chapter 12 accounting principles, ninth edition accounting for partnerships

Chapter 12

Accounting Principles, Ninth Edition

Accounting forPartnerships

Characteristics of PartnershipsCharacteristics of PartnershipsCharacteristics of PartnershipsCharacteristics of Partnerships

SO 1 Identify the characteristics of the SO 1 Identify the characteristics of the partnership form of business partnership form of business organization.organization.

Association of IndividualsLegal entity.

Accounting entity.

Net income not taxed as a separate entity.

Mutual AgencyAct of any partner is binding on all other partners, so long as the act appears to be appropriate for the partnership.

Characteristics of PartnershipsCharacteristics of PartnershipsCharacteristics of PartnershipsCharacteristics of Partnerships


Limited LifeDissolution occurs whenever a partner withdraws or a new partner is admitted.

Dissolution does not mean the business ends.

Unlimited LiabilityEach partner is personally and individually liable for all partnership liabilities.


Special forms of business organizations are often used to provide protection from unlimited liability.

Special partnership forms are:

1. Limited Partnerships,

2. Limited Liability Partnerships, and

3. Limited Liability Companies.

Organizations with Organizations with Partnership Partnership CharacteristicsCharacteristics

Organizations with Organizations with Partnership Partnership CharacteristicsCharacteristics


Organizations with Partnership Organizations with Partnership CharacteristicsCharacteristicsOrganizations with Partnership Organizations with Partnership CharacteristicsCharacteristics

Major Advantages

Simple and inexpensive to create and operate.

Major Disadvantages

Owners (partners) personally liable for business debts.

Regular Partnership



Major Advantages

Limited partners have limited personal liability for business debts as long as they do not participate in management.

General partners can raise cash without involving outside investors in management of business.

Major Disadvantages

General partners personally liable for business debts.

More expensive to create than regular partnership.

Suitable for companies that invest in real estate.

“Ltd.,” or “LP”



Major Advantages

Mostly of interest to partners in old-line professions such as law, medicine, and accounting.

Owners (partners) are not personally liable for the malpractice of other partners.

Major Disadvantages

Unlike a limited liability company, partners remain personally liable for many types of obligations owed to business creditors, lenders, and landlords.

Often limited to a short list of professions.

“LLP”



Major Advantages

Owners have limited personal liability for business debts even if they participate in management.

Major Disadvantages

More expensive to create than regular partnership.

“LLC”

Should specify relationships among the partners:

1. Names and capital contributions of partners.

2. Rights and duties of partners.

3. Basis for sharing net income or net loss.

4. Provision for withdrawals of assets.

5. Procedures for submitting disputes to arbitration.

6. Procedures for the withdrawal or addition of a partner.

7. Rights and duties of surviving partners in the event of a partner’s death.

Partnership AgreementPartnership AgreementPartnership AgreementPartnership Agreement


Illustration: Assume that A. Rolfe and T. Shea combine their proprietorships to start a partnership named U.S. Software. Rolfe and Shea have the following assets prior to the formation of the partnership.

Forming a PartnershipForming a PartnershipForming a PartnershipForming a Partnership

SO 2 Explain the accounting entries for the formation of a SO 2 Explain the accounting entries for the formation of a partnership.partnership.

Illustration 12-3

Illustration: Prepare the entry to record the investment of A. Rolfe.

Office equipment 4,000

Cash 8,000

Prepare the entry to record the investment of T. Shea.

Forming a PartnershipForming a PartnershipForming a PartnershipForming a Partnership

SO 2 Explain the accounting entries for the formation of a SO 2 Explain the accounting entries for the formation of a partnership.partnership.

A. Rolfe, Capital

12,000

Accounts receivable 4,000Cash 9,000

Allowance for doubtful accounts

1,000T. Shea, Capital

12,000

Partners equally share net income or net loss unless the partnership contract indicates otherwise.

Dividing Net Income or Net LossDividing Net Income or Net LossDividing Net Income or Net LossDividing Net Income or Net Loss

Closing Entries:

Close all Revenue and Expense accounts to Income Summary.

Close Income Summary to each partner’s Capital account for his or her share of net income or loss.

Close each partners Drawing account to his or her respective Capital account.

SO 3 Identify the bases for dividing net income or net loss.SO 3 Identify the bases for dividing net income or net loss.

Income Ratios

Dividing Net Income or Net LossDividing Net Income or Net LossDividing Net Income or Net LossDividing Net Income or Net Loss

SO 3 Identify the bases for dividing net income or net loss.SO 3 Identify the bases for dividing net income or net loss.

Partnership agreement should specify the basis for sharing net income or net loss. Typical income ratios:

Fixed ratio.

Ratio based on capital balances.

Salaries to partners and remainder on a fixed ratio.

Interest on partners’ capital balances and the remainder on a fixed ratio.

Salaries to partners, interest on partners’ capital, and the remainder on a fixed ratio.

Division of Net Income$57,000

Partner 1 Partner 2 Total

Salary 15,000 12,000 27,000

Remaining $30,000

Partner # 1 60% 18,000

Partner #2 40% 12,000

Total Income Dist 30,000

Total Division of Income

33,000 24,000 57,000

Closing Entry

Income Summary 57,000Partner #1 Capital 33,000Partner #2 Capital 24,000

The balance sheet for a partnership is the same as for a proprietorship except for the owner’s equity section.

Partnership Financial StatementsPartnership Financial StatementsPartnership Financial StatementsPartnership Financial Statements

SO 4 Describe the form and content of partnership financial SO 4 Describe the form and content of partnership financial statements.statements.

Illustration 12-8

Partnership Financial Statements

• Partners Capital Statement

Partner 1 Partner 2 Total

Capital, Beg 28,000 24,000 52,000

Add Invest 2,000 2,000

Add Net Income

12,400 9,600 22,000

Less Draw(Salaries)

(7,000) (5,000) (12,000)

Capital End 35,400 28,600 64,000

Establishing a Partnership

Jennifer DeVine and Stanley Farrin decide to organize the ALL-Star partnership. DeVine invests $15,000 cash and Farrin contributes $10,000 cash and equipment that has a book value of $3,500. Prepare the entry to establish a partnership. The equipment has a market value of $5,000.

Sharing the Income/Loss

Gist-Bradley Bond Co. reports net income of $70,000. The income ratios are Gist 60% and Bradley 40%. Prepare an entry to distribute net income.

BE 12-1, BE 12-2, BE 12-4, BE 12-5, DO IT 12-1, 12-2

Liquidating a Partnership

• Sell all the assets.• Pay all liabilities• Distribute any remaining assets• Read 538-539

Liquidating a Partnership

BE 12-6, E 12-8, E12-9

Assignments

E 12-2 Book Page 557 (Example Page 533)E 12- 4 Book Page 557 (Example Page 536)E 12- 8 Book Page 558 (Example Page 541)

chapter 12 accounting principles, ninth edition accounting for partnerships

Documents