PARTNERSHIP

ACCOUNTING

Dr. Eman Abdallah Othman

Y2-T1-2020
Lecture (2)
(Recorded)
 lecture (2)

chapter (12)
Accounting for partnerships
LEARNING OBJECTIVES
• 1st: discuss and account for the formation of
a partnership
• 2nd: explain how to account for net income
and net loss of a partnership
• 3rd: explain how to account for the liquidation
of a partnership
 1 st:

discuss and account for the

formation of a partnership
 1st: discuss and account for the formation of a
partnership

 Characteristics of partnerships.
 Forms of a partnership.
 Advantage and disadvantage of partnerships.
 The partnership agreement.
 Accounting for a partnership formation.
A partnership
 Is an association of two or more persons to
carry on as co-owners of a business to
generate profit.
 Partnerships can be easily formed through a
verbal or written agreement between partners.
Characteristics of partnerships
 Association of individuals: A partnership
consists of 2 or more partners who come
together through verbal or written agreement
to conduct a business to generate profit.
 Taxation: each partner’s share is taxable at
personal tax rates regardless of the amount of
net income each partner withdraws from the
business during the year.
Characteristics of partnerships
 Mutual agency: as each partner act of behalf
of the partnership when engaging in
partnership business.
 The act of any partner is binding on all other
partners (even when partners act beyond the
scope of their authority) as long as the act
appears to be appropriate for the partnership.
Characteristics of partnerships
 Limited life: although corporations have
unlimited life, partnerships do not have.
 Partnership may be ended voluntarily at any
time due the acceptance of new partner,
withdrawal of a partner or upon the death of
one of the partners (without necessarily ending
the business).
 Partnership dissolution: occurs whenever a
partner withdraws or a new partner is admitted.
Characteristics of partnerships
 Unlimited liability: each partner is personally
and individually liable for all partnership
liabilities.
 Creditors claims attach partnership assets first
(if assets are not sufficient to cover claims),
then creditors attach partners personal
resources.
Characteristics of partnerships
 Co-ownership of property: partners jointly own
partnership assets.
 If the partnership is dissolved, each partner
has a claim on total assets equal to the
balance of the partner in the respective capital
(claims are not attached to specific assets that
the partner contributed to the firm).
 Net income (loss): all income and loss are
shared equally by the partners.
Forms of a partnership
 Regular partnerships
 Special partnership forms: Different forms of
partnership existed to provide protection from
unlimited liability for partners who wish to
work together in some activities that is risky
or related to provide professional services.
Limited partnership.
Limited liability partnership.
Limited liability company.
Forms of a partnership
 Special forms partnership use same
accounting procedures as in a regular
partnership.
 All profit and losses pass through these
organizations (similar to the regular
partnership) to the owners.
Forms of a partnership
 Limited partnership (LP): in which one or more
partners have unlimited liability and one or
more partners have limited liability.
 General partners: have unlimited liability to firm
debts.
 Limited partner: have limited liability to firm debts
(are responsible for the debts of the partnership up
to the limit of their investment in the firm).
Limited partners usually accepts less compensation
compared by general partners, exercise less influence
in the firm affaires.
Forms of a partnership
 Limited liability partnership (LLP): helps to
protect innocent partners from the
malpractices or negligence claims resulted
from the act of another partner.
 Most lawyers, doctors and accountants prefer LLP
(as LLP provide large insurance policies as
protections to partners against malpractices suits).
Forms of a partnership
 Limited liability companies (LLC): is a hybrid
form (it contain certain features form
corporation and other features from limited
partnership (LP).
 LLC had limited life.
 Owners (members) had limited liability for firm debt
like owners in corporation.
 Members in LLC perform an active management role.
 Tax is applied on partners same as in a regular
partnership
Advantage and disadvantages of
partnerships:
 Advantage of a partnership firm:
 Easy to form.
 Combine the skills and resources of two or more
individuals together.
 Freedom from government regulation and restrictions
(partnership is conducted through verbal agreement
between partners).
 Easy for decision making.
Advantage and disadvantages of
partnerships:
 Disadvantage of a partnership firm:
 Mutual agency.
 Limited life.
 Unlimited liability.
Partnership agreement (Articles of
co-partnership)
 Partners agreement to construct a partnership
should express in a written contract, that
contain:
 Names and capital contribution of partners.
 Rights and duties of each partner.
 Basis for sharing income(loss).
 Provision for withdrawals of assets.
 Procedures for the withdrawal or addition of a
partner.
 Rights and duties of surviving partners in case of
partner death.
Accounting for a partnership
formation
 When forming a partnership: each partner
initial investment in the partnership is entered
in the partnership records (with the fair value
of the assets at the date of transferring to the
partnership).

 Note: assets will be recorded with their fair

value not book value and any depreciation will
not be recorded.
Accounting for a partnership
formation
 Example:
A. Rolfe and T. Shea combine their proprietorships to start a
partnership named U.S. Software. The firm will specialize in
developing financial modeling software. Rolfe and Shea have the
following assets prior to the formation of the partnership.
Accounting for a partnership
formation
 At the formation of the partnership, the fair
value of partners assets is as following:
Accounting for a partnership
formation
 The records for the investment done by both
partners for the formation of the partnership:
Accounting for a partnership
formation
 Notes:
 Assets are not recorded with its book value or initial
cost, but they are recorded with their current fair
value at market
 No accumulated depreciation shall be carried
forward from previous entities at the formation of a
partnership.
 Allowance for doubtful accounts had been adjusted
to (1000) instead of (700) to arrive to net cash of
3000.
 Remember

Next Monday (next week)

live hour will be for this
lecture discussion and
questions
THANKS TO YOU
ALL
Dr. Eman Abdallah Othman
Y2-T1-2020
Lecture (2)