Chapter 10
Accounting for Partnership
合伙企业会计
Organizing a Partnership
Partners can invest both assets and liabilities in the
partnership.
Assets and liabilities are recorded at an agreedupon value, normally fair market value.
Contributions increase the partner’s capital
account. (additional investment)
Withdrawals decrease the partner’s
capital account.
Organizing a Partnership
Drawing
Cash or other assets withdrawn by a partner
Payments from partnership funds of the personal debt
Collections on behalf of the firm by a partner but
retained by the partner personally
Choosing a Business Form
Proprietorship Partnership LLP
Business entity
yes
yes
yes
Legal entity
no
no
no
Limited liability
no
no
limited*
Business taxed
no
no
no
One owner allowed
yes
no
no
LLC
yes
yes
yes
no
yes
S Corp. Corporation
yes
yes
yes
yes
yes
yes
no
yes
yes
yes
*A partner's personal liability for LLP debts is limited. Most LLPs carry insurance to protect against
malpractice.
Many factors should
be considered when
choosing the proper
business form.
Dividing Income or Loss
• In the absence of an agreement, the
Uniform Partnership Act says that the
income or loss is shared equally by
the partners.
• Four frequently used methods to
divide income or loss are:
– A stated ratio
– Salary allowances to the partners, with
the remaining net income or loss divided in
a fixed ratio
– Interest allowances on partners’ capital
balance the partners, wit the remaining net Let’s look at each
of these
income or loss divided in a fixed ratio
methods!
– Salary and interest allowances and any
remainder in a fixed ratio.
Allocation on Stated Ratios
Greene and Red agree to a three-fourths,
one-fourth allocation of partnership income
and loss, respectively. For 2002, net
income is $60,000.
GENERAL JOURNAL
Date
Description
Page 34
PR
Debit
Prepare the closing entry for Income
Summary that will allocate the income to the
partners based on their agreement.
Credit
Allocation on Stated Ratios
Greene and Red agree to a three-fourths, one-fourth
allocation of partnership income and loss, respectively.
For 2002, net income is $60,000.
GENERAL JOURNAL
Date
Description
Income Summary
Page 34
PR
Debit
60,000
Greene, Capital
Redd, Capital
Credit
45,000
Greene: $60,000 (3/4) = $45,000
Redd: $60,000 (1/4) = $15,000
15,000
Salaries to Partners, remainder in a
fixed ratio
Greene receives $15,000 and Red receives
$10,000 as annual salaries. Any remaining
balance of income or loss is allocated equally.
Net income for 2002 is $60,000.
GENERAL JOURNAL
Date
Description
Page 34
PR
Debit
Prepare the closing entry for Income
Summary that will allocate the income to the
partners based on their agreement.
Credit
Allocation on Services and
Stated Ratios
Greene
Net income
Salaries
Remainder
Equal allocation of remainder
Balance of net income
Income of each partner
$
15,000 $
17,500
$
32,500 $
Redd
Total
$ 60,000
10,000
25,000
35,000
17,500
35,000
$
27,500
If the allowances exceed net income, the deficit
would be allocated equally, just as the excess is
in the example above.
Allocation on Services and
Stated Ratios
Greene
Net income
Salaries
Remainder
Equal allocation of remainder
Balance of net income
Income of each partner
$
15,000 $
(2,500)
$
12,500 $
Redd
Total
$
20,000
10,000
25,000
(5,000)
(2,500)
(5,000)
$
7,500
If the net income is 20000, the deficit would be
allocated equally, just as the excess is in the
example above.
Salaries to Partners, remainder in a
fixed ratio
Greene receives $15,000 and Red receives
$10,000 as annual salaries. Any remaining
balance of income or loss is allocated equally.
Net income for 2002 is $60,000.
