000

8 000

19 420

11 780

19 420

11 780

2024

Jan 1

 

Balance b/d

 

12 820

 

6 280

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