When closing the accounts of a partnership it is true that:
A) partner's salaries must be treated as drawings because partners are owners.
B) a retained profits account is used rather than a profit or loss summary account.
C) profit is credited to each partner's capital account according to the profit sharing agreement.
D) a loss for the period is carried forward and is not transferred to the partner's capital accounts.

Question

Quizplus · Accepted Answer

When closing the accounts of a partnership, the profit is credited to each partner's capital account according to the profit sharing agreement. This is because in a partnership, the profits and losses are shared among the partners as per the agreement. Thus, the profits belong to the partners and are credited to their capital accounts. Option A is incorrect because partner's salaries are treated as an expense and not as drawings, as salaries are paid to partners for their services to the partnership. Option B is incorrect because a profit or loss summary account is commonly used to close the accounts of a partnership. Option D is incorrect because a loss for the period is transferred to the partner's capital accounts in the same way as profits, reducing their balances.

When Closing the Accounts of a Partnership It Is True