McGraw-Hill/Irwin
1-1
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
19-1
Chapter
19
Accounting
for Partnerships
Section 1: Forming a
Partnership
Section Objectives
1.
Explain the major advantages and disadvantages
of a partnership.
2.
State the important provisions that should be
included in every partnership agreement.
3.
Account for the formation of a partnership.
19-2
Objective 1
Explain the major advantages and
disadvantages of a partnership
Advantages of a Partnership

It pools the skills, abilities, and financial
resources of two or more individuals.

It is easy and inexpensive to form.

A partnership does not pay income tax.
Each partner is taxed individually on his or her
share of the partnership’s income
19-3
Disadvantages of a Partnership

Each partner has unlimited liability.

The partnership is a mutual agency.

The business lacks continuity. It has a limited
life.

Ownership rights are not freely transferable.
19-4
Every partnership agreement should
contain:

Names of the partners.
 Name, location, and nature of the business.
 Starting date of the agreement.
 Life of the partnership.
 Rights and duties of each partner.
19-5
Every partnership agreement should
contain:

Amount of capital to be contributed by each
partner

Drawings (withdrawals) by the partners.
Fiscal year and accounting method.
Method of allocating income or loss to the
partners.
Procedures to be followed if the partnership is
dissolved or the business is liquidated.



19-6
Objective 3
Account for the formation of a
partnership

Memorandum entry to record formation of
partnership.

Investment of assets and liabilities by partners.

Setting up partners’ capital accounts.

Setting up partners’ drawing accounts.

Subsequent investments and permanent
withdrawals.
19-7
Chapter
19
Accounting
for Partnerships
Section 2: Allocating
Income or Loss
Section Objectives
4.
Compute and record the division of net
income or net loss between partners in
accordance with the partnership agreement.
5.
Prepare a statement of partners’ equities.
19-8
Objective 4
Compute and record the division of net income or net loss
between partners in accordance with the partnership
agreement
Allocating Partnership Income or
Loss
Step 1.
Close revenue to Income Summary.
Step 2.
Close expenses to Income Summary.
Step 3.
Close Income Summary to the partners’
capital accounts.
Step 4.
Close each partner’s drawing account
to the partner’s capital account.
In step 3 the business determines the distributive
share for each partner.
19-9
Allocation of Partnership Income
or Loss

Based on the partnership agreement.

Allocated equally to each partner if the
partnership agreement is “silent.”

Income distribution does not mean cash
distribution.
19-10
Capital Account Balances
Net Income X partner’s share
percentage:
Net Income $100,000
Barret
$100,000 x 65.517% = $65,517
Reed
$100,000 x 34.483% = $34,483
19-11
Salary and Interest Allowances
 Allowances
for partners’ salaries and interest on
their investments can be included in the
allocation of net income or loss.
 Allowances
are debited to the Income Summary
account and credited to the partners’ capital
accounts.

The remaining net income or loss is then
allocated in the proper ratio.
19-12
Salary Allowances
Salary allowances are intended to reward the
partners for the time they spend in the
business and for the expertise and talents they
bring to it.
Salary allowances are withdrawals
Salary allowances do not represent salary
expense
19-13
Objective 5
Prepare a statement of partners’
equities
Partnership Financial Statements
Income Statement
Balance Sheet
 Same as that for a sole
proprietorship.
 Same as that for a sole
proprietorship.
 One exception—on the
bottom of the
statement, the division
of net income is shown
between the partners.
 One exception—there
exists a separate
capital account for
each of the partners in
Partner’s Equity
section.
19-14
Statement of Partners’ Equities
OLD ARMY
Statement of Partners’ Equities
Year Ended December 31, 2013
Capital Balances, Jan. 1, 2013
Investment During Year
Net Income (Loss) for Year
Totals
Less Withdrawals During Year
Capital Balances, Dec. 31, 2013
Barret
Capital
Reed
Capital
0.00
53,200.00
6,308.00
59,508.00
30,000.00
29,508.00
0.00
28,000.00
(2,908.00)
25,092.00
22,800.00
2,292.00
Total
Capital
0.00
81,200.00
3,400.00
84,600.00
52,800.00
31,800.00
Each partner’s salary is treated as a withdrawal on the statement
19-15
Chapter
19
Accounting
for Partnerships
Section 3: Partnership
Changes
Section Objectives
6.
7.
8.
9.
Account for the revaluation of assets and
liabilities prior to the dissolution of a partnership.
Account for the sale of a partnership interest.
Account for the investment of a new partner in an
existing partnership.
Account for the withdrawal of a partner from a
partnership.
19-16
Objective 6 Account for the revaluation of assets
and liabilities prior to the dissolution
of a partnership
Dissolution
Step 1

Accounting records are closed.

Net income or net loss on the date of
dissolution is recorded and transferred to
the partners’ capital accounts.

Assets and liabilities are revalued at fair
market value.
Step 2
19-17
Asset Revaluation

When transferred from one partnership to
another, assets are revalued to their fair
market value.

The new value will not necessarily agree with
the book value carried by the old firm.

The revaluation of assets affects the balance
sheet only.
19-18
Objective 7
Account for the sale of a
partnership interest
Admission of a New Partner
There are two ways a new
partner may be admitted to the
partnership:

By purchasing all or part of the
interest of an existing partner and
paying that partner directly.

By investing cash or other
assets directly in the existing
partnership.
19-19
Objective 9
Account for the withdrawal of a
partner from a partnership
When a partner withdraws, the payment given to
the withdrawing partner may be more or less than
the withdrawing partner’s capital balance.
The difference in the cash payment and the
withdrawing partner’s capital account is debited or
credited to the remaining partners according to
their profit-and-loss ratio.
19-20
Withdrawing Partner’s
Capital Account

If the amount paid is higher than the withdrawing
partner’s capital account balance, the excess is
debited to the capital accounts of the remaining
partners according to their income and loss ratio.

If the amount paid is less than the withdrawing
partner’s capital account balance, the difference is
credited to the remaining partners’ capital accounts
based on their income and loss ratio.
19-21