Fundamentals of Accounting II (PARTNERSHIP)

Accounting for a partnership differs from that of other forms of business organizations with regard to capital accounts. In a partnership, there should be as many capital accounts and as many drawing accounts as there are partners Capital Account DEBIT Permanent withdrawal Share from loss in operations Debit balance of drawing closed to capital CREDIT Original investment Additional investment Share in profits to be closed to capital

Drawing Account DEBIT Temporary withdrawal (in anticipation of profits) Share in loss (but may be directly debited to capital) CREDIT Share in partnership profits from operations (but may be directly credited to partners capital

PARTNERSHIP FORMATION

Partners may contribute cash, property or industry to the partnership. Assets contributed are debited to appropriate asset accounts and partners capital accounts are credited for the total amount of consideration Cash contribution is recorded in the partnership books at face value; Properties or non-cash assets contributions are recorded at agreed values, or in the absence of an agreement, at their fair values less any related liabilities to be assumed by the partnership. When industry is contributed into the partnership, a memorandum entry is prepared
DISTRIBUTION OF PROFITS AND LOSSES 1. 2. Based on partners written agreement as specified in the articles of co-partnership (percentage, decimal, fraction, ratio, etc.) In the absence of pre-determined agreement, P&L is divided according to capital contribution; preferably based on original contribution Payment of interest on partners contributions and salaries will be made regardless of the results of partnership operations, if the agreement includes such payments, it should be treated as part of profit distribution not as an expense. Payment of bonus will depend on the profitability of partnerships operations If the net income is insufficient to cover partners salaries, bonuses and interest allocations, partners should decide how this remainder is to be divided among themselves

PARTNERSHIP DISSOLUTION does not mean the formal termination of a business. It can be recognized as a change in the capital structure of a business as a new unit Causes of dissolution Admission of a new partner (by purchase or by investment) Retirement of a partner Death, incapacity or bankruptcy of a partner Incorporation of a partnership

Admission by purchase The price paid by the incoming partner is not recorded in the partnership books The admission is recorded by merely transferring the interest purchased from the selling/existing partner to the buying/new partner Admission by investment Capital credit equal to capital contribution Capital credit is not equal to capital contribution (bonus method or asset revaluation method) PARTNERSHIP LIQUIDATION is the winding up of business affairs; business operations are completely terminated or ended. Types of liquidation 1. Lump-sum this is the process whereby the non-cash assets are realized at one time; gains and losses that arise are distributed to partners based on P&L ratio; outside creditors are paid and any remaining cash is paid/distributed to remaining good partners 2. Installment this is a process whereby assets are realized on a piecemeal basis and cash is distributed to partners on a periodic basis as it becomes available even before converting all non-cash assets into cash based on (a) safe payment schedule or (b) cash distribution plan Procedures in partnership liquidation 1. Conversion of non-cash assets 2. Distribution of cash to creditors and partners in accordance with the following rank order payment: a. Those owing to creditors b. Those owing to partners with respect to loans/advances c. Those owing to partners with respect to capital d. Those owing to partners with respect to profits