Year 13 Accounting Introductory Exercises

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NCEA LEVEL 3 ACCOUNTINGBy Elizabeth Pitu2013BOOK 1INTRODUCTIONandPARTNERSHIPSTeacher Manual

NCEA LEVEL 3 ACCOUNTINGBy Elizabeth Pitu2013BOOK 1INTRODUCTIONandPARTNERSHIPSStudent WorkbookSTUDENT NAME:

CONTENTSExercises – CompletedOVERVIEWTopicPageCourse Informationii-v INTRODUCTION GST and Balance Day AdjustmentsPractice Example1-3Financial Statements4-6Introductory Exercises7-12PARTNERSHIP NOTES Achievement Criteria13Introduction14-16Examples – Partnerships17-21Partnership Financial Statements22-25Worked Example – Island Style26-28PRACTICE EXERCISES Partnership Formation– Takeover a business29– Sole proprietor admits a partner30– Two partners join businesses31Profit Distribution and Current Accounts for partnersBringing it togetherFinancial Statements including Balance Day Adjustments32-333435-37Dealing with Interest on Average Capitals38Including salaries paid to partners in cash39-40Partnership Formation and Financial Statements41Revision Tasks42-44Partnership Assignments45-49

NCEALEVEL 3 ANDSCHOLARSHIPACCOUNTINGCOURSE INFORMATION

General OverviewNCEA Level 3 Accounting covers partnership accounting, company accounting, company annual report interpretation,cost accounting, management accounting and decision making.The Accounting Scholarship Standard is one standard with a focus on reporting entities. Management accounting isalso covered in Scholarship. This is assessed by a separate three hour examination at the end of the year and demands avery thorough and in-depth knowledge of the course content.Wider reading and independent study will be expected of any student wishing to undertake the Scholarship examinationNCEA Level 3 Achievement Standards in AccountingAchievementStandard numberMode ofAssessment &Credit ValueTitle of the StandardMain focus of the standard91404 (3.1)External4 CreditsDemonstrate understanding ofaccounting concepts for a NewZealand reporting entityApplying, explaining andjustifying the conceptual basis ofaccounting for a New Zealandreporting entity so itsstakeholders can make decisions.91405 (3.2)Internal4 CreditsDemonstrate understanding ofaccounting for partnershipsPreparing and explainingaccounting entries for theformation and changes in equity,including profit distribution, of apartnership to enable thepartnership to continue operations91406 (3.3)External5 CreditsDemonstrate understanding ofcompany financial statementpreparationPreparing and/orexplaining/justifying fit forpurpose financial statements andrelated accounting entries forcompanies.91407 (3.4)Internal5 CreditsPrepare a report for an externaluser that interprets the annualreport of a New Zealandreporting entityPreparing a written report on aNew Zealand reporting entity’sannual report that meets the needsof a specified externaluser/stakeholder91408 (3.5)External4 CreditsDemonstrate understanding ofmanagement accounting toinform decision makingFinancial and non-financialinformation needs ofmanagement to inform decisionmaking includingCVP analysis techniques,budgets and the preparation of acash budget91409 (3.6)Internal4 CreditsProcess financial information fora manufacturing job costsubsystemPreparing and explainingaccounting entries formanufacturers who use a job costsystem for costing jobsLevel 3 AccountingOVERVIEW – Course Informationpage ii

