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Chapter 12

Chapter 12. Accounting for Partnerships. Accounting Principles, Ninth Edition. Characteristics of Partnerships. Association of Individuals Legal entity. Accounting entity. Net income not taxed as a separate entity. Mutual Agency

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Chapter 12

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  1. Chapter12 Accounting for Partnerships Accounting Principles, Ninth Edition

  2. Characteristics of Partnerships • Association of Individuals • Legal entity. • Accounting entity. • Net income not taxed as a separate entity. • Mutual Agency • Act of any partner is binding on all other partners, so long as the act appears to be appropriate for the partnership. SO 1 Identify the characteristics of the partnership form of business organization.

  3. Characteristics of Partnerships • Limited Life • Dissolution occurs whenever a partner withdraws or a new partner is admitted. • Dissolution does not mean the business ends. • Unlimited Liability • Each partner is personally and individually liable for all partnership liabilities. SO 1 Identify the characteristics of the partnership form of business organization.

  4. Organizations with Partnership Characteristics • Special forms of business organizations are often used to provide protection from unlimited liability. • Special partnership forms are: • Limited Partnerships, • Limited Liability Partnerships, and • Limited Liability Companies. SO 1 Identify the characteristics of the partnership form of business organization.

  5. Organizations with Partnership Characteristics Regular Partnership • Major Advantages • Simple and inexpensive to create and operate. • Major Disadvantages • Owners (partners) personally liable for business debts. SO 1 Identify the characteristics of the partnership form of business organization.

  6. Organizations with Partnership Characteristics “Ltd.,” or “LP” • Major Advantages • Limited partners have limited personal liability for business debts as long as they do not participate in management. • General partners can raise cash without involving outside investors in management of business. • Major Disadvantages • General partners personally liable for business debts. • More expensive to create than regular partnership. • Suitable for companies that invest in real estate. SO 1 Identify the characteristics of the partnership form of business organization.

  7. Organizations with Partnership Characteristics “LLP” • Major Advantages • Mostly of interest to partners in old-line professions such as law, medicine, and accounting. • Owners (partners) are not personally liable for the malpractice of other partners. • Major Disadvantages • Unlike a limited liability company, partners remain personally liable for many types of obligations owed to business creditors, lenders, and landlords. • Often limited to a short list of professions. SO 1 Identify the characteristics of the partnership form of business organization.

  8. Organizations with Partnership Characteristics “LLC” • Major Advantages • Owners have limited personal liability for business debts even if they participate in management. • Major Disadvantages • More expensive to create than regular partnership. SO 1 Identify the characteristics of the partnership form of business organization.

  9. Partnership Agreement Should specify relationships among the partners: 1. Names and capital contributions of partners. 2. Rights and duties of partners. 3. Basis for sharing net income or net loss. 4. Provision for withdrawals of assets. 5. Procedures for submitting disputes to arbitration. 6. Procedures for the withdrawal or addition of a partner. 7. Rights and duties of surviving partners in the event of a partner’s death. SO 1 Identify the characteristics of the partnership form of business organization.

  10. Forming a Partnership Illustration: Assume that A. Rolfe and T. Shea combine their proprietorships to start a partnership named U.S. Software. Rolfe and Shea have the following assets prior to the formation of the partnership. Illustration 12-3 SO 2 Explain the accounting entries for the formation of a partnership.

  11. Forming a Partnership Illustration: Prepare the entry to record the investment of A. Rolfe. Cash 8,000 Office equipment 4,000 A. Rolfe, Capital 12,000 Prepare the entry to record the investment of T. Shea. Cash 9,000 Accounts receivable 4,000 Allowance for doubtful accounts 1,000 T. Shea, Capital 12,000 SO 2 Explain the accounting entries for the formation of a partnership.

  12. Dividing Net Income or Net Loss Partners equally share net income or net loss unless the partnership contract indicates otherwise. • Closing Entries: • Close all Revenue and Expense accounts to Income Summary. • Close Income Summary to each partner’s Capital account for his or her share of net income or loss. • Close each partners Drawing account to his or her respective Capital account. SO 3 Identify the bases for dividing net income or net loss.

  13. Dividing Net Income or Net Loss Income Ratios • Partnership agreement should specify the basis for sharing net income or net loss. Typical income ratios: • Fixed ratio. • Ratio based on capital balances. • Salaries to partners and remainder on a fixed ratio. • Interest on partners’ capital balances and the remainder on a fixed ratio. • Salaries to partners, interest on partners’ capital, and the remainder on a fixed ratio. SO 3 Identify the bases for dividing net income or net loss.

  14. Division of Net Income$57,000

  15. Closing Entry Income Summary 57,000 Partner #1 Capital 33,000 Partner #2 Capital 24,000

  16. Partnership Financial Statements Illustration 12-8 The balance sheet for a partnership is the same as for a proprietorship except for the owner’s equity section. SO 4 Describe the form and content of partnership financial statements.

  17. Partnership Financial Statements • Partners Capital Statement

  18. Establishing a Partnership Jennifer DeVine and Stanley Farrin decide to organize the ALL-Star partnership. DeVine invests $15,000 cash and Farrin contributes $10,000 cash and equipment that has a book value of $3,500. Prepare the entry to establish a partnership. The equipment has a market value of $5,000.

  19. Sharing the Income/Loss Gist-Bradley Bond Co. reports net income of $70,000. The income ratios are Gist 60% and Bradley 40%. Prepare an entry to distribute net income. BE 12-1, BE 12-2, BE 12-4, BE 12-5, DO IT 12-1, 12-2

  20. Liquidating a Partnership • Sell all the assets. • Pay all liabilities • Distribute any remaining assets • Read 538-539

  21. Liquidating a Partnership BE 12-6, E 12-8, E12-9

  22. Assignments E 12-2 Book Page 557 (Example Page 533) E 12- 4 Book Page 557 (Example Page 536) E 12- 8 Book Page 558 (Example Page 541)

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