Partnerships
Chapter 12
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1
Objective 1
Identify the characteristics
of a partnership
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2
Partnership
• Association of two or more persons who
co-own a business for a profit
• Combines
– Capital
– Talent
– Experience
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3
Partnership Agreement
• Contract between partners should specify
– Name, location, and nature of business
– Name, investment, and duties of each partner
– How new partners are admitted
– How profits and losses are divided up
– Withdrawals of assets by the partners
– How to settle up with a withdrawing partner
– How to liquidate the partnership
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4
Characteristics of a Partnership
•
•
•
•
•
•
Limited life
Mutual agency
Unlimited liability
Co-ownership of property
No partnership income taxes
Partners’ capital accounts
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5
Types of Partnerships
• General partnership – basic form
• Limited partnership – two classes of
partners
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Limited Liability Company
• Its own form of business organization
– Owners are called members
– Limited liability
– Members can participate in management
– Can elect not to pay business income tax
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S Corporations
• Corporation taxed as a partnership
– Limited liability of owners
– No corporate income tax
– Stockholders pay personal income tax on
their share of income
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8
Objective 2
Account for partner investments
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9
The Partnership Start-Up
• Record assets invested by partners at fair
market values
• Record liabilities assumed at fair market
values
• Each partner has his/her own capital and
withdrawals account
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10
E12-15
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Cash
Accounts Receivable
Furniture
Building
Note Payable
Accounts Payable
N. Fuentes, Capital
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DEBIT
CREDIT
8,000
10,000
1,000
90,000
10,000
3,000
96,000
11
Objective 3
Allocate profits and losses
to the partners
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12
Sharing Profits and Losses
• Stated fraction for each partner
• Based on percent of capital balances of
the partners
• Based on each partner’s service
• Combination
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13
Sharing Profits and Losses
• If no partnership agreement, the law states
earnings will be divided equally
• If agreement specifies how to share
profits, but not losses – losses are shared
the same way as profits
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14
When there is no
written agreement,
partners share profits
losses equally.
Netand
loss
Remember, a debit to
Capital
B.
Fultzdecreases it
E12-16 a
($90,000)
45,000
45,000
J. Hardie
GENERAL JOURNAL
DATE
DESCRIPTION
REF
B. Fultz, Capital
J. Hardie, Capital
Income Summary
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DEBIT
CREDIT
45,000
45,000
90,000
15
E12-16 b
Net income
B. Fultz (40,000/120,000) x 60,000
J. Hardie (80,000/120,000) x 60,000
$60,000
20,000
40,000
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Income Summary
B. Fultz, Capital
J. Hardie, Capital
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DEBIT
CREDIT
60,000
20,000
40,000
16
E12-16 c
Capital Balance
–
Service:
Fultz (30,000
x 40%)
Remainder:
same
as equally
part
b. x 60%)
and
Hardie
(30,000
B. Fultz J. Hardie
Capital Bal.
Service
Remainder
Total
$20,000
12,000
5,000
$37,000
$40,000
18,000
5,000
$63,000
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Net income to
be distributed
$100,000
40,000
10,000
0
17
E12-16 c
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Income Summary
B. Fultz, Capital
J. Hardie, Capital
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DEBIT
CREDIT
100,000
37,000
63,000
18
Partner Drawings
• Reduces capital
• Debit Drawing and credit Cash
• At period end, close drawing to capital
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19
Objective 4
Account for the admission of a
new partner
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Purchasing a Partner’s Interest
• Equity is transferred from retiring partner
to new partner
– Debit retiring partner’s capital
– Credit new partner’s capital
• Partnership assets are not affected
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21
Purchasing A Partner’s Interest
E12-19 a
G. Rose, Capital
C. Novak, Capital
Total
$100,000
50,000
$150,000
GENERAL JOURNAL
DATE
DESCRIPTION
REF
C. Novak, Capital
H. Hollis, Capital
DEBIT
CREDIT
50,000
50,000
Notice, this is an agreement between
two individuals. No new assets are
acquired by the partnership
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22
E12-19 a
Balances:
G. Rose, Capital
H. Hollis, Capital
Total
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$100,000
50,000
$150,000
23
Investing in the Partnership
• New partner contributes assets to the
partnership in exchange for a share of the
business
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24
Investing in the Partnership
at Book Value
• New partner invests assets equal to
his/her interest in the new partnership
– Debit assets
– Credit new partner’s capital
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25
Investing in Partnership at Book Value
E12-19 b
G. Rose, Capital
C. Novak, Capital
Total before admitting
Hollis investment
Total after admitting
$100,000
50,000
$150,000
50,000
$200,000
¼ interest = $50,000
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26
E12-19 b
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Cash
H. Hollis, Capital
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DEBIT
CREDIT
50,000
50,000
27
E12-19 b
Balances
G. Rose, Capital
C. Novak, Capital
Hollis investment
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$100,000
50,000
50,000
$200,000
28
Investing in the Partnership Bonus to the Old Partners
• New partner invests assets greater than
his/her equity in the new partnership
• Bonus increases old partner’s capital in
profit-and-loss sharing ratio
– Debit assets
– Credit new partner’s capital for his/her share
– Credit each old partners’ capital for his/her
share of the bonus
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29
Investing in Partnership Bonus to Existing
Partners
Hollis contributed $90,000. The credit to her
E12-19 c.
