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Financial Accounting Analysis Report: Profit

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Question:

Discuss about the Financial Accounting Analysis Report for Profit.

 

Answer:

The current scenario is based on the depiction of drawings in partnership in order to determine the appropriateness of Craig. As evident, Craig has been drawing from the capital contributed by him in partnership business however the drawings was ultimately used by Craig for his own personal purpose. An important point in this context is that excessive drawings will ultimately result in reduced capital and profit for the business. Under a partnership firm, it is important to deal with appropriations prior to sharing of residual profit between the partners (Davidson, 2014). In practice, it would have been convenient to separate the sum of investment by the partner’s capital account from the amount, which Craig and Michelle earn through their trading activities of the partnership. Instead of drawing from the capital account, Craig would have set up current account in context of the total appropriations to keep an account of the share of residual profit or loss after deducting drawings.

Debiting the partners drawing in the current account would have provided better scenario in the partners appropriation account. Michelle should have charged interest on the amount drawn by Craig as this could have discouraged the partners from withdrawing the excessive amount from the business. Following this, a debit entry on the partners drawings account and a credit entry in Appropriation account would have discouraged Craig from drawings (Cohen, 2017). There should have been a partnership agreement including the ownership percentage based on the respective contribution made by Craig and often correlate the allocation of profit and loss and drawings for the partners.

 

Reference List:      

Cohen, G. M. (2017). LAW AND ECONOMICS OF AGENCY AND PARTNERSHIP. The Oxford Handbook of Law and Economics: Volume 2: Private and Commercial Law, 399.

Davidson, W. A. (2014). U.S. Patent No. 8,818,819. Washington, DC: U.S. Patent and Trademark Office.

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