(a) Explain the term fixed capital account.
(b) State three conditions that would result in a change in the profit and loss sharing ratio of a partnership.
(c) Outline three circumstances that would give rise to the creation of goodwill in a partnership
Explanation
(a) A fixed capital account:
- This is a type of capital account in a partnership
- It is credited with the initial capital contribution of the partners and any addition to the capital.
- It is debited with any capital withdrawals by partners.
(b) Conditions that would result in a change in profit and loss sharing ratio of a partnership:
i. On the admission of a new partner
ii. On the retirement of a partner
iii. When there is a change in capital contribution
iv. On the death of a partner
v. On the resignation of a partner
vi. When there is a change in status of a partner, e.g. from dormant partner to an active partner
vii. On the amalgamation of partnerships
viii. When there is a takeover of a partnership
ix. Where profit and loss sharing ratio is based on capital contributions, additions, or withdrawals of capital
(c) Circumstances that would give rise to the creation of goodwill in partnerships are:
i. One the admission of a new partner
ii. Change in the profit and loss sharing ratio
iii. On the retirement of a partner
iv. On amalgamation of partnership
v. On dissolution of a partnership
vi. On the death of a partner
vii. Takeover or purchase of a partnership by another business
viii. On the resignation of a partner