GENERAL JOURNAL
Date
Description
Income summary
Page 34
PR
Debit
Credit
60,000
Creene capital
32,500
Red receivable
27,500
Interest to Partners, remainder in a
fixed ratio
Each partner is allowed an annual interest allowance of 5% on
the beginning-of-year capital balance ,Any remaining balance
of income or loss is allocated equally. Green’s capital balance
is $80,000 and Red’s capital balance is $40,000 .Net income
for 2002 is $60,000.
GENERAL JOURNAL
Date
Description
Page 34
PR
Debit
Prepare the closing entry for Income
Summary that will allocate the income to the
partners based on their agreement.
Credit
Allocation on interest and
Stated Ratios
Greene
Net income
Interest
Remainder
Equal allocation of remainder
Balance of net income
Income of each partner
4,000
(33,000)
$
(29,000) $
Greene: $80,000 *5% = $4,000
Redd: $40,000 *5% = $2,000
Redd
Total
$ (60,000)
2,000
6,000
(66,000)
(33,000)
(66,000)
$
(31,000)
Interest to Partners, remainder in a
fixed ratio
Each partner is allowed an annual interest allowance of 5% on the
beginning-of-year capital balance. Any remaining balance of
income or loss is allocated equally. Green’s beginning capital
balance is $80,000 and Red’s beginning capital balance is
$40,000 .Net income for 2002 is $60,000
GENERAL JOURNAL
Date
Description
Income Summary
Page 34
PR
Debit
Credit
60,000
Greene, Capital
31,000
Red, Capital
29,000
Allocation on Salary and Interest
allowances, Stated Ratios
Greene and Red’s partnership agreement contains the
following information:
• Greene receives $15,000 and Red receives $10,000 as
annual salaries.
• Each partner is allowed an annual interest allowance
of 5% on the beginning-of-year capital balance.
Green’s beginning capital balance is $80,000 and
Red’s beginning capital balance is $40,000 .
• Any remaining balance of income or loss is allocated
equally.
Net income for 2002 is $60,000.
What amount of the net income will be allocated to each
partner based on their agreement?
Allocation on Salary and Interest
allowances, Stated Ratios
Greene
Net income
Salaries
Interest
Remainder
Equal allocation of remainder
Balance of net income
Income of each partner
$
15,000 $
4,000
14,500
$
33,500 $
Redd
Total
$
60,000
10,000
25,000
2,000
6,000
29,000
14,500
29,000
$
26,500
If the allowances exceed net income, the deficit
would be allocated equally, just as the excess is
in the example above.
Allocation on Salary and Interest
allowances, Stated Ratios
Greene
Net income
Salaries
Interest
Remainder
Equal allocation of remainder
Balance of net income
Income of each partner
$
15,000 $
4,000
(500)
$
18,500 $
Redd
Total
$
30,000
10,000
25,000
2,000
6,000
(1,000)
(500)
(1,000)
$
11,500
If the net income is 30,000, the deficit would be
allocated equally, just as the excess is in the
example above.
Allocation on Salary, interest
Allowances and Stated Ratios
Greene
Net income
Salaries
Interest
Remainder
Equal allocation of remainder
Balance of net income
Income of each partner
$
15,000 $
4,000
(45,500)
$
(26,500) $
Redd
Total
$ (60,000)
10,000
25,000
2,000
6,000
(91,000)
(45,500)
(91,000)
$
(33,500)
If there is a net loss 60,000
Partnership Financial Statements
Although most partnership financial statements are very
similar to those of a proprietorship, the Statement of
Changes in Partners’ Equity is one exception.
Greene and Redd Partnership
Statement of Changes in Partners' Equity
For the Year Ended December 31, 2002
Greene
Redd
Beginning capital balances
$
$
Investments by owners
80,000
Net income
Salary allowances
$ 15,000
$ 10,000
Interest allowances
4,000
2,000
Balance allocated
14,500
14,500
Total net income
33,500
Less partners' withdrawals
(5,000)
Ending capital balances
$ 108,500
$
Total
$
40,000
120,000
26,500
(1,000)
65,500
60,000
(6,000)
174,000
Assignments :p256 problem 4
P237 Problem 3