Chapter 39 Textbook P.569 ykp.

Chapter 39Textbook P.569

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CHAPTER 39 ACCOUNTING FOR PARTNERSHIPS

CHAPTER 39 ACCOUNTING FOR PARTNERSHIPS

After attending these 2 lessons, you should be able to:1 Identify the characteristics of the partnership

form of business organization.2 Explain the accounting entries for the

formation of a partnership.3 Explain the accounting entries for dividing net

income or net loss.4 Describe the form and content of partnership

financial statements.

PREVIEWPREVIEW

ACCOUNTING FOR PARTNERSHIPS

Gain/loss attributable to partners

Final accounts of a partnership

Forming a partnership

Dividing net income/loss

Financial statements

Partnership dissolution

Partnership dissolution

Accounting for changes in

partnership

Goodwill for partnerships

Characteristics

Advantages/ disadvantages

Partnership agreement

Partnership Form of Organization

Revaluation of

Partnership assets

Admission/ retirement of partner(s)

STUDY OBJECTIVE 1STUDY OBJECTIVE 1

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1 Identify the characteristics of the partnership form of business organization.

PARTNERSHIP FORM OF ORGANIZATIONPARTNERSHIP FORM OF ORGANIZATION

A partnership is an association of two or more persons to carry on as co-owners of a business for a profit.

The principal characteristics of the partnerships are:The principal characteristics of the partnerships are:

CHARACTERISTICS OF PARTNERSHIPS1) Mutual agency

each partner acts on behalf of the partnership when engaging in partnership business

act of any partner is binding on all other partners (true even when partners act beyond the scope of their

authority, so long as the act appears to be appropriate for the partnership)

CHARACTERISTICS OF PARTNERSHIPS2) Association of individuals

may be based on as simple an act as a handshake, it is preferable to state the agreement in writing

A partnership legal entity for certain purposes (i.e., property can be owned in

the name of the partnership)accounting entity for financial reporting purposes

Net income of a partnership not taxed as a separate entity (in USA)each partner’s share of income is taxable at personal tax rates

CHARACTERISTICS OF PARTNERSHIPS

3) Limited lifeDissolution

whenever a partner withdraws or a new partner is admitted

End involuntarily by death or incapacity of a partner

End voluntarily through acceptance of a new partner or withdrawal of a

partner

CHARACTERISTICS OF PARTNERSHIPS4) Unlimited liability

each partner is personally and individually liable for all partnership liabilities.

creditors’ claims attach first to partnership assets

if insufficient assets claims then attach to the personal resources of any partner,

irrespective of that partner’s capital equity in the company

CHARACTERISTICS OF PARTNERSHIPS5) Co-ownership of assets Partnership Assets

assets invested in the partnership are owned jointly by all the partners

Partnership Income or Loss co-owned; if the partnership contract does not specify

to the contrary, net income or net loss is shared equally by the partners

REVIEW: Which of the following is not a characteristic of a partnership:a. The liability for debts is limited to capital.

b. Co-ownership of property.c. A partner is able to engage business on behalf of the partnership.

d. The life of a partnership is limited.

Group work 1What are the advantages & disadvantages of a partnership?

AdvantagesCombining skills & resources (e.g.

$/property)of 2 or more individualsEase of formationFreedom from governmental regulations &

restrictionsEase of decision making

Group work 1What are the advantages & disadvantages of a partnership?

DisadvantagesMutual agency, other partners are able to make

decision without your permissionLimited lifeUnlimited liability, the debts of partnership

could become partners’ personal liabilities.

THE PARTNERSHIP AGREEMENT (P.571)THE PARTNERSHIP AGREEMENT (P.571) The written contract

contains information of the name and principal location of the firm, the purpose of the business, and the date of inception. The following relationships among the partners should be specified:

1 Names and capital contributions of the partners.

2 Rights and duties of partners.

3 Procedures for the withdrawal or addition of a partner.

4 Rate of interests to be paid on partner’s capital.5 Rate of interests to be charged on partner’s

drawings.

6 Salaries to be paid to partners.

7 Ratio for sharing net income/(loss).

Group work 2You are planning to run a stall in a

Lunar New Year Bazaar (Flower market) at the Victoria Park with your group-mates.

a) Draw up a “Partnership Agreement” between partners

STUDY OBJECTIVE 2STUDY OBJECTIVE 2

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2 Explain the accounting entries for the formation of a partnership.

STUDY OBJECTIVE 2FORMING A PARTNERSHIP

Initial investment recorded at the fair market value of the assets at

the date of their transfer to the partnershipvalues assigned must be agreed to by all of the

partners

BOOK AND MARKET VALUE OF ASSETS INVESTED

Book Value Market ValueA. Rolfe T. Shea A. Rolfe T. Shea

Cash $ 8,000 $ 9,000 $ 8,000 $ 9,000Office equipment 5,000 4,000Accumulated depreciation ( 2,000)Accounts receivable 4,000 4,000Allowance for doubtful accounts ( 700) ( 1,000)

$ 11,000 $ 12,300 $ 12,000 $ 12,000

Peter and Paul combine their proprietorships to start a partnership. They have the following assets prior to the formation of the partnership:

Peter and Paul combine their proprietorships to start a partnership. They have the following assets prior to the formation of the partnership:

Peter PeterPaul Paul

RECORDING INVESTMENTS IN A PARTNERSHIPRECORDING INVESTMENTS IN A PARTNERSHIP

Entries to record the investments are:Entries to record the investments are:

Account Titles and Explanation Debit Credit Investment of Peter Cash Office Equipment Peter, Capital (To record investment of Peter) Investment of Paul Cash Accounts Receivable Allowance for Doubtful Accounts Paul, Capital (To record investment of Paul)

8,0004,000 12,000

9,0004,000 1,000 12,000

Group work 2 (continued)You are planning to run a stall in a

Lunar New Year Bazaar (Flower market) at the Victoria Park with your group-mates.

b) Your partnership has been formed. All of the partners have paid their capital and deposited cash into bank, prepare the Balance sheet for your partnership.

