partnerships
PARTNERSHIP FORM OF
ENTITY
A partnership is defined as
Is a contract whereby two or
more persons bind themselves to
contribute money, property or
industry to a common fund with
the intention of dividing the
profits among themselves
2
Characteristics of
partnerships
Characteristics of
partnerships
1. Association of individuals
Voluntary association
May be based on handshake or
written agreement
Partnership not a legal entity, so is
not taxed
Individual partners pay tax on their
share of profit
4
Characteristics of
partnerships
continued
2. Mutual agency
Each partner acts on behalf of the partnership
when engaging in partnership business
Act of any partner is binding on all other
partners
3. Limited life
May be ended voluntarily at any time through
the acceptance of a new partner or withdrawal
of a partner
May be ended by involuntarily by death of
incapacity of a partner
5
Characteristics of
partnerships
continued
4. Unlimited liability
Each partner is personally and individually
liable for all partnership liabilities
5. Co-ownership of property
Partnership assets are owned jointly by the
partners
If partnership is dissolved, assets do not
legally revert to original contributor
Partners have a claim on total assets equal to
the balance in individual capital account
Partnership profit or loss is co-owned
6
Advantages and
disadvantages of partnerships
Advantages
Combining skills and resources
of 2 or more individuals
Ease of formation
Not subject to as much
government regulation as
companies
Ease of decision making
No taxation on partnership
profits
Disadvantages
Mutual agency
Limited life
Unlimited
liability
Partners must
be able to work
together
Kinds of partner
As to contribution
Capitalist partner contributes money or
property
Industrial partner contributes skills,
knowledge, industry or service
Capitalist-industrial partner contributes
money or property and industry
As to liability
General partners have unlimited liability
Limited partners have limited liability
8
Kinds of partnership
General Partnership
Partners are all general partner
Limited Partnership
Composed of one or more general
partner and one or more limited
partner
Articles of Partnership
A written contract made by the partners
specifying such details as
Review question 1
A.
B.
C.
D.
11
Review question 2
A.
B.
C.
D.
BASIC PARTNERSHIP
ACCOUNTING
Major accounting issues in relation to
partnerships are
Forming a partnership
Dividing profit or loss
Preparing financial statements
Dissolution of partnership
Liquidation of partnership
13
Forming a partnership
Initial investment
Rules to be observed:
15
16
Forming a partnership
continued
Example 1
Carrying amount and fair value of assets
invested
Carrying amt
Fair value
A.Gibson T.Jones A.Gibson T.Jones
Cash
P 8 000 P 9 000
P 8 000 P 9 000
Office equipment
5 000
4 000
Accum. depreciation
(2 000)
Accounts receivable
4 000
4 000
Allow. for doubtful debts
(700)
(1 000)
P11 000 P12 300 P12 000 P12 000
17
Forming a partnership
continued
8 000
4 000
Cash
Accounts Receivable
Allowance for Doubtful Debts
T. Jones, Capital
(To record investment of Jones)
9 000
4 000
12 000
1 000
12 000
18
Forming a partnership
continued
Example 2
C, D and E formed a partnership with agreed total
capitalization of P30, 000 which should be contributed
equally by C and D. Meanwhile, E was designated to
manage the operation of the partnership as industrial
partner with a share of 20% from partnership profits. C
and D contribute the following assets:
19
Review question 3
A.
B.
C.
D.
20
21
continued
Closing entries:
1. DR each revenue account for its balance and CR
Profit and Loss Summary for total revenue
2. DR Profit and Loss Summary for total expenses
and CR each expense account for its balance
3. DR (CR) Profit and Loss Summary for its balance
and CR (DR) each partners capital account for
their share of profit (loss)
4. DR each partners capital account for the balance
in that partner's drawing account and CR each
partners drawing account for the same amount
24
continued
Example
Partnership profit for year is P32 000
Partners share profit and loss equally
32 000
L. Cooke, Capital
8 000
D. Kam, Capital
L. Cooke, Drawings
D. Kam, Drawings
(To close drawings
accounts to current
PowerPoint presentation by Dr
accounts) Anne Abraham, University of
Western Sydney
16 000
16 000
6 000
8 000
6 000
25
continued
Example2:
Assume that Adam and Eve formed a partnership
with original capital contributions of P60,000 and
P30,000 respectively. The profit agreement is
60% and 40% respectively. During the year, the
partnership generated an income of P100,000.
