Partnerships 17. Partnership Characteristics OBJECTIVE 1: Identify the principal characteristics, advantages, and disadvantages of the partnership form

Partnerships17

Partnership Characteristics

OBJECTIVE 1: Identify the principal characteristics, advantages, and disadvantages of the partnership form of business.


• Define partnership and discuss the following topics:– Voluntary association– Partnership agreement– Limited life


• 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


• 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


• 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


• Other forms of association:– Limited partnerships– Joint ventures

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Accounting for Partners’ Equity

OBJECTIVE 2: Record partners’ investments of cash and other assets when a partnership is formed.


• Separate Capital and Withdrawals accounts are maintained for each partner.


• 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.



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


• 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


• Journalize the distribution of income and losses.







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


• Causes of partnership dissolution– Admission of new partner– Withdrawal of a partner– Death of a partner


• 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


• 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)


• 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.


• 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.


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 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 involves three steps: (cont.)– The distribution of remaining cash to the

partners (which is not according to their stated ratios)


• 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.


Documents

Partnerships 17. Partnership Characteristics OBJECTIVE 1: Identify the principal characteristics, advantages, and disadvantages of the partnership form