Chapter 39
Textbook P.569
http://home.sbc.edu.hk/~ykp
CHAPTER 39
ACCOUNTING FOR PARTNERSHIPS
After attending these 2 lessons, you should be able
to:
1 Identify the characteristics of the partnership
form of business organization.
2 Explain the accounting entries for the
formation of a partnership.
3 Explain the accounting entries for dividing net
income or net loss.
4 Describe the form and content of partnership
financial statements.
PREVIEW
ACCOUNTING FOR
PARTNERSHIPS
Partnership Form
of Organization



Final accounts of a
partnership
Characteristics
Advantages/
disadvantages

Forming a
partnership

Dividing net
income/loss
Partnership
agreement

Financial
statements
Accounting for
changes in
partnership



Goodwill for
partnerships
Partnership
dissolution
Admission/
retirement of
partner(s)
Revaluation of
Partnership assets

Gain/loss
attributable to
partners
STUDY OBJECTIVE 1
................................
1 Identify the characteristics of the partnership
form of business organization.
PARTNERSHIP FORM OF
ORGANIZATION
 A partnership is an association of two or
more persons to carry on as co-owners
of a business for a profit.
The principal characteristics of the
partnerships are:
CHARACTERISTICS OF
PARTNERSHIPS
1) Mutual agency
 each partner acts on behalf of the partnership
when engaging in partnership business
 act of any partner is binding on all other
partners

(true even when partners act beyond the scope of their
authority, so long as the act appears to be appropriate
for the partnership)
CHARACTERISTICS OF PARTNERSHIPS
 2) Association of individuals
 may be based on as simple an act as a handshake, it is preferable
to state the agreement in writing
 A partnership
 legal entity for certain purposes (i.e., property can be owned in
the name of the partnership)
 accounting entity for financial reporting purposes
 Net income of a partnership
 not taxed as a separate entity (in USA)
 each partner’s share of income is taxable at personal tax rates
CHARACTERISTICS OF
PARTNERSHIPS
3) Limited life
 Dissolution

whenever a partner withdraws or a new partner is
admitted
 End involuntarily

by death or incapacity of a partner
 End voluntarily

through acceptance of a new partner or withdrawal of a
partner
CHARACTERISTICS OF
PARTNERSHIPS
 4) Unlimited liability
 each partner is personally and individually liable
for all partnership liabilities.
 creditors’ claims attach first to partnership assets
 if insufficient assets

