The surplus capital method-partnership, Financial Accounting

Assignment Help:

THE SURPLUS CAPITAL METHOD

Under this method, the initial amounts repaid to partners are in order to reduce their capitals to amounts such that these are now in the same ratio as that in which they share profits and losses. The amounts so repaid are referred to as “repayment of surplus capital”.

For example, if there are three partners who share profits and losses equally, and have capitals of Ksh 100,000 Ksh 60,000 and Ksh 40,000, the surplus capitals will be as follows:

610_graph1.jpg

Once the surplus capital has been paid to partners the remaining capital, known as ‘base capital’ can be repaid. The base capital is in the same ratio as that in which profits and losses are shared. In the illustration, it is 1:1:1(equal). Any cash collected can also be distributed in profit sharing ration – 1:1:1.  This will allow capital balances to fall uniformly as more and more cash is paid to partners.

As a final example to this, assume that there are three partners with capitals of Ksh 60,000, Ksh 75,000 and Ksh 120,000 who share profits and losses in the ratio 3:2:1 respectively. Their surplus capitals can be illustrated as follows:

888_graph2.jpg

Of course, there will be a priority payment of surplus capital between the two partners who have surplus capital.  The partner who will receive the first payment is said to have been repaid his ‘surplus surplus capital’.


Related Discussions:- The surplus capital method-partnership

Inventory turnover, During 2014, Victoria’s Fashion had beginning inventory...

During 2014, Victoria’s Fashion had beginning inventory of $480,000, ending inventory of $560,000, and cost of goods sold of $2,200,000. Compute the inventory turnover and days’ in

The american institute of cpas'' (aicpa), Describe:-1. Compare the American...

Describe:-1. Compare the American Institute of CPAs' (AICPA) Statements on Tax Standards (SSTS) and the Treasury Department Circular 230 rules to practice before the Internal Reven

Capital budgeting, A project has a one-year life. It has an outlay of Rupee...

A project has a one-year life. It has an outlay of Rupee 1,500 million. At the end of Year 1, the net inflow is likely to be Rupee 2,200 million. The pretax cost of debt is 11%, th

Balance Sheet, What is the function of balance sheet

What is the function of balance sheet

Powers of trustee-rights and duties of trustee, Powers of trustee (A) ...

Powers of trustee (A) Of his own initiative, he may: 1.    Sell and transfer any part of the bankrupt's property; 2.    Gives receipts for money received; 3.    Take all n

Net realizable value of the accounts receivable, After the accounts are adj...

After the accounts are adjusted at the end of the year, Accounts Receivable has a balance of $215,000, Uncollectible Accounts Expense has a balance of $17,500, and Allowance for Do

Explain why the operating cycle, The Operating Cycle Two Wheeler Cycle Shop...

The Operating Cycle Two Wheeler Cycle Shop buys all of its bikes from one manufacturer, Baxter Bikes. On average, bikes are on hand for 45 days before Two Wheeler sells them. The c

Determine the overvalue or undervalue of share, The New York Jets have deci...

The New York Jets have decided to go public and are offering new shares for $40. Since the Jets want to build a new stadium, the firm will retain all earnings and will not issue an

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd