19-1 1-1 mcgraw-hill/irwin copyright © 2012 by the mcgraw-hill companies, inc. all rights reserved
TRANSCRIPT
19-11-1McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
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Accounting for Partnerships
Accounting for Partnerships Section 1: Forming a
Partnership
Chapter
19
Section Objectives1. Explain the major advantages and disadvantages
of a partnership.
2. State the important provisions that should be included in every partnership agreement.
3. Account for the formation of a partnership.
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Advantages of a Partnership
Each partner is taxed individually on his or her share of the partnership’s income
It pools the skills, abilities, and financial resources of two or more individuals.
It is easy and inexpensive to form.
A partnership does not pay income tax.
Explain the major advantages and disadvantages of a partnershipObjective 1
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Disadvantages of a Partnership
Each partner has unlimited liability.
The partnership is a mutual agency.
The business lacks continuity. It has a limited life.
Ownership rights are not freely transferable.
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Names of the partners. Name, location, and nature of the business. Starting date of the agreement. Life of the partnership. Rights and duties of each partner.
Every partnership agreement should contain:
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Amount of capital to be contributed by each partner
Every partnership agreement should contain:
Drawings (withdrawals) by the partners. Fiscal year and accounting method. Method of allocating income or loss to the
partners. Procedures to be followed if the partnership is
dissolved or the business is liquidated.
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Memorandum entry to record formation of partnership.
Investment of assets and liabilities by partners.
Setting up partners’ capital accounts.
Setting up partners’ drawing accounts.
Subsequent investments and permanent withdrawals.
Account for the formation of a partnershipObjective 3
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Accounting for Partnerships
Accounting for Partnerships Section 2: Allocating
Income or Loss
Chapter
19
Section Objectives
4. Compute and record the division of net income or net loss between partners in accordance with the partnership agreement.
5. Prepare a statement of partners’ equities.
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Allocating Partnership Income or Loss
In step 3 the business determines the distributive share for each partner.
Step 1. Close revenue to Income Summary.
Step 2. Close expenses to Income Summary.
Step 3. Close Income Summary to the partners’ capital accounts.
Step 4. Close each partner’s drawing account to the partner’s capital account.
Compute and record the division of net income or net loss between partners in accordance with the partnership agreement
Objective 4
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Allocation of Partnership Income or Loss
Based on the partnership agreement.
Allocated equally to each partner if the partnership agreement is “silent.”
Income distribution does not mean cash distribution.
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Capital Account Balances
Net Income X partner’s share percentage: Net Income $100,000
Barret $100,000 x 65.517% = $65,517
Reed $100,000 x 34.483% = $34,483
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Salary and Interest Allowances
Allowances for partners’ salaries and interest on
their investments can be included in the allocation of net income or loss.
Allowances are debited to the Income Summary account and credited to the partners’ capital accounts.
The remaining net income or loss is then allocated in the proper ratio.
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Salary allowances are intended to reward the partners for the time they spend in the business and for the expertise and talents they bring to it.
Salary Allowances
Salary allowances are withdrawals
Salary allowances do not represent salary expense
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Partnership Financial StatementsPartnership Financial StatementsIncome Statement Same as that for a sole
proprietorship.
One exception—on the bottom of the statement, the division of net income is shown between the partners.
Balance Sheet Same as that for a sole
proprietorship.
One exception—there exists a separate capital account for each of the partners in Partner’s Equity section.
Prepare a statement of partners’ equitiesObjective 5
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OLD ARMY Statement of Partners’ Equities Year Ended December 31, 2013
Barret Reed Total Capital Capital Capital
Capital Balances, Jan. 1, 2013 0.00 0.00 0.00
Investment During Year 53,200.00 28,000.00 81,200.00
Net Income (Loss) for Year 6,308.00 (2,908.00) 3,400.00
Totals 59,508.00 25,092.00 84,600.00
Less Withdrawals During Year 30,000.00 22,800.00 52,800.00
Capital Balances, Dec. 31, 2013 29,508.00 2,292.00 31,800.00
Statement of Partners’ Equities
Each partner’s salary is treated as a withdrawal on the statement
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Accounting for Partnerships
Accounting for Partnerships
Section 3: Partnership
Changes
Chapter
19
Section Objectives6. Account for the revaluation of assets and
liabilities prior to the dissolution of a partnership.7. Account for the sale of a partnership interest.8. Account for the investment of a new partner in an
existing partnership. 9. Account for the withdrawal of a partner from a
partnership.
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Dissolution Step 1
Accounting records are closed.
Net income or net loss on the date of dissolution is recorded and transferred to the partners’ capital accounts.
Step 2
Assets and liabilities are revalued at fair market value.
Account for the revaluation of assets and liabilities prior to the dissolution of a partnership
Objective 6
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Asset Revaluation
When transferred from one partnership to another, assets are revalued to their fair market value.
The new value will not necessarily agree with the book value carried by the old firm.
The revaluation of assets affects the balance sheet only.
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There are two ways a new partner may be admitted to the partnership:
By purchasing all or part of the interest of an existing partner and paying that partner directly.
By investing cash or other assets directly in the existing partnership.
Admission of a New Partner
Account for the sale of a partnership interestObjective 7
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When a partner withdraws, the payment given to the withdrawing partner may be more or less than the withdrawing partner’s capital balance.
The difference in the cash payment and the withdrawing partner’s capital account is debited or credited to the remaining partners according to their profit-and-loss ratio.
Account for the withdrawal of a partner from a partnershipObjective 9
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Withdrawing Partner’s Capital Account
If the amount paid is higher than the withdrawing partner’s capital account balance, the excess is debited to the capital accounts of the remaining partners according to their income and loss ratio.
If the amount paid is less than the withdrawing partner’s capital account balance, the difference is credited to the remaining partners’ capital accounts based on their income and loss ratio.