STUDY OBJECTIVE 3STUDY OBJECTIVE 3

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3 Explain the accounting entries for

sharing net income or net loss.

Interest on capital 資本利息 (P.572)This is a means of compensating partners for funds tied up in the

business that could be earning interest if invested elsewhere. Interest will be treated as a deduction (Dr.) of income in the

“Profit & Loss & Appropriation A/C”.Work it out:

Peter put $6,000 & Paul put $4,000 into bank as their capital on 1 Nov 2009, partners are entitled to receive 2% interest on capital per month. Today is 28 Feb 2010, please record the above transactions by double entries.

Double entry for paying interest on capital is:Dr. Profit & loss A/C $15,000

Cr. Mr. Lam’s Capital $10,000Cr. Mr. Lee’s Capital $5,000

Interest on CapitalThe double entries are:

Dr. Bank $10,000Cr. Peter’s Capital $6,000 Cr. Paul’s Capital $4,000

To record the capital injection

Dr. Profit & loss & Appropriation A/C $800 Cr. Peter’s Capital ($6,000x 2% x 4mths) $480

Cr. Paul’s Capital ($4,000x 2% x 4mths) $320To record the interests paid to partners

Interest on drawings 提用利息 (P.573)

This is a means of discouraging partners from drawing funds from the company/ partnership. Interest will be treated as an income (Cr.) in the “Profit & Loss & Appropriation A/C”.

Work it out:Peter drew $2,500 & Paul drew $3,000 from bank on 1 Dec 2009, the interest on drawings is charged to partners at 5% per month.

Today is 28 Feb 2010, please record the above transactions by double entries.

Interest on drawings The double entries are:Dr. Peter’s Capital $2,500 Dr. Paul’s Capital $3,000

Cr. Bank $5,500To record the capital drawn by partners

Dr. Peter’s Capital ($2,500x5% x 3mths) $375 Dr. Paul’s Capital ($3,000x5% x 3mths) $450

Cr. Profit & loss & Appropriation A/C $825

To record the interests charged to partners

PARTNERS’ SALARIESSalaries to partners and interest on partner’s capital

balances are not expenses of the partnership; therefore, these items do not enter into the matching of

expense with revenues and these are deducted after the net income in the P/L Appropriation A/C.

Work it out:Peter & Paul are entitled to receive $3,500 & $4,000 as salaries per month, this agreement is effective from 1 Dec 2009. Today is 28 Feb 2010, please record the above transactions by double entries.

PARTNERS’ SALARIES

Dr. Profit & loss & Appropriation A/C $22,500

Cr. Peter’s Capital ($3,500 x 3mths) $10,500

Cr. Paul’s Capital ($4,000 x 3mths) $12,000

To record the salaries paid to partners

SHARING NET INCOME /(LOSS) P.572SHARING NET INCOME /(LOSS) P.572

Partnership net income or net loss is shared equally unless the partnership agreement indicates.

1 A fixed ratio, expressed as a proportion (6:4), a percentage (60% and 40%), or

a fraction (3/5 and 2/5).

2 A ratio can be based on

capital balances at the beginning of the year

or other equitable method.

INCOME-SHARING RATIOSINCOME-SHARING RATIOS

Peter and Paul are partners, they contributed the same amount of capital, but Peter expects to work full-time and Paul only part-time, a 2/3, 1/3 ratio may be equitable. The net income after charging/ paying interests is $21,000. The double entry is:

Peter and Paul are partners, they contributed the same amount of capital, but Peter expects to work full-time and Paul only part-time, a 2/3, 1/3 ratio may be equitable. The net income after charging/ paying interests is $21,000. The double entry is:

21,000 14,000

7,000

Group work 2 (continued)You are planning to run a stall in a

Lunar New Year Bazaar (Flower market) at the Victoria Park with your group-mates.

The New Year Bazaar was finished, now it’s time to calculate & report how much do we earn in the bazaar! c) Please prepare a “Profit & Loss & Appropriation Account” for your partnership.

Review answers on group work

CHARACTERISTICS OF PARTNERSHIPSCHARACTERISTICS OF PARTNERSHIPS

The principal characteristics of the partnership form of business organization are:

1 Association of individuals

2 Mutual agency

3 Limited life

4 Unlimited liability

5 Co-ownership of property

Partnership AgreementInterest on capital

a means of compensating partners for funds tied up in the business that could be earning interest if invested elsewhere.

Interest on drawingsa means of discouraging partners from drawing

funds from the company/ partnership. Interest will be treated as an income (Cr.) in the “Profit & Loss & Appropriation A/C”.

Partners’ salariesSalaries to partners and interest on partner’s

capital balances are not expenses of the partnership

Sharing of profit & loss