In the partnership firm all the economic transactions are firstly recorded in journal in subsidiary book. Then posting of all these transactions is done in the ledger and balance of every account is found out. All these accounts balances are recorded in the trial balance as on (particular) date.
Based on this trial balance balances and given adjustments/ other information to know financial results and financial position of business, final accounts of the business are prepared.
In the final accounts of partnership firm, following necessary accounts and a statement are prepared :
(1) Trading Account : In this account, transactions related to purchase and sales of goods, goods return, goods goes out by any means, purchase expenses and stock of goods are recorded and to find gross profit or gross loss . Trading A/c is to be prepared. Result of Trading A/c (gross profit or gross loss) is transferred to Profit and Loss A/c.
(2) Profit and loss Account : In the partnership firm, transactions of Revenue expenses and incomes are recorded in the Profit and Loss A/c to find net profit or net loss. On the debit side of profit and loss A/c, administrative exp., Selling-distribution exp., financial exp., and other exp. are recorded while on the credit side, revenue incomes are recorded. Net profit or net loss is to be transferred to Profit and Loss Appropriation A/c.
(3) Profit and Loss Appropriation Account : To show the distribution of profit and loss among the partners, a special account is prepared known as profit and loss Appropriation A/c, which is a part of profit and loss A/c on the debit side of this account partners’ interest on capital, interest on credit balance of current account, salary, bonus, commission, general reserve etc. amounts are shown. While on the credit side of this account, partners, interest on drawings, interest on debit balance of current account amounts are shown. From profit and loss Appropriation A/c, net divisible profit or loss can be known which is transferred to partners’ capital or current account.
(4) Partners Capital Accounts : To record the partners transactions with the firm, partners’ capital accounts are prepared. When fluctuating capital account method is adopted, all the transactions related to partners are recorded in this account and final balance is transferred to the balance sheet.
When fixed capital account method is adopted, opening balance and transactions due to permanent increase/ decrease take place in the capital are recorded. In the partners capital account while other transactions concern with partners are recorded in the partners current account. Final balance of this account is also transferred to the balance sheet.
(5) Balance sheet: At the end of the year to know financial position of the business, balance sheet is to be prepared. On the capital liability side of balance sheet, partner capital account balance, current account balance, reserves, current and non-current liabilities are shown. While on asset-receivable side, fixed assets,, intangible assets, investments, current assets, deferred revenue expenditure, debit balance of partners current-account, etc. are shown. Remember total of both the sides of balance sheet should be equal.
