Partnership Flashcards
CHAPTER 13
Advantages of a partnership
- Total capital introduced is higher
- Business risks are shared between more owners
- Different partners bring different skillsets to the business
- If a partner is deceased or retires, the business can continue operating
Disadvantages of partnership
- Decision-making takes a longer time
- Disputes and disagreements may arise about the strategy of the business
- Each partner is jointly and severally liable for the actions of the other partners
Content of a partnership agreement
1) Name of the partnership
2) Type of business activity it carries out
3) Duration of business
4) Capital each partner must introduce
5) Amount of drawing can take out
6) Profit-sharing arrangements :
- Salary
- IOC
- IOD
- IOL0
- PSR (profit-sharing ratio)
7) Business continuity upon partner’s death
8) Plan to solve conflict
What happen when there is no agreement between partners ?
The partners will share profits equally and will not pay salaries or interest on capital
What if a partner with a minimum guaranteed profit share receives less than the guaranteed amount?
The difference is extracted from another partner using their profit-sharing ratio
Example:
A,B,C (2:3:4)
A has guaranteed SOP. The difference will be extracted using B & C ratio.
B will give 3/7 and C will give 4/7
What does debit balance on capital account means
It suggest that the business is not a going concern
Is partnership loan part of the capital invested into the business?
NO
Partnership loan is recognised like any other 3rd party lender as Liabilities.
Double entry:
Dr Bank
Cr Partner’s Loan Liability
Where is Statement of Appropriation of Profit shown?
Shown beneath SOPL and is completed before preparing the Capital section of SOFP
How did you obtain goodwill value ?
Difference between the market value of a business and the value of the net assets in the statement of financial position
4 key elements of a partnership
- Two or more individuals
- Business arrangement (exists to carry on a business)
- Profit motive
- Unincorporated business entity
Unincorporated business entity meaning (Partnership)
- Partners have unlimited liability
- If the partnership cannot pay its liabilities, the partners may be called upon to use their personal assets to settle the partnership’s unpaid liabilities.
BUT
Business entity principle applies to a partnership, so for accounting purposes, the partnership is a separate entity from the partners
Is a partnership agreement mandatory?
YES/NO
NO
What happens if the total of the appropriations is greater than the profit for the year?
The amount to be shared between the partners will be a loss
Dr Current A/C
Cr Appropriation A/C (to nil the balance)
What happens when a new partner joins the partnership?
- The new partner effectively buys the assets of the old partnership from the old partners
- Profit or loss sharing ratio will change
Is salaries paid to partners taxed?
YES
