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Hi All,
I would like to know whether it is logical for Retained Earnings ($30k) to derive as Inventories, and does it violate any IFRS?
ASSETS
Inventories – $70,000
Cash – $0EQUITY
Partner A Initial Paid-up Capital – $20,000
Partner B Initial Paid-up Capital – $15,000
Retained Earnings – $30,000 (Is this correct?)LIABILITY
NilThree years ago both partners started an e-commerce retail business with $40,000 (25+15) paid up capital which was used to purchase inventories for sale. Over the years the inventories grew and valuate at $70,000 after a portion of Net Operating Profit was reinvested consistently into new inventories Before paying the partners as personal income, thus the cash balance every month/year end will be $0
There was no bank loan or short-term payable due to the suppliers was paid on cash-basis
Please note the instruction for this General Forum “Everything about ACCA which is not exam specific please post in General ACCA Forums” and make any future posts to the appropriate forum after checking out the related notes.
See for example on page 60 of the FA notes (available here https://opentuition.com/acca/fa) Total Assets = Total equity and liabilities so if there are no liabilities Total Assets will indeed equal total equity.
It doesn’t matter whether capital is that of a sole trader, partnership or limited company this must hold true.
Yes, he just accidently put Partner A’s capital as $20k instead of $25k, then it would balance.
An easy mistake to make – the ‘0’ and the ‘5’ are so close together
But shouldn’t those ‘retained earnings’ be allocated between the partners at the end of the year
In partnership accounts, there should not be a figure for ‘retained earnings’
Or am I wrong?
In partnership accounting (which are not examinable in ACCA) the profit (or loss) for each year is allocated to the partners in their profit-sharing ratio (whatever is agreed) and accumulated in their capital accounts.
Retained earnings/accumulated profits, whatever you want to call it always “belongs” to the owners – for a partnership, profits are easily accumulated in their individual capital accounts because there is a limit on the number of partners and, technically, an existing partnership ceases to exist when a new partner is admitted or a partner retires. However, for a company with 100s or 1000s of shareholders (potentially) – who can also trade their shares – it would clearly be impossible to attribute profits to individuals.
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