claims then attach to the personal resources of any partner,
irrespective of that partner’s capital equity in the company
CHARACTERISTICS OF PARTNERSHIPS
 5) Co-ownership of assets
 Partnership Assets
 assets invested in the partnership are owned jointly by
all the partners
 Partnership Income or Loss
 co-owned; if the partnership contract does not specify
to the contrary, net income or net loss is shared equally
by the partners
REVIEW: Which of the
following is not a
characteristic of a partnership:
a. The liability for debts is limited to
capital.
b. Co-ownership of property.
c. A partner is able to engage business on
behalf of the partnership.
d. The life of a partnership is limited.
Group work 1
What are the advantages &
disadvantages of a partnership?
 Advantages
 Combining skills & resources (e.g. $/property)of
2 or more individuals
 Ease of formation
 Freedom from governmental regulations & restrictions
 Ease of decision making
Group work 1
What are the advantages &
disadvantages of a partnership?
 Disadvantages
 Mutual agency, other partners are able to make decision
without your permission
 Limited life
 Unlimited liability, the debts of partnership could
become partners’ personal liabilities.
THE PARTNERSHIP
AGREEMENT (P.571)
 The written contract
contains information of the name and principal location of the firm,
the purpose of the business, and the date of inception.
 The following relationships among the partners should be specified:
1 Names and capital contributions of the partners.
2 Rights and duties of partners.
3 Procedures for the withdrawal or addition of a partner.
4 Rate of interests to be paid on partner’s capital.
5 Rate of interests to be charged on partner’s drawings.
6 Salaries to be paid to partners.
7 Ratio for sharing net income/(loss).
Group work 2
 You are planning to run a stall in a Lunar New
Year Bazaar (Flower market) at the Victoria Park
with your group-mates.
 a) Draw up a “Partnership Agreement” between
partners
STUDY OBJECTIVE 2
................................
2 Explain the accounting entries for the formation
of a partnership.
STUDY OBJECTIVE 2
FORMING A PARTNERSHIP
 Initial investment
 recorded at the fair market value of the assets at
the date of their transfer to the partnership
 values assigned must be agreed to by all of the
partners
BOOK AND MARKET VALUE
OF ASSETS INVESTED
Peter and Paul combine their proprietorships to start a
partnership. They have the following assets prior to the
formation of the partnership:
Book Value
Market Value
A.Peter
Rolfe T. Shea
Rolfe T.Paul
Shea
Paul A. Peter
Cash
$ 8,000 $ 9,000 $ 8,000 $ 9,000
Office equipment
5,000
4,000
Accumulated depreciation
( 2,000)
Accounts receivable
4,000
4,000
Allowance for doubtful accounts
( 700)
( 1,000)
$ 11,000 $ 12,300 $ 12,000 $ 12,000
RECORDING INVESTMENTS IN A
PARTNERSHIP
Entries to record the investments are:
Account Titles and Explanation
Investment of Peter
Cash
Office Equipment
Peter, Capital
(To record investment of Peter)
Debit
Credit
8,000
4,000
12,000
Investment of Paul
Cash
Accounts Receivable
Allowance for Doubtful Accounts
Paul, Capital
(To record investment of Paul)
9,000
4,000
1,000
12,000
Group work 2 (continued)
 You are planning to run a stall in a Lunar New
Year Bazaar (Flower market) at the Victoria Park
with your group-mates.
 b) Your partnership has been formed. All of the
partners have paid their capital and deposited cash
into bank, prepare the Balance sheet for your
partnership.
STUDY OBJECTIVE 3
................................
3 Explain the accounting entries for
sharing net income or net loss.
Interest on capital
資本利息(P.572)
 This is a means of compensating partners for funds tied
up in the business that could be earning interest if
invested elsewhere.
 Interest will be treated as a deduction (Dr.) of income
in the “Profit & Loss & Appropriation A/C”.
Work it out:
Peter put $6,000 & Paul put $4,000 into bank as their
capital on 1 Nov 2009, partners are entitled to receive
2% interest on capital per month.
Today is 28 Feb 2010, please record the above
transactions by double entries.
Interest on Capital
The double entries are:
Dr. Bank
Cr. Peter’s Capital
Cr. Paul’s Capital
To record the capital injection
$10,000
$6,000
$4,000
Dr. Profit & loss & Appropriation A/C
$800
Cr. Peter’s Capital ($6,000x 2% x 4mths)
$480
Cr. Paul’s Capital ($4,000x 2% x 4mths)
$320
To record the interests paid to partners
Interest on drawings
提用利息(P.573)
This is a means of discouraging partners from drawing
funds from the company/ partnership.
Interest will be treated as an income (Cr.) in the “Profit
& Loss & Appropriation A/C”.
Work it out:
Peter drew $2,500 & Paul drew $3,000 from bank on
1 Dec 2009, the interest on drawings is charged to
partners at 5% per month.
Today is 28 Feb 2010, please record the above
transactions by double entries.
Interest on drawings
The double entries are:
Dr. Peter’s Capital
Dr. Paul’s Capital
Cr. Bank
To record the capital drawn by partners
$2,500
$3,000
$5,500
Dr. Peter’s Capital ($2,500x5% x 3mths) $375
Dr. Paul’s Capital ($3,000x5% x 3mths) $450
Cr. Profit & loss & Appropriation A/C
$825
To record the interests charged to partners
PARTNERS’ SALARIES
 Salaries to partners and interest on partner’s capital
balances are not expenses of the partnership;
 therefore, these items do not enter into the matching of
expense with revenues and these are deducted after the net
income in the P/L Appropriation A/C.
Work it out:
Peter & Paul are entitled to receive $3,500 & $4,000 as
salaries per month, this agreement is effective from 1 Dec
2009.
Today is 28 Feb 2010, please record the above transactions
by double entries.
PARTNERS’ SALARIES
Dr. Profit & loss & Appropriation A/C $22,500
Cr. Peter’s Capital ($3,500 x 3mths)
$10,500
Cr. Paul’s Capital ($4,000 x 3mths)
To record the salaries paid to partners
$12,000
SHARING NET INCOME /(LOSS)
P.572
 Partnership net income or net loss isshared equally
unless the partnership agreement indicates.
1 A fixed ratio, expressed as a proportion (6:4), a
percentage (60% and 40%), or
a fraction (3/5 and 2/5).
2 A ratio can be based on
capital balances at the beginning of the year
or other equitable method.
INCOME-SHARING RATIOS
Peter and Paul are partners, they
contributed the same amount of capital, but
Peter expects to work full-time and Paul only
part-time, a 2/3, 1/3 ratio may be equitable.
The net income after charging/ paying
interests is $21,000. The double entry is:
Date
Account Titles and Explanation
Dec. 31
Profit & loss & AppropriationA/C- Income
Peter, Capital ($21,000 X 2/3)
Paul, Capital ($21,000 X 1/3)
(To transfer net income to owners’
capital accounts)
Debit
Credit
21,000
14,000
7,000
Group work 2 (continued)
 You are planning to run a stall in a Lunar New
Year Bazaar (Flower market) at the Victoria Park
with your group-mates.
The New Year Bazaar was finished, now it’s time to
calculate & report how much do we earn in the bazaar!
c) Please prepare a “Profit & Loss & Appropriation
Account” for your partnership.
 Review answers on group work
CHARACTERISTICS OF
PARTNERSHIPS
The principal characteristics of the
partnership form of business organization are:
1 Association of individuals
2 Mutual agency
3 Limited life
4 Unlimited liability
5 Co-ownership of property
Partnership Agreement
 Interest on capital
 a means of compensating partners for funds tied up in
the business that could be earning interest if invested
elsewhere.
 Interest on drawings
 a means of discouraging partners from drawing funds
from the company/ partnership.
Interest will be treated as an income (Cr.) in the “Profit &
Loss & Appropriation A/C”.
 Partners’ salaries
 Salaries to partners and interest on partner’s
capital balances are not expenses of the
partnership
 Sharing of profit & loss