capital account is $60,000. The extra
$30,000 is considered a bonus to the existing
Rose,
Capital
$100,000
partners
G.
C. Novak, Capital
Total before admitting
Hollis investment
Total after admitting
50,000
$150,000
90,000
$240,000
¼ interest = $60,000
Bonus of $30,000 paid to existing partners
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E12-19 c
Distribution of bonus:
G. Rose, Capital (30,000 x 1/2)
C. Novak, Capital (30,000 x 1/2)
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$15,000
15,000
31
E12-19 c
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Cash
H. Hollis, Capital
G. Rose, Capital
C. Novak, Capital
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DEBIT
CREDIT
90,000
60,000
15,000
15,000
32
E12-19 c
Balances:
G. Rose, Capital
C. Novak, Capital
Hollis investment
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$115,000
65,000
60,000
$240,000
33
Investing in the Partnership Bonus to New Partners
• New partner invests assets less than
his/her equity in the new partnership
• Bonus decreases old partner’s capital in
profit-and-loss sharing ratio
– Debit assets
– Debit each old partners’ capital for his/her
share of the bonus to the new partner
– Credit new partner’s capital for his/her share
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34
Objective 5
Account for a partner’s withdrawal
from the firm
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Withdrawal of a Partner
• Assets may be revalued
• Any gain or loss is allocated among the
partners based on their profit- and-loss
ratios
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36
Partner Sells Interest to Existing
Partner
• Transfer equity from the withdrawing
partner to the purchaser
• No assets flows through the partnership
• Debit withdrawing partner’s capital
• Credit purchaser’s capital
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37
Withdrawal at Book Value
• Partner takes assets with value equal to
his capital account (equal to book value)
• Debit withdrawing partner’s capital
• Credit assets taken
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38
Withdrawal at
Less Than Book Value
• Remaining partners share the difference
(bonus) based on their profit-and losssharing ratio.
• Debit withdrawing partner’s capital
• Credit assets and remaining partners’
capital
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Withdrawal at
More Than Book Value
• Bonus to the withdrawing partner reduces
the remaining partners’ capital balances
based on their profit-and-loss ratio
• Debit withdrawing partner’s capital
• Debit remaining partners’ capital
• Credit assets
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40
E12-21
Distribute gain on land to partners based on
profit-loss ratio
Sam (32,000 x 4/10)
$12,800
Bob (32,000 x 3/10)
9,600
Tim (32,000 x 3/10)
9,600
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E12-21
GENERAL JOURNAL
DATE
DESCRIPTION
REF
May31 Land
Sam, Capital
Bob, Capital
Tim, Capital
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DEBIT
CREDIT
32,000
12,800
9,600
9,600
42
E12-21
Distribute loss on inventory to partners
based on profit-loss ratio
Sam (12,000 x 4/10)
$4,800
Bob (12,000 x 3/10)
3,600
Tim (12,000 x 3/10)
3,600
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43
E12-21
GENERAL JOURNAL
DATE
DESCRIPTION
REF
May31 Sam, Capital
Bob, Capital
Tim, Capital
Inventory
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DEBIT
CREDIT
4,800
3,600
3,600
12,000
44
E12-21
Sam, Capital
36,000
12,800
4,800
44,000
Bob, Capital
51,000
9,600
3,600
57,000
Tim, Capital
22,000
9,600
3,600
28,000
Sam receives a bonus of $16,000 ($60,000 - $44,000)
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45
E12-21
Distribute bonus to withdrawing partner
based on profit-loss ratio
Bob (16,000 x 3/6)
$8,000
Tim (16,000 x 3/6)
8,000
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46
E12-21
GENERAL JOURNAL
DATE
DESCRIPTION
REF
May31 Sam, Capital
Bob, Capital
Tim, Capital
Cash
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DEBIT
CREDIT
44,000
8,000
8,000
60,000
47
Objective 6
Account for the liquidation of a
