Lecture 11: Accounting for Partnerships Flashcards
What is a partnership?
Relation which exists between persons
Carrying on a business with a common view to profits
What is the principle that supports the partnership?
Partnership act
What is the minimum number of a partnership?
2
What is the max number of a partnership?
20
What are the advantages of a partnership?
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)
What are the disadvantages of a partnership?
Unlimited liability of partners
Mutual agency
Co ownership of partnership property
What does unlimited liability mean?
In event of insolvency, personal assets may be taken to clear debts in partnership
How is a partnership formed?
Agreement made orally
Writing
Combining the capital talent and experience of 2 or more people is very
Convenient
Inexpensive
Why is there an agency in ‘mutual agency’
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
Why is mutual agency a disadvantage?
The act may be negligent or wrongful
What does it mean when there is co-ownership of property?
Each partner is a co-owner of it
Why is co-ownership of property an advantage?
More resources can be pooled
Why is co-ownership of property an disadvantage/
when partnership breaks up
each of them might not be entitled to the specific items he contributed
Profits and losses are shared according to
profit sharing ratio
The profit sharing ratio is provided in the
partnership agreement
If there is no partnership agreement, profts and losses are shared_______ according to the
equally
partnership act
What does it mean when a partnership has limited life?
it is terminated upon occurrence of certain events
With what events is a partnership terminated?
death
retirement
bankruptcy of partners
A limited life can be avoided by making
a provision in the Partnership Agreement
Is a partnership subject to income tax?
No
Although a partnership does not have income tax, Each partner is subjected to
personal income tax
What is the scale for income tax
0% to 20%
What are the 2 alternatives for formation of partnerships?
Limited Partnership LP
Limited Liability Partnership LLP
What does a limited partnership consist of
1 general partner
1 limited partner
What can general partners do?
given right to manage partnership
What do general partners have to bear?
unlimited personal liability for the debts of business
What can limited partners do?
invest capital
What are limited partners not allowed to do?
participate in management of business
What do limited partners liable to ?
only their capital contribution
limited liability
Who is an LLP made up of?
partners who are all limited partners
Limited liability partnerships are used in professions like
lawyers
accountants
What is a partnership agreement?
agreement written/oral
regarding intentions of partners
each partner’s rights and duties
rules governing the business
What does a partnership agreement make provision for/
capital to be contributed partner salary interest on capital interest on drawings profit-sharing ratio
When partnership agreement is silent at some points, what will take precedence
partnership act
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
When sole proprietorship or existing partnership come together, what is also brought into the partnership?
liabilities
The capital accounts for each partner are
separate
In bringing in existing assets, the partners of the new partnership may
reevaluate some of the assets
What are some liabilities an individual can bring in
bank overdraft
creditors
allowance for impairment loss
What is the additional statement for partnerships?
Profit and loss appropriation
How is the distributable profit obtained>
net profit+ interest on drawings
interest on capital + partner’s salaries +share of residual profits represent a partners’
entitlements
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
the balance in the current account shows the partner’s
entitlement
What are the changes in a partner’s current account
interest on drawings
interest on capital
partner salary
