© 2009 The McGraw-Hill Companies, Inc., All Rights Reserved ACCOUNTING FOR PARTNERSHIPS Chapter 12
© 2009 The McGraw-Hill Companies, Inc., All Rights Reserved ACCOUNTING FOR PARTNERSHIPS Chapter 12.
Dec 13, 2015
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© 2009 The McGraw-Hill Companies, Inc.,
All Rights Reserved
ACCOUNTING FOR PARTNERSHIPS
Chapter 12
McGraw-Hill/Irwin Slide 2McGraw-Hill/Irwin Slide 2
PARTNERSHIP FORM OF ORGANIZATION
Partnership AgreementPartnership Agreement
Voluntary AssociationVoluntary
AssociationLimited
LifeLimited
Life
TaxationTaxation
Unlimited Liability
Unlimited Liability
Mutual AgencyMutual Agency Co-
Ownership of Property
Co-Ownership of Property
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McGraw-Hill/Irwin Slide 3McGraw-Hill/Irwin Slide 3
ORGANIZATIONS WITH PARTNERSHIP CHARACTERISTICS
Limited Partnerships
(LP)
Limited Partnerships
(LP)
•General partners assume management duties and unlimited liability for partnership debts.•Limited partners have no personal liability beyond invested amounts.
•General partners assume management duties and unlimited liability for partnership debts.•Limited partners have no personal liability beyond invested amounts.
Limited Liability
Partnerships(LLP)
Limited Liability
Partnerships(LLP)
•Protects innocent partners from malpractice or negligence claims.
•Most states hold all partners personally liable for partnership debts.
•Protects innocent partners from malpractice or negligence claims.
•Most states hold all partners personally liable for partnership debts.
Limited Liability
Corporations(LLC)
Limited Liability
Corporations(LLC)
•Owners have same limited liability feature as owners of a corporation.
•A limited liability corporation typically has a limited life.
•Owners have same limited liability feature as owners of a corporation.
•A limited liability corporation typically has a limited life.
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McGraw-Hill/Irwin Slide 4McGraw-Hill/Irwin Slide 4
CHOOSING A BUSINESS FORM
Proprietorship Partnership LLP LLC S Corp. CorporationBusiness entity yes yes yes yes yes yesLegal entity no no no yes yes yesLimited liability no no limited* yes yes yesBusiness taxed no no no no no yesOne owner allowed yes no no yes yes yes*A partner's personal liability for LLP debts is limited. Most LLPs carry insurance to protect against malpractice.
Many factors should be considered when Many factors should be considered when choosing the proper business form.choosing the proper business form.
Many factors should be considered when Many factors should be considered when choosing the proper business form.choosing the proper business form.
McGraw-Hill/Irwin Slide 5McGraw-Hill/Irwin Slide 5
ORGANIZING A PARTNERSHIP
Partners can invest both assets and liabilities in the partnership.
Partners can invest both assets and liabilities in the partnership.
Assets and liabilities are recorded at an agreed-upon value, normally fair market value.
Assets and liabilities are recorded at an agreed-upon value, normally fair market value.
Asset contributions increase the partner’s capital account.
Asset contributions increase the partner’s capital account.
Withdrawals from the partnership decrease the partner’s capital account.
Withdrawals from the partnership decrease the partner’s capital account.
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McGraw-Hill/Irwin Slide 6McGraw-Hill/Irwin Slide 6
ORGANIZING A PARTNERSHIP
In accounting for partnerships:In accounting for partnerships:1.1.Partners’ withdrawals are debited to their own separate Partners’ withdrawals are debited to their own separate withdrawals account.withdrawals account.2.2.Partners’ capital accounts are credited (or debited) for Partners’ capital accounts are credited (or debited) for their shares of net income (or net loss) when closing the their shares of net income (or net loss) when closing the accounts at the end of the period.accounts at the end of the period.3.3.Each partner’s withdrawal account is closed to that Each partner’s withdrawal account is closed to that partner’s capital account. Separate capital and withdrawals partner’s capital account. Separate capital and withdrawals accounts are kept for each partner.accounts are kept for each partner.
In accounting for partnerships:In accounting for partnerships:1.1.Partners’ withdrawals are debited to their own separate Partners’ withdrawals are debited to their own separate withdrawals account.withdrawals account.2.2.Partners’ capital accounts are credited (or debited) for Partners’ capital accounts are credited (or debited) for their shares of net income (or net loss) when closing the their shares of net income (or net loss) when closing the accounts at the end of the period.accounts at the end of the period.3.3.Each partner’s withdrawal account is closed to that Each partner’s withdrawal account is closed to that partner’s capital account. Separate capital and withdrawals partner’s capital account. Separate capital and withdrawals accounts are kept for each partner.accounts are kept for each partner.
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McGraw-Hill/Irwin Slide 7McGraw-Hill/Irwin Slide 7
DIVIDING INCOME OR LOSS
Three frequently used methods to divide Three frequently used methods to divide income or loss are allocation on:income or loss are allocation on:
1.1. Stated ratios.Stated ratios.
2.2. Capital balances.Capital balances.
3.3. Services, capital and stated ratios.Services, capital and stated ratios.
Partners are not employees of the partnership but are its Partners are not employees of the partnership but are its owners. This means there are no salaries reported as owners. This means there are no salaries reported as
expense on the income statement. Profits or losses of the expense on the income statement. Profits or losses of the partnership are divided on some agreed upon ratio.partnership are divided on some agreed upon ratio.
