ACC 13/1/1
What is a partnership?
Two
or
more
individuals
form
a
partnership
to
run
a
business
together
to
hopefully
achieve
a
prot.
Legalities of a Partnership
In
New
Zealand
we
have
the
Partnership
Act
1908
which
outlines
the
legaliIes
of
a
partnership.
Legal
deniIon
of
a
partnership:
Legalities of a Partnership
Therefore,
for
a
partnership
to
exist:
there
must
be
more
than
one
person
the
partners
must
be
carrying
on
a
business
together
The
partners
operate
the
business
with
the
view
to
make
a
prot
Legalities of a Partnership
Partnership
Act
1908
-
Liability
of
the
partners:
Every
partner
in
a
rm
is
liable
jointly
with
the
other
partners
for
all
debts
and
obligaIons
of
the
rm
incurred
while
he
is
a
partner;
and
a6er
his
death
his
estate
is
also
severally
liable
in
a
due
course
of
administraIon
for
such
debts
and
obligaIons
as
far
as
they
remain
unsaIsed,
but
subject
to
the
prior
payment
of
his
separate
debts.
Legalities of a Partnership
Liability
of
the
partners:
What
does
this
mean?
The
partners
are
all
individual
legal
enJJes
themselves
and
they
are
all
liable
for
all
of
the
partnerships
debts.
Just
like
a
sole
proprietor,
the
personal
assets
of
the
partner
can
be
used
to
pay
the
partnerships
debts.
Legalities of a Partnership
Partnership
Act
1908
-
Sharing
of
prot
by
partners:
The
interests
of
partners
in
the
partnership
property,
and
their
rights
and
duIes
in
relaIon
to
the
partnership,
shall
be
determined,
subject
to
any
agreement
(express
or
implied)
between
the
partners,
by
the
following
rules:
n All
the
partners
are
enItled
to
share
equally
in
the
capital
and
prots
of
the
business,
and
must
contribute
equally
towards
the
losses,
whether
of
capital
or
otherwise,
sustained
by
the
rm
Legalities of a Partnership
Sharing
of
prot
by
partners:
What
does
this
mean?
Unless
there
is
a
Partnership
Agreement
that
states
otherwise,
the
prots
of
the
partnership
must
be
shared
EQUALLY
between
the
partners.
Partnership Agreement
Most
partnerships
will
have
a
formal
Partnership
Agreement
drawn
up
when
the
business
is
formed.
The
Partnership
Act
1908
default
provisions
are
not
likely
to
be
in
the
partners
interest
so
most
partners
use
a
Partnership
Agreement
to
formalise
an
alternaIve.
Partnership Agreement
The
most
important
areas
to
consider
are:
n Prot
sharing
n Control
of
business
decisions
n AdmiQance
and
expulsion
of
partners
n ValuaIon
of
intangible
assets
(such
as
trade
names
and
customer
goodwill)
n Liability
for
partnership
debts
n TerminaIon
Example of Clause
ExplanaJon of Clause
Example of Clause
ExplanaJon of Clause
Example of Clause
ExplanaJon of Clause
Bonus
Forming a Partnership
Once
it
has
been
decided
that
a
partnership
will
be
formed
and
the
Partnership
Agreement
has
been
wriQen,
the
accounts
of
the
partnership
can
be
opened
starIng
with
the
formaIon
entries.
Forming a Partnership
Partnership
business
may
be
formed
by:
n each
partner
contribuIng
cash
n each
partner
contribuIng
cash
and
some
personal
assets
(for
example
a
vehicle,
computer,
building)
n one
person
who
is
currently
a
sole
proprietor
running
a
business
and
another
person
contribuIng
cash
and/or
assets
to
become
a
partner
in
the
business
Forming a Partnership
Each
partner
contributes
cash
Bank
Capital Partner A
Bank
Capital Partner B
Debit
Credit
50 000
50 000
100 000
100 000
Forming a Partnership
One
partner
contributes
cash
and
the
other
partner
contributes
cash
and
an
asset
Debit
Bank
50 000
Capital Partner A
Bank
Vehicle
Capital Partner B
Credit
50 000
100 000
20 000
120 000
Forming a Partnership
One
partner
contributes
an
exisIng
business
and
one
partner
contributes
cash.