Section OneIntroductionFinancial statements and balance day adjustments from Achievement Standard 91408, but using a sole proprietorcontextPartnership accountingAchievement Standard 91405 (3.2) internal 4 credits accounting concepts applied to formation of partnershipsaccounting entries for formation including goodwillaccounting entries for profit distribution including reasons for different methods of profit distribution, currentaccounts, (drawings) and capital accountsfinancial statements including balance day adjustments for partnerships to include Income Statement, ProfitDistribution Statement and Balance Sheet with accompanying notesNote:Teaching and learning includes balance day adjustments, income statements and full balance sheets with accompanyingnotes. Assessment does not include these except for the Equity section and note to the balance sheet.Section TwoJob CostingAchievement Standard 91409 (3.6) internal 4 credits prepare accounting entries for a manufacturer using a job cost accounting system including entries on sourcedocuments, job cost sheets, general journal entries, general ledger control accounts, subsidiary ledger entriesexplain accounting entries including the controls related to and purpose of source documents and job cost sheets,the importance of correctly allocating costs to jobs, an explanation of the cost driver(s)/bases used in the job costsubsystem to allocate overhead to jobs, the reasons for under or over applied overhead.Section ThreeCompany financial statements and associated accounting entries features and legal requirements of companiesAchievement Standard 91406 (3.3) external 5 credits accounting entries specific for a company including revaluation of financial assets, revaluation of land andbuildings upwards, issue of shares for cash including issue of shares for cash through a sharebroker, sharerepurchase, provisional tax payments, taxation expense and taxation payable, payment of final and interimdividends (after meeting the Solvency Test)explain the Solvency Test and the accounting entries specific to a companyfinancial statements for companies including balance day adjustments and company accounting entries to includeIncome Statement/Statement of Comprehensive Income, Statement of Financial Position, Statement of Cash Flowsand Notes to the Financial Statements.Section FourAnnual report of a New Zealand reporting entityAchievement Standard 91407 (3.4) internal 5 creditsPrepare a report on a New Zealand reporting entity’s annual report to meet the specified needs of an externaluser/stakeholder.Level 3 AccountingOVERVIEW – Course Informationpage iii

Section FiveThe Conceptual Framework as applied to a New Zealand reporting entityAchievement Standard 91404 (3.1) external 4 credits features of reporting entities including accountability, contents of annual reports, stakeholdersstatutory reporting requirements from the Companies Act 1993 and the Financial Reporting Act 1993generally accepted accounting practice (GAAP or NZGAAP)general purpose financial statements and accounting policies including statement of comprehensive income,statement of financial position, statement of cash flows, notes to the financial statementsPart A of the New Zealand FrameworkSection SixDecision MakingAchievement Standard 91408 (3.5) external 4 credits Financial and non-financial information managers use to inform their decision making including budgetsCash budget preparationComparison of actual results with budgetCost concepts including direct and indirect costs, variable, fixed and semi-variable costs, relevant range,contribution margin, break-even and margin of safetyCVP analysis techniques including calculations, CVP graph, CVP profit statement, for one product or serviceLevel 3 AccountingOVERVIEW – Course Informationpage iv

SECTION 1aINTRODUCTIONNotes, Examples & Exercises

GST and Balance Day Adjustments – A quick summaryNote: You are not required to learn any of these general journal entries They are provided for illustration purposes.Accrued ExpensesFor example the business has a flat rate mortgage of 40,000. Interest is 9.6% p.a. The trial balance has Interest onMortgage as 3,520. This means that 320 is owing for interest on mortgage.The general journal entry is31/3/13Interest on Mortgage320Accrued ExpensesOne month interest owing on mortgage.320For expense invoices dated before balance day the full amount is credited to Accounts Payable, the amount of GST isdebited to GST and the net amount is debited to the expense.For example – a business has an invoice on hand for electricity dated 29 March 2013, 920 including GST.The general journal entry isThis entry IS NOT reversed.31/3/13Electricity800When the invoice is paid,GST120Bank is credited andAccounts Payable920Accounts Payable is debited.Account on hand for electricity owing for March.Prepayments and Income in AdvanceAs both of these adjustments relate to transactions which have already occurred, the GST relating to them will havealready been accounted for as GST is always accounted for when the transaction occurs – in the case of invoice basisGST this means the earlier of the money received or paid or the invoice being issued.We have already paid the money in the case of prepayments and we have already received the money in the case ofincome in advance so we have already accounted for the GST component of the transaction.The result is that Prepayments and Income in advance are always recorded at their GST exclusive amounts. Unless youare told you have a GST inclusive amount, you should assume that the amount of the prepayment or income in advancegiven is GST exclusive.ExampleInsurance paid in advance 400 excluding GSTMarch 31PrepaymentsInsuranceFor insurance paid in advance 400.400400ExampleTour income received in advance 6900 including GST. Remember, remove and ignore the GST.March 31Tour Income6,000Income in AdvanceFor tour revenue received in advance 6,0006,000Accrued IncomeFor example dividends owing to the business 7c per share on 10,000 shares in Chorus LtdMarch 31Accrued IncomeDividends ReceivedFor dividends received owing 700700700Bad DebtsBad debts include GST and require an adjustment to GST if they are to be written off. The entry to write off 4,600 offurther bad debts isMarch 31Bad Debts4,000GST600Accounts Receivable4,600Bad debts written off.Level 3 AccountingINTRODUCTIONpage 1

