BUSINESS CASE

Presented to theAccountancy DepartmentDe La Salle University

In partial fulfillmentof the course requirementsIn ACCTBA2 V24

Tan, Nicole P.March 4, 2015

Partnership accounting is a type of business organization structure of which the partners have unlimited personal liability for the business. Two or more persons bind themselves to contribute to a common fund and the profits intended to be divided amongst themselves. In the scenario provided, Lanie Marquez and Tom Rodriguez are partners in a small retail business with capital contributions of P500,000 and P300,000, respectively. On the onset of their partnership, they had various agreements: equal sharing in the profits and losses, no interest on capital contributions is given, a P15,000 salary allowance in given to both partners. However, the agreement on the salary is that there is an equal contribution to the management of the business.The problem arose when it came to Marquez attention that the time devoted by Rodriguez has been cut to half, and his personal drawings are up by 75%. With such occurrences, Marquez was deeply concerned that Rodriguez was not properly managing the business. However, Rodriguez defended his expenses as marketing expenses given that he was on the resorts to conduct business activities as well.The stakeholders in this situation are the partners in the business, Lanie Marquez and Tom Rodriguez. The ethical issues in this situation pertain to the proper adherence to the acceptable accounting principles and the agreement formed by the partners when they created the partnership. The most apparent problems with the actions of Rodriguez is that he started to invest only 50% of his time in the business, when it has been agreed by both of the partners that they would invest equal effort in managing the business. In addition, his personal drawings has increased by 75% and upon inspection, these expenses were due to weekend stay overs at local beach resorts involving family members. Considering Rodriguezs actions, it was definitely a breach in partnership agreements that he spends only around 50% of his time to the partnership. It would be unfair to Marquez that Rodriguez would also be receiving a monthly salary of P15,000 given that there is a stipulation of managing the business with equal efforts on the parts of the two partners. Furthermore, the actions of Rodriguez in combining leisure with business activities is unethical given that he already went over the acceptable limits given that he technically did not consider the separation of the partnership entity with the owners. He did not place this particular characteristic of a partnership into consideration when he technically combined his personal expenses with that of the partnership. Although partnerships have a characteristic of a mutual agency, in the case of Rodriguez, his expenses were mostly traced to personal activities with family members, instead of purely business ones. It is highly significant that the appropriate levels of marketing expenses are assessed with the basis of their return on investment and industry standards. Rodriguez has been considering his expenses and classifying them as marketing expenses when it is clear that he is already overspending on marketing costs because he withdraws from this account for personal reasons, which is not allowed as the business expenditures are separate from personal expenditures of each partner. He is increasing the expenditures of the business that needs to be offset by the generated revenues of the business. However, if the marketing expenses incurred by the representation of Rodriguez on external business activities do not have a high return on investment then his decision is questionable to consider his expenses as marketing expenses. Although marketing expenses are tax deductible, the personal situation of Rodriguez interferes with his management of the business when he goes to resorts with his family members and conducts business activities at the same time. Although all of Rodriguez drawings were in order and properly and accurately recorded, the amount withdrawn should not be excessive given that it could affect the business negatively if it allows too many withdrawals.To alleviate some of Marquez concerns, the partners should discuss the extent of expenses that can be considered under marketing expenses. As it is relatively easy to just place all possible expenses, even if it was personal, it is important to monitor the marketing expenses to ensure that these expenses are for the benefit of the business and not the owners of the business. Marquez could set, with the agreement of Rodriguez, various guidelines of which expenses can be considered a marketing expense. One of which is that there should be a return on investment of every marketing expense incurred by any partner to ensure that the business does not absorb the personal expenditures of the partners. There could also be an allotment of how much marketing expense could be incurred. Another suggestion would be to require a mutual reporting of business activities in support of the assumption that they would contribute equally to the management of the business. It could be that there is also an acceptable limit given for personal withdrawals of a partner to ensure that the business would not be liable for all personal expenditures in the discretion of one partner only. Such decisions should be agreed among the partners involved in the business so that they understand the extent of their withdrawals.