The
assets
and
liabiliIes
of
the
business
will
be
taken
over
at
their
agreed
values
(as
decided
by
the
partners,
maybe
their
book
values)
The
sole
proprietorship
being
contributed
to
the
partnership
is
a
going
concern
and
the
value
of
the
sole
proprietorship
becomes
the
capital
of
the
partner
that
is
contribuIng
the
business.
If
the
valuaIon
of
the
sole
proprietorship
is
greater
than
the
net
value
of
the
assets
and
liabiliIes
being
contributed,
goodwill
is
created
Forming a Partnership
Why
are
assets
and
liabiliIes
taken
over
at
agreed
values?
When
a
partnership
is
formed
the
partners
agree
on
the
values
for
the
items
to
be
contributed.
This
agreed
value
could
be
the
market
value,
replacement
value
or
book
value.
The
agreed
value
must
be
a
fair
value.
The
agreed
value
then
becomes
the
historical
cost
to
the
new
business
because
this
is
the
acquisiIon
cost
to
the
new
partnership.
For
assets,
Accumulated
DepreciaIon
is
therefore
not
carried
forward
to
the
partnership
records.
Forming a Partnership
All
assets
and
liabiliIes,
except
accounts
receivable,
are
recorded
at
their
new
historical
cost
(their
agreed
value).
How
are
Accounts
Receivable
recorded?
Accounts
Receivable
are
recorded
at
historical
cost
in
the
new
partnership
and
an
Allowance
for
Doubiul
Debts
will
be
created
when
the
agreed
value
is
less
than
historical
cost.
This
is
because
the
partnership
has
a
claim
to
the
debtors
total
amount
and
it
must
be
disclosed.
The
Allowance
for
Doubiul
Debts
recognises
that
the
partnership
may
expect
future
losses
from
debtors.
Forming a Partnership
Example
of
how
Accounts
Receivable
is
recorded
Business
that
is
being
contributed
to
the
partnership:
Accounts Receivable
12 000
2 000
10 000
4 000
Forming a Partnership
Example
of
a
journal
entry
for
one
partner
contribuIng
an
exisIng
business
and
one
partner
contributes
cash.
Accounts Receivable
Inventory
Property
100,000
Equipment
67,000
Goodwill
Allowance for Doubtful Debts
Accounts Payable
agreed
Loan
value of the
business
Capital Partner A
Bank
Capital Partner B
12 000
15 000
50 000
25 000
33 000
4 000
6 000
25 000
100 000
50 000
50 000
Forming a Partnership
GOODWILL
Goodwill
is
the
dierence
between
the
agreed
value
contributed
by
the
partner/s
and
the
agreed
value
of
the
net
assets
that
are
taken
over
by
the
partnership.
Goodwill = Net Assets Agreed Capital figure
What
does
Goodwill
represent?
The
value
placed
on
the
enItys
reputaIon,
loyal
customers,
and
quality
of
service
that
are
immediately
protable
thus
providing
future
economic
benets
for
the
partnership.
Forming a Partnership
When
one
partner
contributes
a
business,
the
other
partner
may
want
to
contribute
cash
that
is
in
proporIon
to
the
value
of
the
sole
proprietorship
business
being
contributed.
For
example:
Partner
A
contributes
a
business
valued
at
$150,000.
Partner
B
wants
to
be
of
the
TOTAL
equity
of
the
partnership.
