Download What is a partnership?

Chapter
Accounting
for Partnerships
Section 1: Forming a
Partnership
Section Objectives
1.
Explain the major advantages and disadvantages
of a partnership.
2.
State the important provisions that should be
included in every partnership agreement.
3.
Account for the formation of a partnership.
19
QUESTION:
What is a partnership?
ANSWER:
A partnership is an association of
two or more persons who carry on,
as co-owners, a business for profit.
Objective 1.
Explain The Major Advantages And
Disadvantages Of A Partnership.
Advantages of a Partnership

It pools the skills, abilities, and financial
resources of two or more individuals.

It is easy and inexpensive to form.

A partnership does not pay income tax.
Each partner is taxed individually on his or her
share of the partnership’s income.
Disadvantages of a Partnership

Each partner has unlimited liability.

The partnership is a mutual agency.

The business lacks continuity. It has a limited
life.

Ownership rights are not freely transferable.
QUESTION:
What is meant by unlimited liability?
ANSWER:
Unlimited liability means that an
individual partner’s personal assets
can be required in payment of the
partnership’s debts.
QUESTION:
What is meant by mutual agency?
ANSWER:
Mutual agency means that each
partner may act as an agent for the
partnership, binding the firm by his
or her acts.
Limited Partnership

Has one or more limited partners.
Limited partners: Liable only for their investment
in the business.

Must have at least one general partner.
General partner: Has unlimited liability.
Limited partners may not take an active management
role and their names may not appear in the name of the
partnership.
Objective 2.
Explain The Important Provisions Which
Should Be Included In A Partnership
Agreement.
QUESTION:
What is a partnership agreement?
ANSWER:
A partnership agreement is a legal
contract forming a partnership and
specifying certain details of the
operation.
Every partnership agreement should
contain:

Names of the partners.
 Name, location, and nature of the business.
 Starting date of the agreement.
 Life of the partnership.
 Rights and duties of each partner.
Every partnership agreement should
contain:

Amount of capital to be contributed by each
partner

Drawings (withdrawals) by the partners.
Fiscal year and accounting method.
Method of allocating income or loss to the
partners.
Procedures to be followed if the partnership is
dissolved or the business is liquidated.



Partnerships dissolve upon a
partner’s:

death,

incapacity, or

withdrawal.
Objective 3.
Account For The Formation Of A Partnership.
Accounting for the Formation of a
Partnership

Memorandum entry to record formation of
partnership.

Investment of assets and liabilities by partners.

Setting up partners’ capital accounts.

Setting up partners’ drawing accounts.

Subsequent investments and permanent
withdrawals.
Example:
Ellen Barret, sole proprietor of
Old Army, is forming a
partnership with Jerry Reed.
Memorandum Entry to Record
Formation of Partnership
20-Jan.
1
On this date a partnership was
formed between Ellen Barret
and Jerry Reed to carry on a
retail clothing business under
the name of Old Army,
according to the terms of the
partnership agreement
effective this date.
Investments of Assets and Liabilities
by a Sole Proprietor
20-Jan. 1
Accounts Receivable
Merchandise Inventory
Store Equipment
Allow. for Doubtful Accts.
Notes Payable—Bank
Accounts Payable
Interest Payable
Ellen Barret, Capital
Investment of Ellen Barret
20,500.00
105,200.00
3,000.00
1,200.00
39,100.00
34,700.00
500.00
53,200.00
Assets that are transferred to a partnership should be appraised
and recorded at the agreed-upon fair market value at the time of
transfer.
Investment of Cash by Partner
Jan.
1
Cash
Jerry Reed, Capital
28,000.00
New
Partner
Investment
of cash by ReedGiven Credit
for Amount Invested
28,000.00
DRAWING ACCOUNTS
 Any withdrawal by a partner, whether it is
cash or some other asset, is a return of
equity to that partner.
 The partner’s drawing account balance
reduces that partner’s equity.
SECTION
R
E
V
I
E
W
Complete the following sentences:
unlimited liability for the
Each partner has _______________
partnership’s debt.
general
In a limited partnership, only the _______
partner has unlimited liability.
_______
Mutual agency is the characteristic that
_____________
binds the firm by the acts of an individual
partner.
SECTION
R
E
Complete the following sentences:
When a partner dies or is incapacitated,
dissolved
the partnership is _________.
V
I
E
W
The first entry in the general journal of the
memorandum
new partnership is a(n) ____________
entry
_____.
Capital
drawing accounts
______ accounts and _______
are set up for each partner.
Thank You
for using
College Accounting, 11th Edition
Price • Haddock • Brock