a)Give the closing entry for the above problem.
b)Assuming instead of profit, it was P100,000 loss.
c)Assuming no agreement was made, give the
closing entry under assumption (a) and (b)
26
continued
Profit-and-loss ratios
Typical profit-and loss ratios include:
1 A specified ratio
expressed as a proportion (6:4), a percentage
(70% and 30%), or a fraction (2/3 and 1/3)
27
continued
continued
Sample Problem :
Assume that Adam and Eve formed a partnership
with original capital contributions of P60,000
and P30,000 respectively. General ledger for
their capital accounts before closing entries are
shown below:
29
continued
During the year Net Income of P100,000 was earned by the partnership.
They agreed that profit will be divided:
continued
31
continued
Insufficient Income
Sample Problem:
M. Kings and S. Lee agree on
Salary allowances of P8400 to Kings and P6000 to
Lee
Interest allowances of 10% on beginning capital
balances
10% Bonus to S. Lee
Remainder shared equally
continued
Division of profit
Net Profit to be distributed
Salary allowance
Interest allowance
Kings (P28 000 x 10%)
Lee (P24 000 x 10%)
Balance: (50:50)
Kings (P14,600 x 50%)
Lee (P14,600 x 50%)
Kings
Running bal.
P 5,000
P 8,400 P 6,000 (9,400)
2,800
(7,300)
Lee
2,400
(12,200)
(14,600)
(7,300)
(7,300)
0
P 3,900 P 1,100
33
continued
5 000
3 900
1 100
34
Review question 4
A.
B.
C.
D.
35
Review question 5
A.
B.
C.
D.
Partnership financial
statements
Income statement
Identical to proprietorship except for division of
profit
37
Partnership financial
statements
KINGSLEE
Statement of Changes in Partners Equity
For the year ended 31 December 2013
Max Kings Steven Lee Total
.
Capital, 1 January P 28,000 P 24,000 P 52,000
Add: Share on Profit
12,400
9,600
22,000
Total
40,400
33,600
74,000
Less: Drawings
7,000
5,000
12,000
Capital, 31 December P 33,400
p 28,600
P 62,000
38
Partnership financial
statements
KINGSLEE
Statement of Financial Position (partial)
As at 31 December 2013
Total Liabilities(assumed amount)
P 115,000
Owners Equity
Max Kings, Capital
P 33,400
Steven Lee, Capital
28,600
Total Owners Equity
62,000
TOTAL LIABILITIES AND OWNERS EQUITY
P
177,000
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Review question 5
A.
B.
C.
D.
40
Partnership dissolution
ADMISSION OF A PARTNER
The admission of a new partner results in
legal dissolution of the existing partnership
and the beginning of a new one
To recognise economic effects it is
necessary only to open a capital account
for each new partner
A new partner may be admitted either by:
Purchasing the interest of an existing partner or
Investing assets in a partnership
42
ADMISSION OF A PARTNER
continued
PowerPoint presentation by Dr
Anne Abraham, University of
Western Sydney
43
Purchase of a partners
interest
The admission of a partner by purchase of an
interest in the firm is a personal transaction
between one or more existing partners and the
new partner
Price paid is negotiated and determined by the
individuals involved
The price may be equal to or different from the
capital equity acquired
Any money or other consideration exchanged is
the personal property of the participants and
not the property of the partnership
44
Purchase of a partners
interest
continued
Example
Cox agrees to pay P10 000 cash to
Adler and Barker each for 1/3 of
their interest in the Adler-Barker
partnership
At the time of admission of Cox,
each partner has a P30 000 capital
balance
45
Purchase of a partners
interest
continued
46
Purchase of a partners
interest
continued
Ledger balances after purchase of partners
interest
C. Adler, Capital
10 000
30 000
Bal. 20 000
D. Barker, Capital
10 000
30 000
Bal. 20 000
L. Cox, Capital
20 000
Purchase of a partners
interest
continued
Sample Problem2:
The capital balances and agreed profit and loss
distribution of Eric and Vincent partnership
prior to dissolution are as follows:
Partners
Capital Balances
P&L Ratio
Vincent
250,000
25%
Eric
750,000
75%
Lally wants to buy 50% of the interest of Eric to
give her interest of 37.5% in the partnerships
asset and in the partnerships profit and loss.
