PARTNERSHIP
8/27/2020
CHARACTERISTICS OF A PARTNERSHIP
It is an association of
two or more persons
who co-own a business
for profit
Partnerships can come in all sizes. Many
partnerships have less than ten partners. Many
legal and medical firms have twenty or more
partners. Big accounting firms can have over a
thousand partners.
8/27/2020
CHARACTERISTICS OF A PARTNERSHIP
THE WRITTEN AGREEMENT
A partnership agreement is drawn
up in writing in order to make
certain that each partner fully
understands how the partnership
will operate and to avoid any
misunderstanding among the
partners.
8/27/2020
CHARACTERISTICS OF A PARTNERSHIP
THE WRITTEN AGREEMENT
The partnership agreement, also known as
the articles of partnership, sets down the
following:
Name, locations, and nature of business
Name, capital investment, and duties of each
partner
Method of sharing profits and losses among
partners
Withdrawals of assets allowed to the
partners
8/27/2020
CHARACTERISTICS OF A PARTNERSHIP
THE WRITTEN AGREEMENT
Procedures for settling disputes between
the partners
Procedures for admitting new partners
Procedures for settling with a partner
who withdraws from the business
Procedures for liquidating the
partnership – selling the assets, paying
the liabilities, and disbursing any
remaining cash to the partners.
8/27/2020
CHARACTERISTICS OF A PARTNERSHIP
THE WRITTEN AGREEMENT
The partnership agreement is a contract
between partners. Therefore, transactions
covered by the agreement are governed by
the contract of law.
8/27/2020
CHARACTERISTICS OF A PARTNERSHIP
LIMITED LIFE
The life of a partnership is limited by the time
that all partners continue to own the business.
Dissolution is the ending of a partnership. If
one or more partners withdraws or dies, the old
partnership ceases to exist. A new partnership
may emerge to continue the same business.
The addition of a new partner dissolves the old
partnership and creates a new partnership
Large partnerships retain the original partnership
name even after there have been additions and
withdrawals of partners.
8/27/2020
CHARACTERISTICS OF A PARTNERSHIP
MUTUAL AGENCY
Mutual agency in a
partnership means
that each partner can
bind the business to a
contract within the
scope of the
partnership’s regular
business operations.
8/27/2020
CHARACTERISTICS OF A PARTNERSHIP
UNLIMITED LIABILITY
Each partner has an
unlimited personal
liability for the debts of the
partnership.
When the partnership cannot
pay its debts with business
assets, the partners must use
their personal assets to pay the
debt.
8/27/2020
CHARACTERISTICS OF A PARTNERSHIP
UNLIMITED LIABILITY
In order to avoid unlimited
liability for partnership
obligations, partners can
form a limited partnership.
In this form of business
organization, the partner’s
liability is similar to that of a
stockholder in an
organization.
8/27/2020
CHARACTERISTICS OF A PARTNERSHIP
CO-OWNERSHIP OF PROPERTY
Any asset that the
partner brings into the
partnership becomes
the joint property of the
partnership.
Each partner can lay
claim to his share of the
business profits.
8/27/2020
CHARACTERISTICS OF A PARTNERSHIP
NO PARTNERSHIP INCOME TAXES
The partnership as a business entity does not
pay income taxes.
However, each individual partner pays
income tax for his share in the business profits
of the partnership.
8/27/2020
CHARACTERISTICS OF A PARTNERSHIP
PARTNER’S OWNER’S EQUITY
ACCOUNTS
The recording of transactions in a partnership is
much the same as in a single proprietorship..
The only difference is that each partner has his
own capital account.
Each capital account includes the name of the
partner and the word “capital”. For example,
Willis, Capital
Each partner will also have his own account for
withdrawals. For example, Willis, Drawing
8/27/2020
CHARACTERISTICS OF A PARTNERSHIP
ADVANTAGES
PATNERSHIPS OVER SINGLE
PROPRIETORSHIPS
Can raise more capital
Can bring in the expertise of more than one
person
8/27/2020
CHARACTERISTICS OF A PARTNERSHIP
ADVANTAGES
PATNERSHIPS OVER CORPORATIONS
Less expensive to organize than a
corporation
Not taxed on business income
8/27/2020
CHARACTERISTICS OF A PARTNERSHIP
DISADVANTAGES
Partnership agreements are difficult to
formulate. Each time a partner is added or a
partner withdraws, a new partnership
agreement is drawn up.
Relationships among partners may not be
amiable.
Mutual agency and unlimited personal
liability creates personal obligations for the
partners.
8/27/2020
TYPES OF PARTNERSHIP
GENERAL PARTNERSHIPS
All business
partners share
equally in the
business’ profits,
losses and risks.
