Partnerships Flashcards
Advantages of Partnerships
New capital to fund growth
Partners bring new skills and ideas
Shared workload, double the work, increased profit.
Disadvantages of Partnerships
Difficult to find a partner with enough capital and skills required
Shared profits at the start
Each partner is legally responsible for decisions made by each other.
Garner V Murray
Remaining solvent partners are responsible for insolvent partners DR balance, in the ratio of their last agreed capitals.
What is in the Capital Account?
Deliberate injections of capital (Capital introduced)
Adjustments of structural nature (Goodwill).
Order liabilities are settled in Partnership Dissolutions
1) Creditors
2) Loans
3 Partners capital accounts
Dissolution Process
Close NCA by transferring balances to Realisation
Realise (sell) the Assets.
(TR and TP never go in, only discounts)
Balance to partners fixed capital accounts.
Fluctuating Capital VS Split Capital + Current Accounts Advantages
Fluctuating Capital is less work as they only have to keep one account up to date.
Fluctuating Capital VS Split Capital + Current Accounts Disadvantages
Harder to see if a partner is drawing out more money than they are earning,
Always big numbers to deal with when there is no need for them,
We only want to see Capital Introduced and goodwill so this would clutter up the capital account.
Structural changes in the Appropriation Account
A Partner Retiring
Admitting a new partner
Retiring a Partner
Dr Captial + CR Bank
Other ways to do this are a partner loan account (if the company is going to fall in liquidity problems).
Admitting a new Partner
Dr Bank (with partners new capital) + Cr Capital.
Reason for Revaluation
We don’t want new partners owning some of the NCA that have risen in value. They need to own the right amount of it depending on their capital.
Reason for Goodwill
Current partners want a new partner to pay for the companies goodwill as in their eyes it is worth a lot and their reason for success.
Goodwill is not on the Balance Sheet so net assets may be undervalued.
How to deal with Goodwill
Revalue and transfer the value to the revaluation account,
Adjust capital account using old ratio,
Make change,
Write off goodwill will new ratio.
