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Partnerships17
Partnership Characteristics
OBJECTIVE 1: Identify the principal characteristics, advantages, and disadvantages of the partnership form of business.
Partnership Characteristics
• Define partnership and discuss the following topics:– Voluntary association– Partnership agreement– Limited life
Partnership Characteristics
• Define partnership and discuss the following topics: (cont.)– Mutual agency– Unlimited liability (except for limited partners)– Co-ownership of partnership property– Participation in partnership income
Partnership Characteristics
• The partnership form of business has several advantages:– The ease with which it can be formed,
changed, and dissolved– The ability to pool capital and individual
talents– Avoidance of the corporation’s tax burden– The freedom and flexibility of partners’ actions
Partnership Characteristics
• The partnership form of business has the following disadvantages:– Limited life– Mutual agency– Unlimited liability– Difficulty of raising large amounts of capital – Difficulty of transferring ownership interest
Partnership Characteristics
• Other forms of association:– Limited partnerships– Joint ventures
©2011 Cengage Learning All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Accounting for Partners’ Equity
OBJECTIVE 2: Record partners’ investments of cash and other assets when a partnership is formed.
Accounting for Partners’ Equity
• Separate Capital and Withdrawals accounts are maintained for each partner.
Accounting for Partners’ Equity
• Journalize an investment by a partner.– Assets are recorded at their fair market value.– Liabilities assumed by the partnership are
deducted from the value of the assets to arrive at the partner’s investment.
Accounting for Partners’ Equity
©2011 Cengage Learning All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Distribution of Partnership Income and Losses
OBJECTIVE 3: Compute and record the income or losses that partners share based on stated ratios, capital balance ratios, and partners’ salaries and interest.
Exhibit 1: Partial Income Statement for Adcock and Villa
Distribution of Partnership Income and Losses
• Illustrate the distribution of partnership income and losses, using the following methods:– Based on a stated ratio – Based on a capital balance ratio
• Beginning capital balances
• Average capital balances
– Based on salaries, interest, and a stated ratio
Distribution of Partnership Income and Losses
• Journalize the distribution of income and losses.
Distribution of Partnership Income and Losses
Distribution of Partnership Income and Losses
Distribution of Partnership Income and Losses
Distribution of Partnership Income and Losses
Distribution of Partnership Income and Losses
©2011 Cengage Learning All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Dissolution of a Partnership
OBJECTIVE 4: Record a person’s admission to or withdrawal from a partnership.
Figure 1: Alternative Ways for a Partner to Withdraw
Dissolution of a Partnership
• Causes of partnership dissolution– Admission of new partner– Withdrawal of a partner– Death of a partner
Dissolution of a Partnership
• An individual can be admitted to a partnership in one of two ways:– Purchasing an interest from one or more
partners– Investing assets in the partnership, possibly
resulting in a bonus
Dissolution of a Partnership
• A partner can withdraw from a partnership in the following ways:– Selling his or her interest to new or existing
partners– Withdrawing partnership assets (equal to,
greater than, or less than his or her capital interest)
Dissolution of a Partnership
• Death of a partner– When a partner dies, the partnership
automatically is dissolved. – The partnership agreement should spell out the
procedures to be followed in this case.
Dissolution of a Partnership
• Death of a partner (cont.)– Normally, to ascertain the capital balance of
each partner on the date of the death, the books are closed, and financial statements are prepared.
©2011 Cengage Learning All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Liquidation of a Partnership
OBJECTIVE 5: Compute and record the distribution of assets to partners when they liquidate their partnership.
Exhibit 2: Statement of Liquidation Showing Gain on Sale of Assets
Exhibit 3: Statement of Liquidation Showing Loss on Sale of Assets
Liquidation of a Partnership
• Liquidation of a partnership involves three steps:– The sale of partnership assets (with gains or
losses distributed among the partners according to their stated ratio)
– The payment of liabilities
Liquidation of a Partnership
• Liquidation of a partnership involves three steps: (cont.)– The distribution of remaining cash to the
partners (which is not according to their stated ratios)
Liquidation of a Partnership
• Deficit in a partner’s Capital account– When a partner has a deficit balance in a
Capital account, that partner must contribute personal assets equal to the deficit.
– When a partner does not have enough personal assets to cover a capital deficit, the solvent partners must absorb the deficit according to their stated ratios.
©2011 Cengage Learning All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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