Practice Example – Income and Expense adjustmentsExample Kayak Tour and Hire Trial Balance extract as at 31 March 2013Advertising7,900Dividends Received8,000Insurance5,400Tour fees Received36,000Accounts Receivable9,600Hire fees Received12,000Accounts Payable12,500GST1,345Adjustments required:1.2.3.4.5.An invoice is on hand for advertising 552 including GST.Invoice dated 31 March 2013 for hire fees 2,300 including GST has not yet been recorded.Insurance is paid in advance 600 excluding GST. 3,000 is owing for Dividends Received.Tour fees of 3,450 including GST has been received in advance.Instructions:1For the invoice on hand for advertising including GSTi) Add the GST inclusive figure to Accounts Payableii) Increase advertising by the GST exclusive figureiii) Decrease the GST (payable/Cr) by the amount of GST2For the invoice on hand for hire fees including GSTi) Add the GST inclusive figure to Accounts Receivableii) Increase hire fees by the GST exclusive figureiii) Increase the GST (payable/Cr) by the amount of GST3For the prepaid insurancei) We have been given the GST exclusive figure which is the one we want to use.ii) Decrease insurance (by the GST exclusive amount)iii) Create Prepayments (Dr) for the same amount4For the Dividends Received owingi) There is no GST with dividends to worry aboutii) Increase the Dividends Received by the amount owing.iii) Create an Accrued Income account (Dr) for the amount owing.2For the tour fees received in advancei) We have been given the GST inclusive figure – we need to use the GST exclusive figure and ignore the GSTii) Decrease the tour fees received by the GST exclusive amountiii) Create an Income in Advance account (Cr) for the same amount.Level 3 AccountingINTRODUCTIONpage 2

Practice Example - Adjustments including bad debts, doubtful debts and depreciation.Example:Accounts ReceivableBad debts27,230400Office Equipment32,000Shop Fittings50,000Allowance for doubtful debtsAccumulated depreciationOffice EquipmentAccumulated depreciationShop FittingsGST3008,00014,0003,255Adjustments required1.2.3.4.Write off further bad debts of 230 including GST.Adjust the Allowance for Doubtful Debts to 2% of Accounts Receivable.Provide for depreciation on office equipment 10% straight line. (SL)Provide for depreciation on shop fittings 10% diminishing value (DV)Instructions1To write off further bad debtsi) Decrease the accounts receivable by the GST inclusive figure for bad debts.ii) Increase bad debts by the GST exclusive figureiii) The GST (Cr) account is decreased by the amount of GST.2To adjust the allowance for doubtful debtsi) Use the new figure for accounts receivable and the percentage for the allowance to calculate what theallowance for doubtful debts should be. In this case * % ii) Change the Allowance for Doubtful debts to this figure.iii) By what amount did you change the allowance?iv) If your answer to (iii) is positive you create a doubtful debts (financial) expense (Dr) for this amount.v) If your answer to (iii) is negative you create a doubtful debts credit (Cr) for this amount. A doubtful debtscredit is recorded in the (administrative) expense section of the Income Statement as a negative number.3For the straight line (SL) depreciationi) Calculate the amount of depreciation expense by multiplying the % by the cost of the asset in the trial balanceii) Add this amount to the Accumulated Depreciation account (Cr) for this asset.iii) Create a Depreciation on expense (Dr) account for this asset.4For the diminishing value (DV) depreciationi) Calculate the amount of depreciation expense by multiply the % by the cost less the current amount ofaccumulated depreciation for the asset (the carrying amount of the asset).iv) Add this amount to the Accumulated Depreciation account (Cr) for this asset.ii) Create a Depreciation on expense (Dr) account for this asset.Level 3 AccountingINTRODUCTIONpage 3