8/27/2020
TYPES OF PARTNERSHIP
LIMITED PARTNERSHIPS
Have at least two types of partners. There
should be at least one general partner, and
the rest are limited partners.
The general partner is primarily in charge
of the management of the business.
Personal obligations to the business are
limited to the amount they have invested in
the business
8/27/2020
TYPES OF PARTNERS
CAPITALIST PARTNER
A capitalist
partner
contributes
money or
property to the
partnership.
8/27/2020
TYPES OF PARTNERS
GENERAL PARTNER
A general partner
has unlimited
liability.
An industrial
partner contributes
labor or service to
the partnership.
8/27/2020
THE PARTNERSHIP
START-
START-UP
Partners may bring in
assets and liabilities into
the partnership.
The net amount of assets
and liabilities are credited
to the partner’s capital
account
The recording of assets and
liabilities in a partnership is
the same as that in a
proprietorship
8/27/2020
THE PARTNERSHIP
START-
START-UP
Sample entries for the recording of assets
and liabilities during a partnership start-up
are as follows:
Cash xxx
Accounts Receivable xxx
Inventory xxx
Equipment xxx
Allowance for Doubtful Accounts xxx
Accounts Payable xxx
Partner A, Capital xxx
To record assets and liabilities brought to the
partnership by Partner A
8/27/2020
SHARING PROFITS, LOSSES AND
DRAWINGS
If the partnership does not have an agreement
stating the division of profits and losses, it is
assumed that profits and losses are divided based
on capital contributions.
If the agreement specifies the sharing of profits
but not losses, it is assumed that losses are shared
in the same manner as profits
8/27/2020
SHARING PROFITS, LOSSES AND
DRAWINGS
SHARING BASED ON A STATED
FRACTION
Partners may be allocated a specific fraction or
percentage to represent their share in the total
profits or losses of the business.
Examples:
60:40
50:50
2:3
8/27/2020
SHARING PROFITS, LOSSES AND
DRAWINGS
SHARING BASED ON A STATED
FRACTION
The entries to record a partner’s share in the
partnership’s profits or losses are as follows:
Income summary xxx
Partner A, Capital xxx
Partner B, Capital xxx
The record partners’ share in the business profits
8/27/2020
SHARING PROFITS, LOSSES AND
DRAWINGS
SHARING BASED ON A STATED
FRACTION
Partner A, Capital xxx
Partner B, Capital xxx
Income summary xxx
To record partners’ share in the business losses
8/27/2020
SHARING PROFITS, LOSSES AND
DRAWINGS
SHARING BASED ON CAPITAL
CONTRIBUTIONS
Business profits and losses may also be allocated
among the partners based on capital contributions.
Each partner’s share will be based on his or her
capital contribution to total partnership capital
contribution.
The formula to compute each partner’s share is :
Partner’s Share = Partner’s Capital Contribution
x Net Income or Loss
Total Capital Contribution
8/27/2020
SHARING PROFITS, LOSSES AND
DRAWINGS
SHARING BASED ON CAPITAL
CONTRIBUTIONS AND ON SERVICE
This method
rewards the partner
who puts in more
hours of work into the
business than the other
partners.
8/27/2020
SHARING PROFITS, LOSSES AND
DRAWINGS
SHARING BASED ON CAPITAL
CONTRIBUTIONS AND ON SERVICE
Using this method, a sample allocation is as
follows:
1. Net income is first allocated according to capital
contributions.
2. Then, specified amounts are distributed to
partners for their service to the business.
3. Any remaining income, after allocation based on
capital contribution and payment of services, is
divided equally
8/27/2020
SHARING PROFITS, LOSSES AND
DRAWINGS
SHARING BASED ON SALARIES
AND INTEREST
If in the process of
allocation, a net loss
occurs after deducting
salaries and interest, the
net loss is allocated to
the partners using the
agreed upon method of
allocation.
8/27/2020
SHARING PROFITS, LOSSES AND
DRAWINGS
SHARING BASED ON SALARIES AND
INTEREST
Using this method, a sample allocation is as
follows:
1. Salaries are paid to partners who work for the
business.
2. From the remaining net income, interest is paid
on the partner’s beginning capital balance as
specified by the partnership agreement.
3. Any remaining income is divided equally among
the partners.
8/27/2020
SHARING PROFITS, LOSSES AND
DRAWINGS
PARTNER DRAWINGS OF CASH AND
OTHER ASSETS
The journal entry to record a partner’s withdrawal
of cash or other assets from the business is as
follows:
Partner A, Drawing xxx
Partner B, Drawing xxx
Cash xxx
To record cash withdrawals of partners
8/27/2020
SHARING PROFITS, LOSSES AND
DRAWINGS
PARTNER DRAWINGS OF CASH AND
OTHER ASSETS
The Drawing account of each partner must be
closed at the end of each period, just like in a
single proprietorship. The closing entry credits
each partner’s drawing account and debits each
capital account.