48
Purchase of a partners
interest
continued
Purchase of a partners
interest
continued
Eric, Capital
375 000
Lally, Capital
375 000
Note:
(To record admission of Lally by purchase)
50
Purchase of a partners
interest
continued
Sample Problem3:
The capital balances and agreed profit and loss
distribution of Pat and Sponge partnership
prior to dissolution are as follows:
Partners
Capital Balances
P&L Ratio
Pat 150,000
30%
Sponge
350,000
70%
Mr. Crab wants to buy 20% of the interest in the
partnerships asset and profit by paying
directly to each of the existing partners.
51
Purchase of a partners
interest
continued
Investment of assets in a
partnership
When a partner is admitted by investment,
both the total assets and the total
partnership capital change
When the new partners investment differs
from the capital equity acquired, the
difference is considered a bonus either to:
1. The existing (old) partners or
2. The new partner
53
Investment of assets in a
partnership continued
Example
Cox invests P30 000 cash in the Adler-Barker
partnership for a 1/3 capital balance
Journal entry to record admission
Cash
30 000
L. Cox, Capital
30 000
(To record admission of Cox by investment)
54
Investment of assets in a
partnership continued
Ledger balances after investment of assets
C. Adler, Capital
30 000
D. Barker, Capital
30 000
L. Cox, Capital
30 000
55
Investment of assets in a
partnership continued
Bonus to old partners
Results when new partners investment in
the firm is greater than the capital credit on
the date of admittance
Sample Problem 1:
Boyd and Chan with total capital of P120 000
agree to admit Dante to the partnership
Dante acquires a 25% ownership interest by
making a cash investment of P80 000
Current profit sharing ratio is Boyd 60% and
Chan 40%
56
Investment of assets in a
partnership continued
Steps in determining bonus
1 Determine the total contributed capital of the
new partnership
New partners investment + capital of the old
partnership
P120 000 + P80 000 = P200 000
57
Investment of assets in a
partnership continued
3 Determine the amount of bonus
Subtract the new partners capital credit from the
new partners investment
P80 000 - P50 000 = P30 000
58
Investment of assets in a
partnership continued
Entry to record admission of Dante
Cash
80 000
S. Boyd, Capital
18 000
T. Chan, Capital
12 000
L. Dante, Capital
50 000
(To record admission of Dante and bonus
to old partners)
59
Investment of assets in a
partnership continued
Bonus to new partner
Results when the new partners
investment is less than his or her capital
credit in the firm
Capital balances of the old partners are
decreased based on their income ratios
before the admission of the new partner
60
Investment of assets in a
partnership continued
Bonus to new partner
Sample Problem2:
Boyd and Chan with total capital of P120 000
agree to admit Dante to the partnership
Dante acquires a 25% ownership interest by
investing cash of P20 000
Current profit sharing ratio is Boyd 60% and
Chan 40%
61
Investment of assets in a
partnership continued
Entry to record admission of Dante
Cash
20 000
S. Boyd, Capital
9 000
T. Chan, Capital
6 000
L. Dante, Capital
35 000
(To record admission of Dante and bonus)
62
Investment of assets in a
partnership continued
Sample Problem 3:
The capital balances and agreed profit and loss
distribution ratio of the partners before admitting Judy
are as follows:
Job
Capital
Balance
s
120,00
0
John
Jun
Total
Profit &
Loss
Judy
admitted by
investing40%
cash of 40%
P200,000
for 30%
Ratio
20%
100%
interest in the partnership assets and profits
63
Investment of assets in a
partnership continued
Sample Problem 3 contd
Required:
1.) Journalized admission of new partner Judy
2.) What is the new profit and loss sharing of
the partners?
3.) Assume that Judy admitted by investing
cash of P200,000 for 20% interest in the
partnership.
64
Review question 6
A.
B.
C.
D.
LIQUIDATION OF A
PARTNERSHIP
The liquidation of a partnership terminates
the business
In a liquidation, it is necessary to:
1 Sell noncash assets for cash and recognise a
gain or loss on realisation
2 Allocate gain/loss on realisation to the partners
based on their profit-and-loss ratios
3 Pay partnership liabilities in cash
4 Distribute remaining cash to partners on the
basis of their capital balances
66
LIQUIDATION OF A
PARTNERSHIP continued
Creditors must be paid before partners
receive any cash distributions
Each step must be recorded by an
accounting entry
No capital deficiency means that all
partners have credit balances in their
capital accounts
Capital deficiency means at least one
partners account has a debit balance
67