Financial StatementsFinancial statements at Level 3 require a number of items to be shown by way of notes to the financialstatements.The following is a model of an Income Statement, Balance Sheet and accompanying notes for a soleproprietor. You will be introduced to additional statements for partnerships and companies in the units onthese during the course of the year.Income StatementNote: In the income statement expenses have been classified as per Level 2 accounting. Expenseclassifications are not assessed at Level 3 but will be used in this introductory unit and in the partnershipunit. Teachers with no scholarship students or students new to accounting may choose to omit the expenseclassifications. This will not affect the total expenses or the profit for the year. However if expenses are notclassified, cost of goods sold is included in expenses and gross profit is not shown.The FirmIncome Statementfor the year ended 31 March 2013SalesLess Cost of SalesGross ProfitAdd Other operating incomeDividends ReceivedCommission 000LessDistribution expensesAdvertisingDelivery expensesDepreciation on shop fittingsSales e expensesAccountancy FeeBad debtsDepreciation on office equipmentDoubtful debtsOffice ExpensesRates and Insurance7,0005006,00010027,0001800058,600Less Finance costsInterest on loanTotal expensesProfit for the yearLevel 3 Accounting3,400125,000 40,000INTRODUCTIONpage 4

Balance Sheet or Statement of Financial PositionNote: In the partnership unit Balance Sheet will be used. In the company unit Statement of FinancialPosition will be used. Either term is acceptable for this statement. External assessments use Statement ofFinancial Position but students may use Balance Sheet without penalty.Disclosure requirements to be shown by: Assets divided into Current and Non-currentLiabilities divided into Current and Non-currentEquityAppropriate notesThe FirmBalance Sheetas at 31 March 2013NoteAssetsCurrent AssetsBankAccounts ReceivableInventoryPrepaymentsAccrued IncomeTotal Current AssetsNon-current AssetsProperty, Plant and EquipmentGoodwillShares The WarehouseTotal Non-current AssetsTotal AssetsLess Liabilities:Current LiabilitiesGST PayableAccounts PayableAccrued ExpensesIncome in AdvanceTotal current liabilitiesNon-current LiabilitiesLoan (10% due 2015)Total Non-current LiabilitiesTotal LiabilitiesNET ASSETSEquityClosing CapitalLevel 3 0034,00048,000 80,0004 80,000INTRODUCTIONpage 5

Notes to the Balance Sheet1. Accounts ReceivableAccounts Receivable8,000Less Allowance for doubtful debts2007,8002. Property, plant and equipmentShopFittingsOpening carrying 6,00014,00064,00021,00085,000Cost or valuation80,00030,000110,000Accumulated depreciation16,0009,00025,000Carrying amount64,00021,00085,000DepreciationCarrying amountAs at 31 March 2013There have been no additions or disposals of shop fittings or office equipment during the year.Depreciation is calculated on a straight-line basis at the following ratesShop Fittings10% per annumOffice Equipment20% per annum.3. InvestmentsShares in The Warehouse have a current market value, which is considered to be their fair value, of 6,5004. EquityOpening Capital70,000Plus Profit for the year40,000less Drawings-30,000Closing Capital 80,000Level 3 AccountingINTRODUCTIONpage 6