8/27/2020
ADMISSION OF A PARTNER
PARTNER DRAWINGS OF CASH
AND OTHER ASSETS
A new partner’s interest in
the partnership is not the
same as the partner’s share
in the sharing of profits and
losses. This is covered
separately in the partnership
agreement.
8/27/2020
ADMISSION OF A PARTNER
ADMISSION BY PURCHASING A
PARTNER’S INTEREST
The interest in the partnership transferred
from the old partner to the new partner is
based on the recorded capital of the old
partner. It does not consider whether the
amount paid by the new partner to the old
partner is higher or lower than the recorded
partner’s interest in the business.
8/27/2020
ADMISSION OF A PARTNER
ADMISSION BY PURCHASING A
PARTNER’S INTEREST
The entry to record the purchase of interest by a
new partner is as follows:
Partner A, Capital xxx
Partner B, Capital xxx
To record the purchase of capital of Partner B from
Partner A
8/27/2020
ADMISSION OF A PARTNER
ADMISSION BY INVESTING IN A
PARTNERSHIP
Admission by Direct Investment in the
Partnership
The new partner may invest cash or inventory or
equipment in the business.
Non-cash assets contributed at the time of
contribution by the new partner will be valued at
market value.
Any liabilities attached to the non-cash assets that
the partnership is willing to assume is deducted
from the total capital contribution of the new
partner.
An example is a mortgage on land brought in by
the new partner
8/27/2020
ADMISSION OF A PARTNER
ADMISSION BY INVESTING IN A
PARTNERSHIP
Admission by Direct Investment in the Partnership
The new partner’s interest in the business is equal
to his or her share in the partnership’s total capital
contribution.
The new partner’s contribution is computed as
follows:
New Partner’s Share =
Capital Contribution of New Partner
Total Capital Contribution of Old and New Partners
8/27/2020
ADMISSION OF A PARTNER
ADMISSION BY INVESTING IN A
PARTNERSHIP
Admission by Direct Investment in the Partnership
Note that the new partner’s share in the
partnership is not necessarily the same as her
share in profit or loss. This is covered by a separate
agreement..
The entry to record a new partner’s direct
investment is as follows:
Cash xxx
Other Assets xxx
Partner C Capital xxx
8/27/2020
ADMISSION OF A PARTNER
ADMISSION BY INVESTING IN A
PARTNERSHIP
Admission by investing in the partnership –
with bonus to the old partners
The difference between the market value of the
assets brought in by the new partner and the
interest in the business given to him is considered
a bonus to the old partners.
Bonus = Total assets contributed by the
new partner – interest in the partnership of
the new partner
8/27/2020
ADMISSION OF A PARTNER
ADMISSION BY INVESTING IN A
PARTNERSHIP
Admission by investing in the partnership –
with bonus to the old partners
Where: interest in the partnership by the new
partner is:.
Capital Contribution of the
New Partner X Capital
Capital Contribution of Old Contribution
and New Partners
8/27/2020
ADMISSION OF A PARTNER
ADMISSION BY INVESTING IN A
PARTNERSHIP
Admission by investing in the partnership –
with bonus to the old partners
This bonus is divided between the old partners
according to the profit and loss agreement existing
before the new partner was accepted. The bonus of
the old partners is recorded as an increase in their
capital accounts.
8/27/2020
ADMISSION OF A PARTNER
ADMISSION BY INVESTING IN A
PARTNERSHIP
Admission by investing in the partnership –
with bonus to the old partners
The entry to record the admission of a new partner
with a bonus to the old partners is as follows:
Cash xxx
Other Assets xxx
Capital, New Partner xxx
Capital, Old Partner xxx
Capital, Old Partner xxx
To record admission of new partner with bonus to old
partners
8/27/2020
ADMISSION OF A PARTNER
ADMISSION BY INVESTING IN A
PARTNERSHIP
Admission by investing in the partnership –
bonus to the new partner
A new partner may be so important to the existing
partners that they would give him a bonus
As a reverse of the foregoing section, the bonus of
the new partner is the difference between his
capital contribution and his interest in the
partnership. In this case, his interest in the
partnership is bigger than his capital
contribution.
8/27/2020
ADMISSION OF A PARTNER
ADMISSION BY INVESTING IN A
PARTNERSHIP
Admission by investing in the
partnership – bonus to the new partner
The bonus of the new partner is added to his
capital account
The computation for the bonus of the new partner
is the same as the computation of the bonus given
to old partners.
8/27/2020
WITHDRAWAL (RESIGNATION OR DEATH)
OF A PARTNER
WITHDRAWAL AT BOOK VALUE
A partner may withdraw from the partnership by
being given an amount equivalent to the
recorded book value of his interest in the
business.