partnership
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Death of a Partner
• Dissolves partnership
• Settlement with the deceased partner’s
estate - based on partnership agreement
• Or, a remaining partner may buy the
deceased partner’s equity
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49
Liquidation of a Partnership
• Adjust and close books
• Sell the noncash assets, allocate gains
and losses to the partners based on their
profit-and-loss-sharing ratio
• Pay all the liabilities
• Distribute the remaining cash based on
the partners’ capital balances
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50
E12-24
Sell off the noncash assets
Noncash
Dodd, Gage, Hamm,
Assets Liabilitie Capital Capital Capital
Cash
s
$6,000 $126,000
$77,000 $12,000 $37,000 $6,000
140,000 (126,000)
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Cash
Noncash Assets
Gain on Sale of Assets
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DEBIT
CREDIT
140,000
126,000
14,000
51
Distribute gain based on profit and loss ratio
E12-24
Distribute Gain on Sale of Assets:
Dodd ($14,000 x 20%)
Gage ($14,000 x 30%)
Hamm ($14,000 x 50%)
$2,800
4,200
7,000
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Gain on Sale of Assets
Dodd, Capital
Gage, Capital
Hamm, Capital
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DEBIT
CREDIT
14,000
2,800
4,200
7,000
52
Pay off the liabilities
E12-24
Noncash
Dodd, Gage, Hamm,
Assets Liabilitie Capital Capital Capital
Cash
s
$6,000 $126,000
$77,000 $12,000 $37,000 $6,000
140,000 (126,000)
2,800
4,200
7,000
$146,000
0
$77,000 $14,800 $41,200 $13,000
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Liabilities
Cash
DEBIT
CREDIT
77,000
77,000
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53
Distribute the cash to the partners and close out
their accounts as well
E12-24
Noncash
Dodd, Gage, Hamm,
Assets Liabilitie Capital Capital Capital
Cash
s
$6,000 $126,000
$77,000 $12,000 $37,000 $6,000
140,000 (126,000)
2,800
4,200
7,000
$146,000
0
(77,000)
$69,000
$77,000 $14,800 $41,200 $13,000
(77,000)
0
0 $14,800 $41,200 $13,000
$69,000
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E12-24
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Dodd, Capital
Gage, Capital
Hamm, Capital
Cash
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DEBIT
CREDIT
14,800
41,200
13,000
69,000
55
E12-24
Noncash
Dodd, Gage, Hamm,
Assets Liabilitie Capital Capital Capital
Cash
s
$6,000 $126,000
$77,000 $12,000 $37,000 $6,000
140,000 (126,000)
2,800
4,200
7,000
$146,000
0
(77,000)
$69,000
$77,000 $14,800 $41,200 $13,000
(77,000)
0
0 $14,800 $41,200 $13,000
(69,000)
0
(14,800) (41,200) (13,000)
0
0
0
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0
0
56
E12-22
1. Cash
Ray, capital
Scott, capital
Van, capital
$80,000
$33,000
28,000
19,000
80,000
Each partner receives cash equal to his capital
balance because cash equals total partnership
capital
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57
E12-22
2. Cash
Ray, capital
Scott, capital
Van, capital
Loss
$50,000
$33,000
28,000
19,000
80,000
$30,000
Each partner gets $10,000 ($30,000 / 3)
less than his capital balance
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58
E12-22
2. Ray
Scott
Van
$23,000
18,000
9,000
$50,000
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59
Objective 7
Prepare partnership financial
statements
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60
Financial Statements
• Much like those of a proprietorship
• Income statement - section showing
division of net income to the partners
• Balance sheet - capital of each partner in
owners’ equity section
• Statement of Owners’ Equity shows
changes to each partner’s capital account
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61
S12-13
Bush and Carter
Income Statement
Year Ended September 30, 2007
Service revenue
Total expenses
Net income
Allocation of net income:
To Bush ($60,000  .60)
To Carter ($60,000  .40)
$145,000
85,000
$60,000
$36,000
24,000
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$60,000
62
End of Chapter 12
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63