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Thread: Partnership Accounting in Pastel

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    Gold Member Mark Atkinson's Avatar
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    Question Partnership Accounting in Pastel

    Hi, this one is for the Pastel/TurboCASH gurus.

    Basically our business is a partnership and we all know that partnerships have different accounting treatments compared to companies and sole props. I'm struggling with grasping how to account for a partnership in Pastel/TurboCASH. (I'm trying to decide which system is best for me at the moment.)

    The main thing I'm baffled about is the year end procedures. I think I understand them on paper:

    1. Net Profit/Loss get's closed off to the Appropriation account.
    2. A salary account for each partner is created at year end. The salaries are debited in the appropriation account, as well as the interest on capital.
    3. The remaining balance in the appropriation account is appropriated between the respective partners and credited (assuming a profit was made) to their current accounts. (Represents their share in the profits of the business).

    Now the problem comes in with the year end procedures in each of these programs. I just can't fathom how to make them work for a partnership. They both seem to do regular year ends where profits are closed off to Retained Earnings etc.

    Can anybody explain to me how I might go about accounting correctly for the partnership in one/both of these accounting packages? It's been a couple years since I studied partnership accounting so I am definitely a bit rusty.
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    Platinum Member Neville Bailey's Avatar
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    Hi Mark,

    It's also a long time since I looked at partnership accounting, and that was in the days of manual accounting!

    I suggest the following:

    • Rename the 5100/000 - Share Capital account to Capital Account
    • Create a separate sub-account for each partner under the Capital Account
    • Rename the 4850/000 - Dividends Declared/Paid account to Appropriation Account
    • Prior to running the year-end, process a general journal, debiting the Appropriation Account with the net profit and crediting the partners' Capital sub-accounts with their respective profit splits
    • Your income statement will now reflect a zero profit/loss
    • Run the year-end - each of the income and expenditure accounts, including the Appropriation Account, will be zero'd and the net amount (zero) will be allocated to 5200/000 - Retained Income.

    Hope this helps.
    Neville Bailey - Pastel Accounting Consultant and Photographer
    neville@accountingsoftwaresupport.co.za
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    *** 20% DISCOUNT ON PASTEL XPRESS / PARTNER SOFTWARE UNTIL 15 DECEMBER 2017 ***

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    Mark Atkinson (07-Feb-11)

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    Gold Member Mark Atkinson's Avatar
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    Thanks Neville.

    So basically, I need to do a "manual" year end where I zero all income and expense accounts to the created appropriation account?

    Also, in partnership accounting partners have both capital accounts and current accounts. Everything goes through the current accounts (drawings included) and only capital contributions go through the capital account. Would this impact your suggestion at all? Can I just create extra current accounts?

    The only problem I see is that the income statement will reflect a zero profit/loss. I need the financial statements to show accurate figures at year end. I suppose I could just take the pre-year end income statement?

    How would I tackle the issue of Salaries to partners? Basically when partners take salaries throughout the year, it is debited from their current accounts as Drawings. At year end their salaries are actually processed and are credited to their current accounts. The problem lies in the fact that the partners' salary accounts are theoretically only created at year end.

    Partnership accounting is such a mission!
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    Platinum Member Neville Bailey's Avatar
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    Quote Originally Posted by Mark Atkinson View Post
    So basically, I need to do a "manual" year end where I zero all income and expense accounts to the created appropriation account?
    Not quite - you don't zero each income and expenditure account individually. You debit the appropriation account with a single value, being the net profit, and debit the same value to the capital accounts, split according to the partners' profit shares.

    As a simple example, this is what your income statement will look like after the journal:

    Sales ............................. 100,000
    Less: expenses
    Bank charges ..... 200
    Repairs ........... 2,000
    Insurance .......... 700 ...... 2,900
    Net profit before approp ..... 97,100
    Less: Appropriation .......... -97,100
    Net profit after approp ....... Nil
    Quote Originally Posted by Mark Atkinson View Post
    Also, in partnership accounting partners have both capital accounts and current accounts. Everything goes through the current accounts (drawings included) and only capital contributions go through the capital account. Would this impact your suggestion at all? Can I just create extra current accounts?
    Yes, I would simply create another main account in the balance sheet called Current Accounts, with a sub-account for each partner.

