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Explaining Partnership Drawings & Profit

Explaining Partnership Drawings & Profit

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Hi

Can someone give me a really simple explanation regarding drawings, profit and loss and the balance sheet and a really simple explanation of where the drawings come from

Eg  SALES  £20000

Less allowable expenses & Costs £12000

Net Profit £8000

Then drawings of £10000

How is this explained, I know Drawings go on the Balance Sheet but where have they come from.

I know it is a really dumb question but any simple quick explanation answers appreciated

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By pedant
13th Feb 2013 17:25

Who's the daddy?

Drawings aren't related to anything. They represent the monies taken out of the business by the proprietor.

Capital a/c  B/fwd    20000

Add profit                10000

                              30000

Less Drawings        10000

Balance C/fwd        20000

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By BKD
13th Feb 2013 17:31

One possible explanation

You've received £20k in cash from sales. Although you've incurred costs of £12k, leaving a profit of £8k, you've only paid £10k of them (you've got invoices for £2k in the drawer still to be paid). So you still have £10k in the bank, which you draw out as drawings.

So your balance sheet would look like this:

Cr Creditors £2k

Dr Capital account £2k (ie overdrawn)

Another:

All sales and expenses have been fully paid, and you have a  bank overdraft facility.

Cr Bank £2k

Dr Capital account £2k

 

In other words, 'someone' - bank, suppliers otherwise, has financed your overdrawn capital account.

All assuming, of course, that this is the first period, ie no B/F figures as in the first response (the key point of which is that drawings and profit are two entirely different things - you're taxed on profits regardless of level of drawings)

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By Euan MacLennan
14th Feb 2013 11:01

Capital account

As Pedant has indicated, it is the partners' capital accounts which are included in the balance sheet.  Each partner's share of the net profit from the bottom of the P&L account is added to his capital account and his drawings are deducted from it - together, they comprise the movement on the capital account in the year.

To add to BKD's two (one?) possible explanations, there is the possibility that if one partner has drawn out more than his share of the profits, it is being funded by another partner drawing less than his share.

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