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McGraw-Hill/Irwin Slide 8McGraw-Hill/Irwin Slide 8
ADMISSION AND WITHDRAWAL OF PARTNERS
When the makeup of the partnership changes, the existing partnership is dissolved.
A new partnership may be immediately formed.
New partner acquires partnership interest by:1. Purchasing it from the other partners, or
2. Investing assets in the partnership.
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McGraw-Hill/Irwin Slide 9McGraw-Hill/Irwin Slide 9
PURCHASE OF PARTNERSHIP INTEREST
A new partner can purchase A new partner can purchase partnership interest directly from partnership interest directly from the existing partners.the existing partners.The cash goes to the partners, not The cash goes to the partners, not
to the partnership.to the partnership. To become a partner, the new To become a partner, the new
partner must be accepted by the partner must be accepted by the current partners.current partners.
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McGraw-Hill/Irwin Slide 10McGraw-Hill/Irwin Slide 10
INVESTING ASSETS IN A PARTNERSHIP
The new partner can gain partnership interest by contributing assets to the partnership.
The new assets will increase the partnership’s net assets.
After admission, both assets and equity will increase.
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McGraw-Hill/Irwin Slide 11McGraw-Hill/Irwin Slide 11
BONUS TO OLD OR NEW PARTNERS
Bonus to Old 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.
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.
Bonus to New Partners
Bonus to New Partners
The partnership may grant a bonus to a new partner if the business is in
need of cash or if the new partner has exceptional talents.
The partnership may grant a bonus to a new partner if the business is in
need of cash or if the new partner has exceptional talents.
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McGraw-Hill/Irwin Slide 12McGraw-Hill/Irwin Slide 12
WITHDRAWAL OF A PARTNER
A partner can withdraw A partner can withdraw in two ways:in two ways:
The partner can sell his/her The partner can sell his/her partnership interest to partnership interest to another person.another person.
The partnership can The partnership can distribute cash and/or other distribute cash and/or other assets to the withdrawing assets to the withdrawing partner.partner.
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McGraw-Hill/Irwin Slide 13McGraw-Hill/Irwin Slide 13
DEATH OF A PARTNER
A partner’s death dissolves a partnership. A deceased A partner’s death dissolves a partnership. A deceased partner’s estate is entitled to receive his or her equity. The partner’s estate is entitled to receive his or her equity. The partnership agreement should contain provisions for partnership agreement should contain provisions for settlement. These provisions usually require:settlement. These provisions usually require:1.1.Closing the books to determine income or loss since the Closing the books to determine income or loss since the end of the previous period, andend of the previous period, and2.2.Determining and recording current market values for both Determining and recording current market values for both assets and liabilities.assets and liabilities.Settlement of the deceased partner’s estate can involve Settlement of the deceased partner’s estate can involve selling the equity to remaining partners or to an outsider, or selling the equity to remaining partners or to an outsider, or it can involve withdrawal of assets.it can involve withdrawal of assets.
A partner’s death dissolves a partnership. A deceased A partner’s death dissolves a partnership. A deceased partner’s estate is entitled to receive his or her equity. The partner’s estate is entitled to receive his or her equity. The partnership agreement should contain provisions for partnership agreement should contain provisions for settlement. These provisions usually require:settlement. These provisions usually require:1.1.Closing the books to determine income or loss since the Closing the books to determine income or loss since the end of the previous period, andend of the previous period, and2.2.Determining and recording current market values for both Determining and recording current market values for both assets and liabilities.assets and liabilities.Settlement of the deceased partner’s estate can involve Settlement of the deceased partner’s estate can involve selling the equity to remaining partners or to an outsider, or selling the equity to remaining partners or to an outsider, or it can involve withdrawal of assets.it can involve withdrawal of assets.
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McGraw-Hill/Irwin Slide 14McGraw-Hill/Irwin Slide 14
LIQUIDATION OF A PARTNERSHIP
A partnership dissolution requires four steps:
Noncash assets are sold for cash and a gain or loss on liquidations is recorded.
Gain or loss on liquidation is allocated to partners using their income-and-loss ratio.
Liabilities are paid or settled.
Any remaining cash is distributed to partners based on their capital balances.
A partnership dissolution requires four steps:
Noncash assets are sold for cash and a gain or loss on liquidations is recorded.
Gain or loss on liquidation is allocated to partners using their income-and-loss ratio.
Liabilities are paid or settled.
Any remaining cash is distributed to partners based on their capital balances.
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McGraw-Hill/Irwin Slide 15McGraw-Hill/Irwin Slide 15
PARTNER RETURN ON EQUITY
Partner returnon equity
Partner net incomeAverage partner equity
=
Total LP I LP II Celtics LPBalance, Beginning of year 84$ 122$ (307)$ 270$ Net income (loss) for year 216 44 61 111 Cash distribution (48) - - (48) Balance, End of year 252$ 166$ (246)$ 333$
Partner return on equity 128.6% 30.6% NA 36.8%
Boston Celtics
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216/[(84+252)/2] = 128.6%
McGraw-Hill/Irwin Slide 16McGraw-Hill/Irwin Slide 16
END OF CHAPTER 12
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