PRACTICE EXERCISESExercise OneTrial Balance of Crazy Crafts as at 31 March 2013Cost of Goods Sold131,500SalesInventory19,200Dividends ReceivedSalaries office13,500Accounts PayableAdvertising4,800Rent ReceivedGeneral Expenses3,900Accumulated Depreciation:Discount Allowed1,000- Shop fittingsFreight out2,800- Office EquipmentBad Debts600Sales wages- 100Bank1,700Rates and insurance1,500GST1,160Interest on mortgage3,600Allowance for doubtful debtsAccounts Receivable18,460CapitalShares in PWL16,000Mortgage (10% p.a. due 2016)Shop fittings40,000Office d30,000Drawings27,000 467,960 467,960Additional information(a)Dividends owing 300(b)Insurance paid in advance 200 excluding GST(c)Office salaries due 500(d)Interest on mortgage is 10% p.a.(e)Rent received in advance 300 excluding GST(f)Write off further bad debts of 460 including GST.(g)Adjust the allowance for doubtful debts to equal 5% of accounts receivable.(h)Provide for depreciation on:Shop fittings at 10% D.V.Office equipment 10% S.L.Buildings 2% S.L.(i)Shares in PWL have a current market value, considered to be fair value, of 17,200Level 3 AccountingINTRODUCTIONpage 7

RequiredPractical aspects(a) Prepare journal entries for the adjustments.(b) Prepare an Income Statement(c) Prepare a Balance Sheet with accompanying notesConceptual AspectsUnder the New Zealand Framework the following are definitions of assets, liabilities, income and expenses: Assets are resources controlled by the entity as a result of past events (usually transactions), from which futureeconomic benefits are expected to flow to the entity Liabilities are present obligations of the business as a result of past events (usually transactions) which areexpected to result in an outflow of resources representing economic benefits when settled (in the future) Incomes are increases in economic benefits in the form of inflows or enhancements of assets or decreases inliabilities that result in increases in equity, other than owner’s contribution Expenses are decreases in economic benefits in the form of outflows or depletions of assets or increases inliabilities that result in decreases in equity, other than drawings.You are required toDiscuss fully how you have applied each of the following financial elements/concepts in the preparation of yourfinancial statements.Financial elements(a)(b)(c)(d)Shop Fittings as an assetMortgage as a liabilityRent received as incomeAdvertising as an expenseConcepts(e)(f)(g)(h)(i)(j)Accounting EntityMonetary MeasurementGoing-ConcernAccrual BasisHistorical CostRelevanceLevel 3 AccountingINTRODUCTIONpage 8

Exercise TwoTrial Balance of Waihaha Treasures as at 31 March 2013Accounts Receivable12,230Sales210,000Accountancy Fee5,900Interest Received200Advertising6,900Accounts Payable12,000Bad DebtsCost of Goods Sold100120,000Delivery expenses2,800Discount Allowed500DrawingsCommission Received7,200Accumulated Depreciation:- Shop Fittings- Office nterest on LoanInventory42,000Allowance for doubtful debtsOffice Equipment25,000Loan (8% due July 2013)25,000Capital69,000Office ExpensesOffice Salaries2,10012,800Insurance1,500Sales Salaries24,800Term Deposit4,000Shop Fittings40,000Goodwill20,000 349,130 349,130Adjustments are required as follows(a) Insurance paid in advance 400(b) Office salaries owing 200(c) Interest is owing on the loan.(d) Write off further bad debts of 230 including GST.(e) Adjust the allowance for doubtful debts to equal 2.5% of accounts receivable.(f) Provide for depreciation on: Shop fittings at 10% D.V., Office equipment 10% S.L.RequiredPrepare the financial statementsLevel 3 AccountingINTRODUCTIONpage 9