    Quote Originally Posted by Mark Atkinson View Post
    The only problem I see is that the income statement will reflect a zero profit/loss. I need the financial statements to show accurate figures at year end. I suppose I could just take the pre-year end income statement?
    Although the income statement will reflect a zero profit/loss after appropriation, you will still see the net profit/loss before appropriation. See my example above.

    Quote Originally Posted by Mark Atkinson View Post
    How would I tackle the issue of Salaries to partners? Basically when partners take salaries throughout the year, it is debited from their current accounts as Drawings. At year end their salaries are actually processed and are credited to their current accounts. The problem lies in the fact that the partners' salary accounts are theoretically only created at year end.
    In other words, during the course of the year, you would debit their current accounts (and credit Bank) and at year-end you would debit Salaries in the income statement and credit their current accounts. I'm not sure why you can't debit Salaries and credit Bank immediately during the course of the year?
    Last edited by Dave A; 10-Feb-11 at 07:01 PM.
    Neville Bailey - Pastel Accounting Consultant and Photographer
    neville@accountingsoftwaresupport.co.za
    www.accountingsoftwaresupport.co.za
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    *** 20% DISCOUNT ON PASTEL XPRESS / PARTNER SOFTWARE UNTIL 15 DECEMBER 2017 ***

    "Give every person more in use value than you take from them in cash value."
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    Platinum Member Neville Bailey's Avatar
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    Yuk, I couldn't get the alignment in my example looking nice, but I think you get the picture...
    Neville Bailey - Pastel Accounting Consultant and Photographer
    neville@accountingsoftwaresupport.co.za
    www.accountingsoftwaresupport.co.za
    View Neville Bailey Photography

    *** 20% DISCOUNT ON PASTEL XPRESS / PARTNER SOFTWARE UNTIL 15 DECEMBER 2017 ***

    "Give every person more in use value than you take from them in cash value."
    WALLACE WATTLES (1860-1911)

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    Site Caretaker Dave A's Avatar
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    Quote Originally Posted by Neville Bailey View Post
    Yuk, I couldn't get the alignment in my example looking nice
    Please pardon the tinkering in your post, Neville. Just trying to help. If you don't like it I'll undo it.
    The trouble with opportunity is it normally comes dressed up as work.

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    Neville Bailey (10-Feb-11)

  9. #7
    Platinum Member Neville Bailey's Avatar
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    Quote Originally Posted by Dave A View Post
    Please pardon the tinkering in your post, Neville. Just trying to help. If you don't like it I'll undo it.
    Thanks Dave - looks much better!
    Neville Bailey - Pastel Accounting Consultant and Photographer
    neville@accountingsoftwaresupport.co.za
    www.accountingsoftwaresupport.co.za
    View Neville Bailey Photography

    *** 20% DISCOUNT ON PASTEL XPRESS / PARTNER SOFTWARE UNTIL 15 DECEMBER 2017 ***

    "Give every person more in use value than you take from them in cash value."
    WALLACE WATTLES (1860-1911)

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    Gold Member Mark Atkinson's Avatar
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    Quote Originally Posted by Neville Bailey View Post
    Not quite - you don't zero each income and expenditure account individually. You debit the appropriation account with a single value, being the net profit, and debit the same value to the capital accounts, split according to the partners' profit shares.

    As a simple example, this is what your income statement will look like after the journal:

    Sales ............................. 100,000
    Less: expenses
    Bank charges ..... 200
    Repairs ........... 2,000
    Insurance .......... 700 ...... 2,900
    Net profit before approp ..... 97,100
    Less: Appropriation .......... -97,100
    Net profit after approp ....... Nil
    I'm not quite sure I fully understand. I'm trying to comprehend how it will all work in comparison with a manual partnership accounting system.

    What type of account are you suggesting I make the Appropriation account? An expense? What I don't understand is that had it been the Dividends Paid account, it would not have affected the income statement, only the SoCIE.

    In order for the partnership accounting treatment to be correct the following would need to happen at year end:

    1. Profit to Appropriation account. (You suggest debiting net profit and crediting appropriation, but there is no actual account for net profit. Your income and expenses only get closed off to Profit & Loss when the year end procedures are performed?)

    2. Salaries + Interest on Capital (created at year end) are debited in the appropriation account to reduce the profit. The salaries account is then closed off to the partner's current account by debiting Salary: Partner A and crediting Current Account: Partner A.

    3. The remaining balance in the appropriation account is split between the partners and credited to their current accounts (assuming a profit was made).



