Partnerships End-of-Year Financial Statements

End-of-Year Financial Statements for Partnerships

Partnerships Overview

Partnerships are a type of businesses owned by 2 to 20 people.
Each partner contributes resources such as money, skills, and property.
Partnerships, like sole traders, have unlimited liability which means all partners are liable for the business’s debts.

Preparation of Financial Statements

For a partnership, the end-of-year financial statements typically consists of: a Statement of Profit or Loss, a Statement of Financial Position, and a Partners’ Current Accounts.
It’s essential to note that partnerships operate through profit-sharing, with ratios typically outlined in a partnership agreement.

Statement of Profit or Loss

This statement details the revenue, costs and profits over the financial year.
It begins with the total sales (turnover), then lists the various costs (direct and indirect).
The bottom line shows the final profit made for the year after all costs and taxes have been subtracted.

Statement of Financial Position

This statement provides a ‘snapshot’ of the partnership’s financial situation at the end of the business year.
It lists the assets (what the partnership owns), liabilities (what it owes), and equity (the partners’ share of the business).
Assets less liabilities provide the net assets which should equal to the partners’ total capitals.

Partners’ Current Accounts

This account keeps track of the money introduced and withdrawn by each partner during the year.
It records the profit share for each partner, as agreed in the partnership agreement.
Partners’ current account also includes other transactions such as salaries, interest on capital and withdrawals made by each partner.

Importance of Financial Statements

These statements give partners comprehensive insights, allowing them to make informed decisions about future financial plans.
They provide transparency over the financial performance and operations of their business.
Financial Statements are also necessary for legal reporting requirements, lenders or investors who may be interested in partnership business.

Considerations

It’s crucial to prepare these statements accurately, as they influence decisions of partners, creditors, and other stakeholders.
Financial statements often require careful interpretation; for instance, a high level of debt might be a concern, unless the partnership also has high levels of assets.
It’s good practice for partnerships to have their end-of-year financial statements professionally audited to ensure accuracy and compliance with legal requirements.