Partner
A
-
$150,000
Partner
B
will
contribute
$50,000
so
that
his
share
is
1/4
Bank
Capital Partner A
Debit
Credit
xx
xx
Trial
Balance
Process the
Balance Day
Adjustments
Income Statement to
calculate profit
Adjusted
Trial
Balance
prepayments
accrued expenses
income in advance
accrued income
invoices on hand on balance day
depreciation
bad debts
doubtful debts
write down of inventory
Revenue
State primary source of income (1)
Add other income (2)
(list)
Less Expenses
Group One expenses (3)
(list)
Administrative expenses
(list)
Finance costs
(list)
Total expenses
Profit (loss) for the year
xxx
xx
xx
xx
xx
xxx
xx
xx
xxx
xx
xx
xxx
xxx
xxx
xxx
$ xxx
Revenue
Sales
Less Sales Returns
Net Sales
Less Cost of goods sold
Gross profit
Add Other income
(list)
xx
xx
xxx
xx
xxx
xx
xxx
Less Expenses
Distribution costs
(list)
Administrative expenses
(list)
Finance costs
(list)
Total expenses
Profit (loss) for the year
xx
xx
xx
xx
xx
xx
xxx
$ xxx
xxx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
Debit
Credit
xx
xx
Credit
xx
xx
Profit Distribution
xx
Debit
Credit
xx
xx
Debit
Credit
xx
xx
Debit
Credit
xx
xx
xx
Debit
Credit
xx
xx
xx
Debit
Credit
xx
xx
xx
Bank / Assets/
Current Account
transfer
XX Cr
XX
XX Cr
XX Cr
XX Cr
XX Cr
XX Cr
XX Cr
XX Cr
XX Cr
Drawings
During
the
year
each
partner
may
take
drawings
from
the
partnership.
Drawings
are
recorded
over
the
year
in
the
Drawings
account.
At
the
end
of
the
year
drawings
is
closed
o
to
the
partners
current
account.
Drawings
REDUCES
their
equity
in
the
partnership.
The
current
account
is
DEBITED.
Journal
entry
for
the
transfer
of
drawings
to
the
partners
current
account:
Debit
Credit
Current Account Partner A
xx
Drawings Partner A
xx
xx
xx
Note
xx
xx
xx
xx
xxx
2
3
xx
xx
xx
xxx
xxx
xx
xx
xxx
Note
xx
xxx
xxx
$ xxx
5
xx
xx
$ xxx
5,000
100
$4,900
2.
Investments
Investments
comprise
shares
in
(eg
ABC
Ltd).
The
current
fair
value
of
the
shares
is
(eg
$7,200)
which
is
their
market
value
on
31
March
2.
Or
Investments
are
in
Government
Stock
/
a
Fixed
Term
Deposit
with
an
interest
rate
of
x%
and
a
maturity
date
of
Land
Equipment
Vehicles
Total
60,000
19,200
32,000
111,200
20,000
0
0
0
0
(2,400)
16,000
(14,000)
(3,600)
36,000
(14,000)
(6,000)
$ 80,000
$ 16,800
$30,400
$127,200
80,000
24,000
36,000
140,000
(7,200)
(5,600)
(12,800)
$80,000
$16,800
$30,400
$127,200
4.
Loan
/
Mortgage
The
loan
/
mortgage
has
an
interest
rate
of
x%
and
a
maturity
date
of
5.
Equity
Partner A
Partner B
Total
Capital
Current
Total
X
X
X
X
X
X
X
X
X
Reason
Reason
Interest
on
Current
Salary
Reason
Interest
The
purpose
of
charging
interest
on
drawings
(eg
on
10%)
is
to
discourage
partners
from
taking
cash
out
Drawings
of
the
business
for
personal
use.
The
high
interest
rate
(compared
with
interest
earned
on
capital
and
current
accounts)
will
discourage
the
partners
from
taking
large
amounts
of
drawings
as
they
will
not
want
to
pay
the
10%
interest.
By
applying
a
10%
interest
rate
on
drawings,
and
therefore
reducing
the
amount
of
drawings,
more
cash
is
retained
in
the
business
to
use
for
expansion
and
improvement.
Reason
Bonus
Reason
Residual
The
Partnership
Act
1908
states
that
all
prots
are
Prot/Loss
to
be
shared
equally
between
partners.
O6en
partners
opt
to
alter
this
clause
in
their
personalised
Partnership
Agreement
to
show
that
they
wish
to
distribute
residual
prots
in
the
manner
that
they
see
most
t
and
fair
which
is
o6en
the
iniIal
capital
invested
by
each
partner.
Rewarding
each
partner
dependant
on
their
capital
investment
reects
the
fact
that
more
capital
is
more
risk
for
the
partner
and
they
should
therefore
be
rewarded
accordingly.
Achieved:
What
Merit:
Why
Excellence:
How
and
Consequence
So
when
wriIng
about
prot
sharing
clauses,
the
answer
needs
to
explain:
what
it
is
and
does
why
is
it
important
how
does
it
help
the
business
moving
forward
consequence
of
not
having
it
or
possible
consequences
of
having
it