Exercise ThreeTrial Balance of Fergusons Furniture as at 31 March 2013Accounts ReceivableAccountancy Fees25,6908,000Bad DebtsCost of Sales300250,000CapitalAccounts PayableBank15,000Dividends ReceivedSales salaries54,000Accumulated DepreciationGoodwill10,000- Fixtures and Equipment5,400Accumulated DepreciationRepairs and llowance for Doubtful Debts200,000Vehicles60,000Fixtures and Equipment85,000Office Expenses21,000Rates and Insurance17,200Shares in PKR Ltd80,0001,05080,00035,000Land and Buildings35,000Mortgage (7.5%. due 2017)Vehicle and delivery expensesInterest on Mortgage274,000- VehiclesSalesRent Received 958,19025,00012,0002,440700473,00040,000 958,190Adjustments required1. Interest on the mortgage is owing2. Two months rent at 2,300 including GST per month, has been received in advance.3. An invoice, dated 28 March 2013, is on hand for repairs and maintenance 1,150 including GST4. Rates of 1,600 excluding GST have been paid in advance.5. Further bad debts of 690 including GST are to be written off.6. The allowance for doubtful debts should be 2% of Accounts Receivable.7. Provide for depreciation 10% SL on Fixtures and Equipment8. Provide for depreciation 20% DV on Vehicles.9. Shares in PKR have a current market value, considered to be fair value of 84,000RequiredPrepare the financial statementsLevel 3 AccountingINTRODUCTIONpage 10

Exercise FourJust Joking Trial Balance as at 30 June 2013Accounts Receivable7,526Accounts PayableAdvertising7,700Rent ReceivedBad DebtsBuildings300140,000Cash on Hand2008,80039,000Accumulated Depreciation- Shop FittingsCapital20,000142,000Cost of Goods Sold70,000Accumulated erest on Mortgage5,700Sales179,000- BuildingsInventory27,000Mortgage (8% due 2017)Land50,000BankOffice Expenses9,200Rates and Insurance6,000Sales SalariesAllowance for Doubtful Debts6,00095,0003,12010030,000Shop Electricity8,400Shop Fittings90,000 495,026 495,026Additional information1.An invoice dated 28 June 2013 is on hand for June’s electricity, 460 including GST.2.An invoice dated 30 June 2013 has not been recorded for sales 1,150 including GST.3. 2,000 is owing for Sales Salaries.4.Three months interest (flat rate) is owing on the mortgage.5.Advertising of 1,600 excluding GST, has been paid in advance for advertisements to appear in The Daily Prophetduring July and August.6.George rents part of his building to Hogsmeade Tavern for 3,000 (excluding GST) per month. The building hasbeen rented for the whole year.7.D Malfoy has left the country and his debt of 276 is to be written off.8.Adjust the allowance for doubtful debts to 2.5% of accounts receivable.9.Depreciation on Buildings is 1,000 p.a.10. Depreciation on Shop Fittings is 10% D.V.RequiredPrepare the financial statements.Level 3 AccountingINTRODUCTIONpage 11

SECTION 1bPARTNERSHIPSNotes, Examples & Exercises

ACHIEVEMENT CRITERIAAchievement Standard 91405 (3.2)Demonstrate understanding of accounting for partnershipsAchievementAchievement with MeritAchievement with Excellence Demonstrate an understanding ofaccounting for partnerships. Demonstrate in-depthunderstanding of accounting forpartnerships. Demonstrate comprehensiveunderstanding of accounting forpartnershipsFrom the explanatory notes:2Demonstrate understanding involves applying partnership accounting elements to enable thepartnership to continue operations.Demonstrate in-depth understanding involves explaining the application of partnership accountingelements to enable the partnership to continue operations.Demonstrate comprehensive understanding involves justifying the application of partnershipaccounting elements to enable the partnership to continue operations.3Partnership accounting elements are: entries for the formation of a partnership using agreed values of assets, liabilities and capitalcontributions Partnership Agreement Partnership Act 1908 entries for partners’ capital and current accounts Profit Distribution Statement equity section and note to financial statements.Level 3 AccountingPartnerships – Notes, Examples & Exercisespage 13

