Lecture 11: Accounting for Partnerships Flashcards

(46 cards)

0
Q

What is a partnership?

A

Relation which exists between persons

Carrying on a business with a common view to profits

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1
Q

What is the principle that supports the partnership?

A

Partnership act

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2
Q

What is the minimum number of a partnership?

A

2

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3
Q

What is the max number of a partnership?

A

20

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4
Q

What are the advantages of a partnership?

A

Ease of formation
Pooling of capital, resources, expertise
Co ownership of partnership property
Sharing of profits
Partnership not subject to income tax (personal tax though)

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5
Q

What are the disadvantages of a partnership?

A

Unlimited liability of partners
Mutual agency
Co ownership of partnership property

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6
Q

What does unlimited liability mean?

A

In event of insolvency, personal assets may be taken to clear debts in partnership

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7
Q

How is a partnership formed?

A

Agreement made orally

Writing

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8
Q

Combining the capital talent and experience of 2 or more people is very

A

Convenient

Inexpensive

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9
Q

Why is there an agency in ‘mutual agency’

A

Each partner is an agent of the partnership when performing acts to carry on the business

The act of a single partner is binding on the partnership

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11
Q

Why is mutual agency a disadvantage?

A

The act may be negligent or wrongful

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12
Q

What does it mean when there is co-ownership of property?

A

Each partner is a co-owner of it

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13
Q

Why is co-ownership of property an advantage?

A

More resources can be pooled

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14
Q

Why is co-ownership of property an disadvantage/

A

when partnership breaks up

each of them might not be entitled to the specific items he contributed

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15
Q

Profits and losses are shared according to

A

profit sharing ratio

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16
Q

The profit sharing ratio is provided in the

A

partnership agreement

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17
Q

If there is no partnership agreement, profts and losses are shared_______ according to the

A

equally

partnership act

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18
Q

What does it mean when a partnership has limited life?

A

it is terminated upon occurrence of certain events

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19
Q

With what events is a partnership terminated?

A

death
retirement
bankruptcy of partners

20
Q

A limited life can be avoided by making

A

a provision in the Partnership Agreement

21
Q

Is a partnership subject to income tax?

22
Q

Although a partnership does not have income tax, Each partner is subjected to

A

personal income tax

23
Q

What is the scale for income tax

24
Q

What are the 2 alternatives for formation of partnerships?

A

Limited Partnership LP

Limited Liability Partnership LLP

25
What does a limited partnership consist of
1 general partner | 1 limited partner
26
What can general partners do?
given right to manage partnership
27
What do general partners have to bear?
unlimited personal liability for the debts of business
28
What can limited partners do?
invest capital
29
What are limited partners not allowed to do?
participate in management of business
30
What do limited partners liable to ?
only their capital contribution | limited liability
31
Who is an LLP made up of?
partners who are all limited partners
32
Limited liability partnerships are used in professions like
lawyers | accountants
33
What is a partnership agreement?
agreement written/oral regarding intentions of partners each partner's rights and duties rules governing the business
34
What does a partnership agreement make provision for/
``` capital to be contributed partner salary interest on capital interest on drawings profit-sharing ratio ```
35
When partnership agreement is silent at some points, what will take precedence
partnership act
36
How does a partnership start?
each partner contributing capital in the form of cash or assets 2 or more sole propretorships/existing partnerships combine to form a larger partnership
37
When sole proprietorship or existing partnership come together, what is also brought into the partnership?
liabilities
38
The capital accounts for each partner are
separate
39
In bringing in existing assets, the partners of the new partnership may
reevaluate some of the assets
40
What are some liabilities an individual can bring in
bank overdraft creditors allowance for impairment loss
41
What is the additional statement for partnerships?
Profit and loss appropriation
42
How is the distributable profit obtained>
net profit+ interest on drawings
43
interest on capital + partner's salaries +share of residual profits represent a partners'
entitlements
44
What is the difference in capital account and current account
capital account shows initial investment, subsequent investment current account shows periodic changes to the partner's interest
45
the balance in the current account shows the partner's
entitlement
46
What are the changes in a partner's current account
interest on drawings interest on capital partner salary