Professional Documents
Culture Documents
Accounting For Partnerships
Accounting For Partnerships
Taxation
Taxation
Mutual
Mutual Unlimited
Unlimited
Agency
Agency Co-
Co- Liability
Liability
Ownership
Ownership
of
of Property
Property
C1 Organizations with Partnership
Characteristics
Limited
Limited
Limited
Limited
Limited
Limited Liability
Liability
Liability
Liability
Partnerships
Partnerships Corporation
Corporation
Partnerships
Partnerships
(LP)
(LP) ss
(LLP)
(LLP) (LLC)
(LLC)
••General
General partners
partners ••Protects
Protects innocent
innocent ••Owners
Owners have
have same
same
assume
assume management
management partners
partners from
from limited
limited liability
liability feature
feature
duties
duties and
and unlimited
unlimited malpractice
malpractice oror as
as owners
owners of of aa
liability
liability for
for partnership
partnership negligence
negligence claims.
claims. corporation.
corporation.
debts.
debts.
••Limited
Limited partners
partners have
have ••Most
Most states
states hold
hold all
all ••AA limited
limited liability
liability
no
no personal
personal liability
liability partners
partners personally
personally corporation
corporation typically
typically
beyond
beyond invested
invested liable
liable for
for partnership
partnership has
has aa limited
limited life.
life.
amounts.
amounts. debts.
debts.
C1
Many
Many factors
factors should
should be
be considered
considered when
when
choosing
choosing the
the proper
proper business
business form.
form.
P1
Organizing a Partnership
Partners
Partners can
can invest
invest both
both assets
assets and
and liabilities
liabilities in
in the
the
partnership.
partnership.
Assets
Assets and
and liabilities
liabilities are
are recorded
recorded atat an
an agreed-
agreed-
upon
upon value,
value, normally
normally fair
fair market
market value.
value.
Asset
Asset contributions
contributions increase
increase the
the partner’s
partner’s capital
capital
account.
account.
Withdrawals
Withdrawals from
from the
the partnership
partnership decrease
decrease the
the
partner’s
partner’s capital
capital account.
account.
P1
Organizing a Partnership
On
On 2/15/08,
2/15/08, Smith
Smith and
and Jones
Jones form
form aa
partnership.
partnership. Smith
Smith contributes
contributes $80,000
$80,000
cash.
cash. Jones
Jones contributes
contributes land
land valued
valued atat
$40,000.
$40,000.
Feb. 15 Cash 80,000
Land 40,000
Smith, Capital 80,000
Jones, Capital 40,000
To record initial investment in partnership
P2
2. Capital balances.
$60,000 × ¾ = $45,000
P2 Allocation Based on
Capital Balances
Smith’s capital balance, before division of profits or
losses is $80,000 and Jones’s capital balance is
$40,000. The partnership agreement calls for
income or loss to be allocated based on the
relative capital balances. Net income for 2008 is
$60,000.
Dr. Cr.
Dec. 31 Income Summary 60,000
Smith, Capital 40,000
Jones, Capital 20,000
To record division of 2008 net income.
P2 Allocation Based on Services,
Capital, and Stated Ratios
Smith and Jones have a partnership
agreement with the following conditions:
Smith receives $15,000 and Jones
receives $10,000 as annual salaries.
Each partner is allowed an annual
interest allowance of 5% on the
beginning-of-year capital balance.
Any remaining balance of income or loss
is allocated equally.
Net income for 2008 is $60,000.
P2 Allocation Based on Services,
Capital, and Stated Ratios
Income Distribution
Smith Jones Remainder
Net income $ 60,000
Salaries $ 15,000 $ 10,000 35,000
Interest 4,000 2,000 29,000
Equal allocation 14,500 14,500 -
Income to each partner 33,500 26,500
$80,000 × 5% = $4,000
$29,000 × ½ = $14,500
P2 Partnership Financial
Statements
Assume that during 2008, Smith withdrew $5,000 cash
from the partnership and Jones withdrew $1,000.
Smith and Jones Partnership
Statement of Partners' Equity
For the Year Ended December 31, 2008
Smith Jones Total
Beginning capital balances $ - $ - $ -
Investments by owners 80,000 40,000 120,000
Net income
Salary allowances $ 15,000 $ 10,000
Interest allowances 4,000 2,000
Balance allocated 14,500 14,500
Total net income 33,500 26,500 60,000
Less partners' withdrawals (5,000) (1,000) (6,000)
Ending capital balances $ 108,500 $ 65,500 174,000
P2 Allocation Based on Services,
Capital, and Stated Ratios
Smith and Jones have a partnership
agreement with the following conditions:
Smith receives $15,000 and Jones
receives $10,000 as annual salaries.
Each partner is allowed an annual interest
allowance of 5% on the beginning-of-year
capital balance.
Any remaining balance of income or loss
is allocated equally.
Net income for 2008 is $30,000.