IntroductionThe Partnership Act 1908 defines a partnership as a group of persons carrying on a business with a view to profit. Inorder for a business to continue operations, ultimately it needs to make a profit. Businesses that persistently makelosses with no view to making a profit will not survive. The Partnership Act 1908 recognises that a partnership existswhen the group of persons carry on a business with the intention of making a profit so the partnership business cancontinue operations. In 1908 when this definition was created, profit for most businesses was based on cash accountingand represented a cash profit. This adds to the need for businesses to have positive cash from operations as well asmaking an accrual based profit to ensure continuing operations.Generally partnerships are relatively small with 2 or 3 partners, except for large professional partnerships which havemany partners. Accounting firms like Price Waterhouse Coopers and KPMG are international firms with many partnersin each office.Advantages ease of formation - no legal requirements but a Partnership Agreement is desirablemore capital available than a sole proprietor so that a sole proprietor business that has reached the limit of itsowner’s ability to fund its future can continue operations with an injection of additional capital from a partner whowill share the risks and rewards of the businesscomplementary skills brought together - partners can specialise in different parts of the business which can allowthe business to grow in different directions or more readily grow its client base so that it can continue operationsDisadvantages each partner jointly and severally liable for the debts of the partnershipas with a sole proprietor business, unlimited liability applies to each partner, so each partner is personally liable forthe debts of the partnership if the partnership experiences financial difficulty and is unable to meet its debtseach partner is bound by the acts of each other partner in the course of business and personally liable if thepartnership is in debt as a resultpartnership has a limited life - unless specifically provided for in the Agreement the partnership dissolves on thedeath or retirement of a partnerPartnership AgreementA partnership agreement is a written agreement (sometimes called a Deed) setting out the rights, liabilities and duties ofthe partners.It is important to have a legally binding Partnership Agreement so that each partner is aware of their rights, liabilitiesand duties in relation to the partnership so that when disputes arise, as inevitabily they will, they can be resolved and thepartnership can continue its operations.This agreement should contain clauses covering such things as: name of the partnership names of the partners objectives or purposes of the partnership so partners know why they are operating the business and can ensure thatthe business continues to operate in such a way as to meet the partnership objectives and purposes rights, liabilities and duties of the partners capital introduced by each partner – capital contributions by a number of partners allow for the business to continueoperation. Some partnerships have ‘sleeping partners’ who contribute capital so that the business is able to be setup/grow/expand in new directions but who take no other part in the operations of the business. Sleeping partnerscapital contribution can be very useful for a partnership just starting out with limited access to capital as it allowsthe business to establish and continue its operations without needing to resort to excessive external debt financewhich can be very costly for businesses starting out. whether capital is to remain fixedLevel 3 AccountingPARTNERSHIPS – NOTES, EXAMPLES & EXERCISESpage 14

how profits and losses are to be divided so different contributions to the business can be recognised – for example asleeping partner may only receive ‘interest on capital’ and may be happy with this as their capital contribution maybe significant and the interest may be set at a higher rate than bank interest rates as the capital contribution is ariskier investmentwhether drawings, salaries to partners, interest on drawings, current or capital accounts and interest onadvances(loans) are to be allowed – explanations of these and how they contribute to the partnership continuingoperations are found in the profit distribution notes below.voting and decision-making procedures to be followed so that the business can continue operation

Level 3 Accounting OVERVIEW – Course Information page ii General Overview NCEA Level 3 Accounting covers partnership accounting, company accounting, company annual report interpretation, cost accounting, management accounting and decision making. The Accounting Scholarship Standard is one standard with a focus on repo

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