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BA 2 > Lecture 11: Accounting for Partnerships > Flashcards

Lecture 11: Accounting for Partnerships Flashcards

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?

A

No

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

A

0% to 20%

24
Q

What are the 2 alternatives for formation of partnerships?

A

Limited Partnership LP

Limited Liability Partnership LLP

25
Q

What does a limited partnership consist of

A

1 general partner

1 limited partner

26
Q

What can general partners do?

A

given right to manage partnership

27
Q

What do general partners have to bear?

A

unlimited personal liability for the debts of business

28
Q

What can limited partners do?

A

invest capital

29
Q

What are limited partners not allowed to do?

A

participate in management of business

30
Q

What do limited partners liable to ?

A

only their capital contribution

limited liability

31
Q

Who is an LLP made up of?

A

partners who are all limited partners

32
Q

Limited liability partnerships are used in professions like

A

lawyers

accountants

33
Q

What is a partnership agreement?

A

agreement written/oral
regarding intentions of partners
each partner’s rights and duties
rules governing the business

34
Q

What does a partnership agreement make provision for/

A 
capital to be contributed
partner salary
interest on capital 
interest on drawings
profit-sharing ratio
35
Q

When partnership agreement is silent at some points, what will take precedence

A

partnership act

36
Q

How does a partnership start?

A

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
Q

When sole proprietorship or existing partnership come together, what is also brought into the partnership?

A

liabilities

38
Q

The capital accounts for each partner are

A

separate

39
Q

In bringing in existing assets, the partners of the new partnership may

A

reevaluate some of the assets

40
Q

What are some liabilities an individual can bring in

A

bank overdraft
creditors
allowance for impairment loss

41
Q

What is the additional statement for partnerships?

A

Profit and loss appropriation

42
Q

How is the distributable profit obtained>

A

net profit+ interest on drawings

43
Q

interest on capital + partner’s salaries +share of residual profits represent a partners’

A

entitlements

44
Q

What is the difference in capital account and current account

A

capital account shows initial investment, subsequent investment

current account shows periodic changes to the partner’s interest

45
Q

the balance in the current account shows the partner’s

A

entitlement

46
Q

What are the changes in a partner’s current account

A

interest on drawings
interest on capital
partner salary

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