Accounting for Partnerships

Part 2

ADMISSION OF A PARTNER
The admission of a new partner results in the
legal dissolution of the existing partnership and
the beginning of a new partnership.
To recognize economic effects, it is necessary
only to open a capital account for each new
partner.
A new partner may be admitted either by:
1. Purchasing the interest of one or more existing
partners, or
2. Investing assets in the partnership.

PROCEDURES IN ADDING PARTNERS

Admission of Partner through:

Partnership
Assets

I. 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. The price paid is negotiated and determined
by the individuals involved; it 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.

PROCEDURES IN ADDING PARTNERS

When a partner is admitted by investment, both the total
net 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.

Hello
Partnership
Assets

II. Investment of Assets in Partnership

BONUS TO OLD PARTNERS

The procedure for determining the new partners
capital credit and the bonus to the old partners is
as follows:
1. Determine the total capital of the new partnership by
adding the new partners investment to the total capital of
the old partnership.
2. Determine the new partners capital credit by
multiplying the total capital of the new partnership by the
new partners ownership interest.
3. Determine the amount of bonus by subtracting the new
partners capital credit from the new partners investment.
4. Allocate the bonus to the old partners on the basis of
their income ratios.

BONUS TO NEW PARTNER

The procedure for determining the new partners
capital credit and the bonus to the new partner is
as follows:
1. Determine the total capital of the new partnership by
adding the new partners investment to the total capital of
the old partnership.
2. Determine the new partners capital credit by
multiplying the total capital of the new partnership by the
new partners ownership interest.
3. Determine the amount of bonus by subtracting the new
partners investment from the new partners capital credit.
4. Allocate the bonus from the old partners on the basis
of their income ratios.

Example

WITHDRAWAL OF A PARTNER
A partner may withdraw from a partnership
voluntarily by selling his or her equity in the
firm or involuntarily by reaching a
mandatory retirement age or by dying.
The withdrawal of a partner may be
accomplished by
1. payment from remaining partners
personal assets or
2. payment from partnership assets.

PAYMENT FROM PARTNERS

PERSONAL ASSETS
The withdrawal of a partner when payment is
made from partners personal assets is the direct
opposite of admitting a new partner who
purchases a partners interest.
Withdrawal by payment from partners personal
assets is a personal transaction between the
partners.
Partnership
Assets

Bye

BONUS TO RETIRING PARTNER

A bonus may be paid to a retiring partner when:
1. the fair market value of partnership assets is
greater than their book value,
2. there is unrecorded goodwill resulting from the
partnerships superior earnings record, or
3. the remaining partners are anxious to remove
the partner from the firm.
BONUS

BONUS TO RETIRING PARTNER

The bonus is deducted from the remaining partners
capital balances on the basis of their income ratios at the
time of the withdrawal.
The procedure for determining the bonus to the retiring
partner and the allocation of the bonus to the remaining
partners is:
1. Determine the amount of the bonus by subtracting
the retiring partners capital balance from the cash
paid by the partnership.
2. Allocate the bonus to the remaining partners on the
basis of their income ratios.

BONUS TO REMAINING PARTNERS

The retiring partner may pay a bonus to the
remaining partners when:
1. recorded assets are overvalued,
2. the partnership has a poor earnings
record, or
3. the partner is anxious to leave the
partnership.
BONUS

BONUS TO REMAINING PARTNERS

The bonus is added to the remaining partners capital
balances on the basis of their income ratios at the time of the
withdrawal.
The procedure for determining the bonus to the remaining
partners is:
1. Determine the amount of the bonus by subtracting
the retiring partners capital balance from the cash
paid by the partnership.
2. Allocate the bonus to the remaining partners on the
basis of their income ratios.

Example