The entry to record the above is as follows:
Partner A, Capital xxx
Cash xxx
To record withdrawal of Partner A at book value
8/27/2020
WITHDRAWAL (RESIGNATION OR DEATH)
OF A PARTNER
WITHDRAWAL AT LESS THAN BOOK
VALUE
If an old partner withdraws from the partnership
at less than the book value of his interest, the
difference is recorded as a profit to the
remaining partners. This profit is shared
between the remaining partners according to the
new profit and loss ratio they may decide on.
8/27/2020
WITHDRAWAL (RESIGNATION OR DEATH)
OF A PARTNER
WITHDRAWAL AT LESS THAN BOOK
VALUE
The entry to record the above is as follows:
Partner A, Capital xxx
Cash xxx
Partner B, Capital xxx
Partner C, Capital xxx
To record withdrawal of Partner A at less than
book value
8/27/2020
WITHDRAWAL (RESIGNATION OR DEATH)
OF A PARTNER
WITHDRAWAL AT MORE THAN BOOK
VALUE
If an old partner withdraws from the partnership
at more than the book value of his interest, the
difference is recorded as a loss to the remaining
partners. The loss is shared between the
remaining partners at a profit and loss ratio they
may agree upon.
8/27/2020
WITHDRAWAL (RESIGNATION OR DEATH)
OF A PARTNER
WITHDRAWAL AT MORE THAN BOOK
VALUE
The entry to record the above is as follows:
Partner A, Capital xxx
Partner B, Capital xxx
Partner C, Capital xxx
Cash xxx
To record withdrawal of Partner A at more than
book value
8/27/2020
WITHDRAWAL (RESIGNATION OR DEATH)
OF A PARTNER
DEATH OF A PARTNER
The death of a partner dissolves
a partnership
The partnership determines its
business income at the time of
the death of the partner. Based
on this, the share of the
deceased partner is computed
and added to his capital
account.
8/27/2020
WITHDRAWAL (RESIGNATION OR DEATH)
OF A PARTNER
DEATH OF A PARTNER
The estate of the deceased partner usually
receives the amount equal to his capital
account
The partnership books close the capital
account of the deceased partner by debiting it
and crediting the amount of assets given to
the estate
8/27/2020
ADMISSION OF A PARTNER
LIQUIDATION
The process whereby
the business entity
stops doing business.
In doing so, it sells
all of its assets and
pays off all of its
liabilities.
8/27/2020
ADMISSION OF A PARTNER
LIQUIDATION
The liquidation of a partnership involves
three steps:
1. Sale of assets. Allocation of profit or loss from
the sale among the partners based on the
agreed upon profit and loss ratio.
2. Payment of partnership liabilities.
3. Distribution of the remaining cash among the
partners based on the partners’ capital
balances.
8/27/2020
ADMISSION OF A PARTNER
LIQUIDATION
Sale of Non-cash Assets at a Gain
The entry to record the sale of non- cash assets
at a gain and the profit distribution based on
the profit and loss ratio is as follows:
Cash xxx
Non-cash assets xxx
Partner A, Capital xxx
Partner B, Capital xxx
To record sale of non-cash assets at a gain and
distribution of profit
8/27/2020
ADMISSION OF A PARTNER
LIQUIDATION
Sale of Non-cash Assets at a Gain
The payment of partnership liabilities is
recorded as follows:
Cash xxx
Liabilities xxx
To record payment of partnership liabilities
The remaining cash left to the partnership
after selling all assets and paying all liabilities
is distributed to the partners based on their
capital account balances
8/27/2020
ADMISSION OF A PARTNER
LIQUIDATION
Sale of Non-cash Assets at a Gain
To record distribution of remaining cash
among the partners :
Partner A, Capital xxx
Partner B, Capital xxx
Cash xxx
8/27/2020
ADMISSION OF A PARTNER
LIQUIDATION
Sale of Non-cash Assets at a Gain
After the payment of cash to the partners, the
business has no more assets, liabilities, and
partners’ equity accounts. All balances are
zero.
Please see Annex 12 – 1 for a sample of a
Partnership Liquidation Statement.
8/27/2020
ADMISSION OF A PARTNER
LIQUIDATION
Sale of Non-cash Assets at a
Loss
The sale of partnership non-
cash assets at a loss follows the
same pattern as the sale of
non-cash assets at a gain
except that the capital accounts
are debited for the loss
8/27/2020
PARTNERSHIP FINANCIAL STATEMENTS
Partnership financial
statements are much like
those of proprietorships.
The only difference is
that the income statement
of a partnership shows
how the income is
allocated among the
partners
8/27/2020
END
8/27/2020