P2 Allocation on Services,
Capital, and Stated Ratios
Income Distribution
Smith Jones Remainder
Net income $ 30,000
Salaries $ 15,000 $ 10,000 5,000
Interest 4,000 2,000 (1,000)
Equal allocation (500) (500) -
Income to each partner 18,500 11,500
($1,000) × ½ = $500
P3 Admission and Withdrawal of
Partners
When
When the
the makeup
makeup ofof the
the partnership
partnership
changes,
changes, the
the partnership
partnership is is dissolved.
dissolved.
AA new
new partnership
partnership may
may be be immediately
immediately
formed.
formed.
New
New partner
partner acquires
acquires partnership
partnership interest
interest
by:
by:
1.
1. Purchasing
Purchasing itit from
from the
the other
other partners,
partners, or
or
2.
2. Investing
Investing assets
assets in in the
the partnership.
partnership.
P3
Admission of a Partner
Purchase of Partnership Interest
AA new
new partner
partner can
can purchase
purchase
partnership
partnership interest
interest directly
directly
from
from the
the existing
existing partners.
partners.
The
The cash
cash goes
goes to
to the
the partners,
partners,
not
not to
to the
the partnership.
partnership.
To
To become
become aa partner,
partner, the
the new
new
partner
partner must
must be
be accepted
accepted by by
the
the current
current partners.
partners.
P3 Purchase of Partnership
Interest
On January 2, 2009, Jones agrees to sell Johnson
$10,000 of her partnership interest for $25,000 cash.
Smith agrees with this. arrangement.
Smith Jones Johnson Total
Capital balances before new partner $ 108,500 $ 65,500 $ - $ 174,000
Allocation to new partner (10,000) 10,000 -
Capital balances after new partner $ 108,500 $ 55,500 $ 10,000 $ 174,000
The
The partnership
partnership may may grant
grant aa bonus
bonus to to
Bonus
Bonus to
to New
New aa new
new partner
partner ifif the
the business
business is is in
in
Partners
Partners need
need of
of cash
cash or
or ifif the
the new
new partner
partner has has
exceptional
exceptional talents.
talents.
P3
Withdrawal of a Partner
A
A partner
partner can
can withdraw
withdraw
in
in two
two ways:
ways:
The
The partner
partner can
can sell
sell
his/her
his/her partnership
partnership
interest
interest to
to another
another
person.
person.
The
The partnership
partnership can can
distribute
distribute cash
cash and/or
and/or
other
other assets
assets toto the
the
withdrawing
withdrawing partner.
partner.
P3
Withdrawal of a Partner
Jones has a capital balance of $65,500. She decides to
withdraw from the partnership of Smith, Jones, and
Johnson for $50,000 cash. Any bonus is attributable to
the remaining partners and is divided equally.
Dr. Cr.
Jan 2 Jones, Capital 65,500
Cash 50,000
Smith, Capital 7,750
Johnson, Capital 7,750
To record withdrawal of partner
Liquidation of a Partnership
When
When aa partnership
partnership is
is dissolved,
dissolved, four
four steps
steps are
are required:
required:
Noncash
Noncash assets
assets are
are sold
sold for
for cash
cash and
and aa gain
gain or
or loss
loss
on
on liquidations
liquidations is
is recorded.
recorded.
Gain
Gain or
or loss
loss on
on liquidation
liquidation is
is allocated
allocated to
to partners
partners
using
using their
their income-and-loss
income-and-loss ratio.
ratio.
Liabilities
Liabilities are
are paid
paid or
or settled.
settled.
Any
Any remaining
remaining cash
cash is
is distributed
distributed to
to partners
partners based
based
on
on their
their capital
capital balances.
balances.
P4
No Capital Deficiency
No capital deficiency means that all partners have a zero or credit
balance in their capital accounts.
Dr. Cr.
Dec 2 Smith, Capital 113,500
Jones, Capital 68,000
Johnson, Captial 32,500
Cash 214,000
To liquidate partnership
P4
Capital Deficiency
Capital deficiency means that at least one partner
has a debit balance in his/her capital account. A
partner with a deficit must, if possible, cover the
deficit by paying cash into the partnership.
Capital Deficiency
Smith Jones Johnson Total
Beginning capital balances $ 25,000 $ 10,000 $ 2,000 $ 37,000
Allocation of $10,000 net loss (5,000) (2,500) (2,500) (10,000)
Subtotal 20,000 7,500 (500) 27,000
Contribution by Johnson 500 500
Capital balances for dissolution $ 20,000 $ 7,500 $ - $ 27,500
Death of a Partner
A partner’s death dissolves a
partnership.
A deceased partner’s estate is entitled
to receive the equity.
This usually requires closing the books
to determine the net income or loss at
the date of death and also recording
market values for assets and liabilities.
A4
Boston Celtics
Total LP I LP II Celtics LP
Balance, Beginning of year $ 84 $ 122 $ (307) $ 270
Net income (loss) for year 216 44 61 111
Cash distribution (48) - - (48)
Balance, End of year $ 252 $ 166 $ (246) $ 333
Partner return on equity 128.6% 30.6% NA 36.8%
End of Chapter 12