Topic 2

Accounting for
Partnership
C1

Partnership Form of Organization

Partnership Limited
Agreement Life

Unlimited
Mutual Liability
Agency
Co-
Ownership
of Property
P1 Part 1 –
Organizing a Partnership

Partners can invest both assets and

liabilities in the partnership.

Assets and liabilities are recorded at

an agreed-upon value, normally the
fair market value.
P1

Organizing a Partnership

On 1/11, Kayla Zayn and Hector Perez organize a

partnership called BOARDS.

Zayn’s initial investment is $7,000 cash, $33,000 in

equipment, and a note payable for $10,000 on the
equipment.
Perez’s initial investment is $10,000 cash.
P1

Organizing a Partnership
Jan 11 Cash 7,000
Equipment 33,000
Notes Payable 10,000
K. Zayn, Capital 30,000
To record Zayn's initial investment.

Jan 11 Cash 10,000

H. Perez, Capital 10,000
To record Perez's initial investment.
P3

Exercises

Q1. In 20X5, Jack and Jill formed a partnership to sell potato chips.
Jack contributed $100,000 cash and a machine valued at $200,000 with a
loan payable of $50,000. Jill’s investment consisted of $150,000 cash and
inventory worth $50,000.

Required:
Using the general journal, record the contribution by each partner.
P2

Part 2 - Dividing Income (Profit) or Loss

Partners are not employees of the partnership

but are its owners.

This means that whatever amount partners

receive is NOT recorded as salaries expense
on the income statement.
P2

Dividing Income or Loss

Because different partners

contribute differently in terms of
capital and effort, it is not fair to
distribute profit and loss equally
amongst the partners.
P2

Dividing Income or Loss

Zayn and Perez have a partnership
agreement with the following
conditions:

1.Zayn receives a $36,000 annual salary

allowance and Perez receives an
allowance of $24,000.
P2

Dividing Income or Loss

2. Each partner is allowed an annual
interest allowance of 10% on their
beginning capital balance.

3. Any remaining balance of income or

loss is allocated equally.

Let’s assume that Net income is $70,000.

P2

Dividing Income or Loss

Income Allocation
Zayn Perez Remainder
Net income $ 70,000
Salaries $ 36,000 $ 24,000 10,000
Interest 3,000 1,000 6,000
Equal allocation 3,000 3,000 -
Income to each partner 42,000 28,000

$30,000 × 10% = $3,000

$6,000 × ½ = $3,000
P2

Dividing Income or Loss

Now let’s assume that net income is only $50,000.
Income Allocation
Zayn Perez Remainder
Net income $ 50,000
Salaries $ 36,000 $ 24,000 (10,000)
Interest 3,000 1,000 (14,000)
Equal allocation (7,000)
3,000 (7,000)
3,000 (20,000)
-
Income to each partner 42,000
32,000 28,000
18,000

($14,000) × ½ = ($7,000)
P3

Exercises

Q2. The partnership agreement provided for the followings:

Salary of $3,000 per month to Jill.

Interest on capital of 10%.
Balance of profit to be shared equally.

In 20X5, the partnership reported a net profit of $100,000.

Required:
Show how the net profit is shared among the partners.
P3

Part 3 – Admission of New Partners

• When the makeup of the partnership changes,

the existing partnership is dissolved.

• A new partnership may be immediately

formed.
P3

Admission New Partners

• When a new partner join an existing

partnership, he may have to pay a premium.

• The premium (or bonus) will then be shared

amongst the existing partners to reward them
for their hard work in building up the business.
P3

Bonus to Old or New Partners

Bonus to Old Partners

When the current value of a partnership is

greater than the recorded amounts of equity,
the old partners usually require a new
partner to pay a bonus when joining.
P3

Bonus to Old or New Partners

Bonus to New Partners

On the other hand, when the business in

urgently in need of fresh capital, new
partner may be able to join at a discount.
In such cases, the bonus goes to the new
partner.
P3

Bonus to Old Partners

On January 4th, Zayn and Perez agree

to accept Rasheed as a partner upon his
investment of $42,000 cash in the
partnership.
Rasheed is to receive a 25% ownership
interest in the new partnership.
Any bonus is attributable to the existing
partners and is shared equally.
The equity of Zayn and Perez is $78,000.
P3

Bonus to Old Partners

Equity of Zayn and Perez $ 78,000

Investment by Rasheed 42,000
Total partnership equity 120,000
Rasheed's ownership percent 25%
Rasheed's equity balance $ 30,000
P3

Bonus to Old Partners

$42,000 - $30,000 = $12,000 × ½ = $6,000

P3

Bonus to New Partner

On January 4th, Zayn and Perez agree to
accept Rasheed as a partner upon his
investment of $18,000 cash in the
partnership.
Rasheed is to receive a 25% ownership
interest in the new partnership.
Any bonus is attributable to Rasheed’s
excellent business skills.
P3

Bonus to New Partner

Equity of Zayn and Perez $ 78,000

Investment by Rasheed 18,000
Total partnership equity 96,000
Rasheed's ownership percent 25%
Rasheed's equity balance $ 24,000
P3

Bonus to New Partner

$18,000 - $24,000 = ($6,000) × ½ = ($3,000)

P3

Exercises

Q3. In 20X7, the partners invited a mutual friend, James to join the
partnership. The capital balances of Jack and Jill were $250,000 and
$200,000 respectively. James was to contribute $150,000 cash for a 20%
share of the partnership.

Required:
Prepare journal entries to record the admission of James into the partnership.
End of Topic 2