Chapter 17
Partnerships
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Learning Objective 1
Journalizing the entry for formation of a
partnership
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Partnership
Defined as: “an association of two or
more persons to carry on as co-owners
of a business for profit” by Uniform
Partnership Act
 Examples:

◦ Service businesses
◦ Professional practitioners
◦ Convenience stores
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Formation of Partnerships
Very easy to form
 Two or more people agree
 Agreements can be oral/written
 Should be in writing for legal reasons
 Articles of partnership – written contract
that spells out details of the agreement
among the partners

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Articles of Partnership
Contains:
◦
◦
◦
◦
◦
◦
◦
◦
Name/address of partners, date of agreement
Rights/responsibilities
Amount each partner is investing
Manner partner profits/losses will be shared
Provisions for one or more partners quitting
Admission of new partners
Asset distribution if business is terminated
Maintenance of accounting records
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Characteristics of Partnerships
Limited Life – Partnership is dissolved by
admission, withdrawal, or death of a
partner
 Mutual Agency – Act of a single partner is
binding on all members of the partnership

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Characteristics of Partnerships

Two Types of Partners
◦ General – individually liable to cover the
obligations of the partnership with their
personal assets.
◦ Limited - have liability only up to the amount
they invest in the partnership.
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Characteristics of Partnerships
Unlimited Liability – Partners may be
personally liable for the debts of the
partnership
 Co-ownership of Property – Each partner
owns a share of the assets
 Taxation

◦ Partnership does not pay taxes
◦ Partners pay taxes on their share of net
income
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Formation of Partnerships
Record assets invested by partners at fair
market value
 Each partner has his/her own capital and
withdrawals account
 Try Exercise 17-1

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Exercise 17-1
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Learning Objective 2
Calculating a partner’s share of net
income based on fractional ratio,
beginning capital investment, and salary
and interest allowances
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Division of Net Income/Loss
Salary allowance – mechanism for dividing
earnings of partnership based on personal
services provided by the partners (not an
expense)
 Interest allowance – mechanism for dividing
earning of partnership based on percent of
capital balances of the partners (not an
expense)
 If no partnership agreement, the law states
earnings will be divided equally

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Division of Net Income/LossProblem 17B-1
Situation 1 - Share income equally
$7,600/2 = $3,800
Mia - $3,800
Matt - $3,800
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Division of Net Income/LossProblem 17B-1
Situation 2:
Beginning investment:
Mia
$4,800
Matt
3,200
Total
$8,000
Mia's ratio:
4,800/8,000 = 60%
Matt’s ratio:
3,200/8,000 = 40%
Mia's share of net income = $7,600 x 60% =
Matt’s share of net income = $7,600 x 40% =
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$4,560
$3,040
LO-2
Division of Net Income/LossProblem 17B-1
Situation 3:
Net Income
Salary allowance
Interest
Divide remainder
equally
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$7,600
Matt
$2,480
576
680
$3,736
Matt
$2,800
384
680
$3,864
(5,280)
$2,320
(960)
$1,360
(1,360)
$0
LO-2
Division of Net Income/LossProblem 17B-1(b)
Situation 3:
Net Income
Salary allowance
Interest
Divide remainder
equally
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$5,600
Matt
$2,480
576
(320)
$2,736
Matt
$2,800(5,280)
$320
384 (960)
($640)
(320)
$2,864
640
$0
LO-2
Learning Objective 3
Preparing a statement of partners’ equity
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Partnership Financial Statement
Statement of Partners’ Equity reports
Beginning capital balances
+ Net income allocated to each partner
- Withdrawals by each partner
Ending capital balances
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Partnership Financial Statement
From data in Problem 17B-1(b)
Matt and Mia
Statement of Partners' Equity
For Year Ended December 31, 20XX
Mia
Capital Balances, January 1, 20XX
$
4,800
Add: Net Income for 20XX
2,736
Totals
7,536
Less: Withdrawals
3,000
Capital Balances, December 31, 20XX
$
4,536
Matt
$
3,200
2,864
6,064
2,500
$
3,564
Note: Withdrawal amounts are assumed.
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Learning Objective 4
Journalizing entries to record admitting a
new partner, withdrawal of a partner, and
bonuses to partners
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Admission of a New Partner
Two ways to join a partnership:
 Purchase an equity interest from one or
more of the existing partners
 Make an investment in the business
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Buying an Equity Interest from an
Original Partner
All partners must agree to equity
exchange.
 The old partnership is dissolved and a
new one is created.
 Record transfer of equity amounts to new
partner.

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Investing in an Existing Partnership
New partner invests assets into business.
 Partners sometimes want to have a
certain percentage of interest in a
business.

◦ If two partners have a total equity of $7,000, a
third partner would have to invest $3,500 to
have a one-third interest in the partnership.
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Recording a Bonus
When new partner pays more or less
than equity interest
 If new partner pays more – old partners
share bonus in profit and loss ratio
 If new partner pays less – new partner
receives bonus

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Recording Permanent Withdrawal of
a Partner
Adjust assets to their current fair market
value
 Allocate any over- or under-valued assets
to partners
 Then record withdrawal of partner

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Recording Permanent Withdrawal of
a Partner
When a partner takes assets of less value
than book equity:
 Remaining partners share the capital that
withdrawing partner does not take
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Recording Permanent Withdrawal of
a Partner
When a partner takes assets of greater
value than book equity:
 Increase withdrawing partner’s capital
 Reduce remaining partners’ capital
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Problem 17B-3 (Situation 1)
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Problem 17B-3 (Situation 2)
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Problem 17B-3 (Situation 3)
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Problem 17B-3 (Situation 4)
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Learning Objective 5
Journalizing entries involved in the
liquidation process and preparing a
statement of liquidation
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Liquidation of a Partnership

When the business is completely ended
by converting assets into cash and paying
off obligations and equity
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Liquidation of a Partnership
1. Sell assets, recognize any loss or gain
2. Divide loss or gain among partners
based on profit/loss ratio
3. Pay off creditors
4. Distribute remaining cash to partners
based on their capital balances
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Problem 17B-4 (Situation 1)
Selling assets at a gain:
1. Sell assets, recognize any loss or gain
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Problem 17B-4 (Situation 1)
Selling assets at a gain:
2. Divide loss or gain among partners based
on profit/loss ratio
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Problem 17B-4 (Situation 1)
Selling assets at a gain:
3. Pay off creditors
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Problem 17B-4 (Situation 1)
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Problem 17B-4 (Situation 1)
Selling assets at a gain:
4. Distribute remaining cash to partners based
on their capital balances
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Problem 17B-4 (Situation 2)
Selling assets at a loss:
1. Sell assets, recognize any loss or gain
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Problem 17B-4 (Situation 2)
Selling assets at a loss:
2. Divide loss or gain among partners based
on profit/loss ratio
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Problem 17B-4 (Situation 2)
Selling assets at a loss:
3. Pay off creditors
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Problem 17B-4 (Situation 2)
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Problem 17B-4 (Situation 2)
Selling assets at a loss:
4. Distribute remaining cash to partners based
on their capital balances
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Problem 17B-4 (Situation 3)
1. Sell assets, recognize any loss or gain
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Problem 17B-4 (Situation 3)
2. Divide loss or gain among partners based
on profit/loss ratio
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Problem 17B-4 (Situation 3)
3. Pay off creditors
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Problem 17B-4 (Situation 3)
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Problem 17B-4 (Situation 3)
4. Distribute Jones’ deficit to other partners
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Problem 17B-4 (Situation 3)
5. Distribute remaining cash to partners based
on their capital balances
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End of Chapter 17
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