    Quote Originally Posted by Neville Bailey View Post
    Although the income statement will reflect a zero profit/loss after appropriation, you will still see the net profit/loss before appropriation. See my example above.
    This is where I don't understand how the Appropriation account features in the Income Statement. The Appropriation account is a year end transfer account, not an expense account. (Dividends paid is the same story, it features only in your SoCIE).

    Quote Originally Posted by Neville Bailey View Post
    In other words, during the course of the year, you would debit their current accounts (and credit Bank) and at year-end you would debit Salaries in the income statement and credit their current accounts. I'm not sure why you can't debit Salaries and credit Bank immediately during the course of the year?
    Not quite. Partners' salaries have no effect on the Income Statement whatsoever. They are seen as drawings of equity (from their current accounts), hence why salaries are taken as drawings throughout the year.

    The reason for this is that partners are taxed on their share of the net profit of the business. By running their salaries through the Income Statement it would reduce the profit and result in lower taxes. The way SARS taxes partnerships is the reason for accounting for salaries in this manner.

    So the accounting treatment of partners' salaries goes like this:

    Every month: Debit Partner A: Drawings, Credit Bank.

    At the end of the year:

    Drawings are closed off to the Current Account by: Credit Drawings: Partner A, debit Current Account: Partner A.

    Salaries are then credited to the current accounts, to balance off the salaries taken as drawings.


    I'm not sure if I'm making sense here? I'm trying to wrap my head around how I might do what I would do manually, in Pastel/TurboCASH. Their automatic year-end procedures are what make things tricky.
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    Platinum Member Neville Bailey's Avatar
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    Hi Mark,

    I think we have a case of:

    • Me not explaining things clearly; or
    • Me not understanding partnership accounting clearly.

    or a combination of the two!

    Allow me to take a completely different tack on this issue...

    When creating a fresh set of accounts in Pastel, there is the option of selecting from a list of pre-set Chart of Accounts (CoA) templates, which one can then tinker with afterwards to refine it to one's particular needs.

    For example, there is a template CoA for Manufacturers, one for Hotels, etc. I found one that is for a Partnership, so the following screenshots are all based on that template. The terminology is slightly different to what you and I have used thus far, but I think the concepts are the same.

    Here is what the Chart of Accounts looks like:



    As you can see in the above screenshot, there is a main Capital / Distribution account for each partner, with all the relevant sub-accounts. In this example, there is no mention of the term "Current" accounts, but they are there, albeit with different terminology!

    In my example, I have processed some transactions for income and various running expenses.

    I also processed capital inputs by each of the partners, i.e. Partner A injected R50,000 and Partner B injected R60,000 (each of these transactions resulted in Bank being debited).

    I also processed Salaries of R1,000 for each partner.

    Here is the resultant Trial Balance (before any appropriation entries):



    Note the net profit of R4,473.67.

    If I assume that the net profit is distributed equally between the two partners, I would process the journal as follows:



    After the above journal has been processed, the trial balance would look like this:



    The Income Statement and Balance Sheet reports would look like this:



    Now I run the Year End process in Pastel.

    The resultant Trial Balance is as follows:



    I hope this is more helpful!

    I have ignored transactions such as interest on capital, as these as simply extensions of what I've shown above.
    Neville Bailey - Pastel Accounting Consultant and Photographer
    neville@accountingsoftwaresupport.co.za
    www.accountingsoftwaresupport.co.za
    View Neville Bailey Photography

    *** 20% DISCOUNT ON PASTEL XPRESS / PARTNER SOFTWARE UNTIL 15 DECEMBER 2017 ***

    "Give every person more in use value than you take from them in cash value."
    WALLACE WATTLES (1860-1911)

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    Mark Atkinson (12-Feb-11)

  13. #10
    Gold Member Mark Atkinson's Avatar
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    Hmm. Very interesting.

    Thanks for taking so much time to help me out with this, Neville! Now the question I have is: Which version of Pastel are you using??? I've got Xpress start-up 09 as well as Partner 07 and I'm damn sure there was no chart of accounts for partnerships? Had there been one, my life would have been a million times easier over the past year or two.

    I'm really hoping it's not only a feature of Pastel Partner, because we definitely can't afford to pay for a new version of Pastel Partner just yet!

    Thanks again for your time invested. I see now that I probably need to allow some variance in the way partnerships should be accounted for and the way that it needs to be accounted for in various accounting systems. Both ways will produce the same result, I'm sure.
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