Chapter 11 Flashcards
what is a partnership
unincorporated with 2 or more people who pursue business profit and are co owners
characteristics of a partnership
- limited life
- taxation of partners
- co-ownership of property
- mutual agency
- unlimited liability
what does business agreement include (7)
- name and contributions
- rights and dutes
- sharing profit/loss
- withdrawal provisions
- dispute procedures
- admission/withdrawal
- rights/ duties if someone dies
what are the 3 forms of partnerships
- general partnership
- limited partnership
- limited liability partnershiip
general partnership
each partner has unlimited liability for debts
limited partnership
at least one partner Is a GENERAL partner and they manage and have unlimited liability for debts. other partners are LIMITED partners, , they are only liable for the amount they invested
Limited Liability Partners
- protect innocent partners from malpractice and negligence claims from acts of another partner
- all partners are personally responsible for other partners debts
- LLP- CPAs, lawyers, regulated industry with strict rules
advantages of a partnership
- easy formation
- low cost of start up
- access to capital resources
- more management talent
- increase effectiveness from pooling talent
- shared risk
- less bureaucracy
disadvantages of a partnership
- unlimited liability creates personal obligations
- hard to find suitable partners
- conflict
- disagreement from dividend authority
- legally minded without authority
- limited life
what to do for accounting with partnerships
- seperate capital and withdrawal account for each partner
- profit/loss allocated based on agreement
- partners can invest assets/ liabilities
- assets invested are recorded at FAIR MARKET VALUE and liabilities at their transfer date
entry for investing capital
dr equip
dr cash
cr melanie capital
partner withdrawals
-not expensed–
dr Melanie withdrawals
cr cash
dividing profit / loss (3 ways)
- fractional basis
- ratio of capital investment
- allocated based on salary/ interest allowance/ remainder
fractional basis
two people share profit or loss from a fraction, say 2:1 would be one person gets 2/3 and the other 1/3
ratio of capital investment
share profit/ loss based on beginning capital investments.
1. make ratio for each person divide their investment by total invested in company to get fraction, then multiply fraction by profit or loss
dr income summary (it will have cr balance if profit)
Cr mel capital
Cr tan capital
allocated based salary, interest allowance, fixed ratio -table plus entry
make table table
mel tan balance
profit 90,000
salary allowance 10,000 30,000 (40,000)
interest allowance 7,000 8,000 (15,000)
35,000
remainder (split) 17,500 17,500 (35,000)
allocation 34,500 55,500 0
entry dr income summary 90,000
cr mel capital 34,500
cr tan capital 55,500
how to do allocated summary/ interest allowance/ fixed ratio when there’s a loss
do everything with salary and interest allowance the same adding the negative values to the already negative balance which is a loss. then total that and split that ‘evening’ or on a ratio between the partners. some partners may still capital, of partners lose capital you debit their capital account
two ways partners are admitted
- purchasing another partners interest
2. investing assets
admission of partners by purchasing assets
the purchase of the equity is a personal transaction of cash between the two people but for accounting purposes of the company you record the transfer of capital from one partner to the other dr mel capital 10 cr tan capital 10 *a new agreement is made * all other partners must accept
admission of partner by investing assets
transaction between new partner and partnerships and it changes the overall equity
- partner invests amount and they get certain percentage of equity, it can be equal to , or more or less than their investment if its more then the partners get a bonus if its less then they get a bonus
entry for investing assets when you invest more than equity share
dr cash
cr Mel capital
cr tan capital
entry for investing assets when you invest less than your equity share
dr cash
Dr tan capital
cr mel capital
2 ways partners can withdraw
- sell interest
2. receive assets from partnership in settlement for their equity– bonus/ no bonus/ bonus to u
partnership bought out of equity and no bonus
dr mel capital 10
cr cash 10
partner retired and is getting a buyout of 200,000 they have 150,000 worth of capital in their account
dr mel capital 150,000
dr tan capital 25,000
dr tanner capital 25,000
cr cash 200,000
partner retired accepting buyout of 150,000 with 200,000 in their capital
the rest is allocated to the remaining partners as a bonus
Dr mel capital 200,000
cr cash 150,000
cr tan capital 50,000
