WILEY
IFRS EDITION
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
F-1
APPENDIX PREVIEW
In this appendix, we discuss reasons why businesses select
the partnership form of organization. We also explain the
major issues in accounting for partnerships.
Financial Accounting
IFRS 3rd Edition
Weygandt ● Kimmel ● Kieso
F-2
APPENDIX
F
Accounting for
Partnerships
LEARNING OBJECTIVES
After studying this chapter, 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. Identify the bases for dividing net income or net loss.
4. Describe the form and content of partnership financial statements.
5. Explain the effects of the entries to record the liquidation of a
partnership.
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Partnership Form of Organization
Partnership: An association of two or
more persons to carry on as co-owners of
a business for profit.
Learning Objective 1
Identify the characteristics
of the partnership form of
business organization.
Type of Business:
F-4

Small retail, service, or manufacturing companies.

Accountants, lawyers, and doctors.
LO 1
Characteristics of Partnerships
ASSOCIATION OF INDIVIDUALS

Legal entity.

Accounting entity.

Net income not taxed as a separate entity.
MUTUAL AGENCY

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Act of any partner is binding on all other partners, so long
as the act appears to be appropriate for the partnership.
LO 1
Characteristics of Partnerships
LIMITED LIFE

Dissolution occurs whenever a partner withdraws or a
new partner is admitted.

Dissolution does not mean the business ends.
UNLIMITED LIABILITY

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Each partner is personally and individually liable for all
partnership liabilities.
LO 1
Characteristics of Partnerships
CO-OWNERSHIP OF PROPERTY
F-7

Each partner has a claim on total assets.

This claim does not attach to specific assets.

All net income or net loss is shared equally by the
partners, unless otherwise stated in the partnership
agreement.
LO 1
Organizations with Partnership
Characteristics
Special partnership forms are:
1. LIMITED PARTNERSHIPS,
2. LIMITED LIABILITY PARTNERSHIPS,
3. LIMITED LIABILITY COMPANIES, and
4. “S” CORPORATIONS.
Illustration F-2
Advantages and disadvantages of a partnership
F-8
LO 1
The Partnership Agreement
Should specify relationships among the partners:
1. Names and capital contributions of partners.
2. Rights and duties of partners.
3. Basis for sharing net income or net loss.
4. Provision for withdrawals of assets.
5. Procedures for submitting disputes to arbitration.
6. Procedures for the withdrawal or addition of a partner.
7. Rights and duties of surviving partners in the event of a
partner’s death.
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LO 1
Basic Partnership Accounting
Forming a Partnership
Learning Objective 2
Explain the accounting entries for
the formation of a partnership.
Illustration: A. Rolfe and T. Shea combine their proprietorships to
start a partnership named U.K. Software. The firm will specialize in
developing financial modeling software packages. Rolfe and Shea
have the following assets prior to the formation of the partnership.
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Illustration F-3
Book and fair values of assets invested
LO 2
Forming a Partnership
Illustration F-3
Book and fair values
of assets invested
Prepare the entry to record the investment of A. Rolfe.
Cash
8,000
Equipment
4,000
A. Rolfe, Capital
F-11
12,000
LO 2
Forming a Partnership
Illustration F-3
Book and fair values
of assets invested
Prepare the entry to record the investment of T. Shea.
Cash
9,000
Accounts Receivable
4,000
Allowance for Doubtful Accounts
T. Shea, Capital
F-12
1,000
12,000
LO 2
Dividing Net Income or Net Loss
Partners equally share net income or net loss
unless the partnership contract indicates otherwise.
CLOSING ENTRIES:
Learning
Objective 3
Identify the bases
for dividing net
income or net loss.
1. Debit each revenue account for its balance, and credit Income
Summary for total revenues. Debit Income Summary for total
expenses, and credit each expense account for its balance.
2. Debit Income Summary for its balance, and credit each partner’s
capital account for his or her share of net income. Or, credit
Income Summary, and debit each partner’s capital account for
his or her share of net loss.
3. Debit each partner’s capital account for the balance in that
partner’s drawing account, and credit each partner’s drawing
account for the same amount.
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LO 3
Dividing Net Income or Net Loss
Illustration: AB Company has net income of £32,000 for 2017. The
partners, L. Arbor and D. Barnett, share net income and net loss
equally. Drawings for the year were Arbor £8,000 and Barnett
£6,000. The last two closing entries are:
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LO 3
Dividing Net Income or Net Loss
Assume that the beginning capital balance is £47,000 for Arbor and
£36,000 for Barnett. The capital and drawing accounts will show
the following after posting the closing entries.
Illustration F-4
Partners’ capital and drawing accounts after closing
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LO 3
Dividing Net Income or Net Loss
INCOME RATIOS
Partnership agreement should specify the basis for sharing net
income or net loss. Typical income ratios:
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
Fixed ratio.

Ratio based on capital balances.

Salaries to partners and remainder on a fixed ratio.

Interest on partners’ capital balances and the remainder on a
fixed ratio.

Salaries to partners, interest on partners’ capital, and the
remainder on a fixed ratio.
LO 3
Dividing Net Income or Net Loss
Illustration: Sara King and Ray Lee are copartners in Kingslee
Company. The partnership agreement provides for (1) salary
allowances of €8,400 to King and €6,000 to Lee, (2) interest
allowances of 10% on capital balances at the beginning of the
year, and (3) dividing the remainder equally. Capital balances on
January 1 were King €28,000, and Lee €24,000. In 2017,
partnership net income is €22,000.
Prepare a schedule showing the distribution of net income.
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LO 3
Dividing Net Income or Net Loss
Illustration F-5
Income statement with division of net income
F-18
LO 3
Dividing Net Income or Net Loss
Journalize the allocation of net income in each of the situations
above.
Dec. 31 Income Summary
Sara King, Capital
Ray Lee, Capital
F-19
22,000
12,400
9,600
LO 3
Dividing Net Income or Net Loss
Illustration: Assume Kingslee’s net income is only €18,000.
Illustration F-6
Division of net income—income deficiency
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LO 3
Partnership Financial Statements
Learning Objective 4
Describe the form and
content of partnership
financial statements.
Illustration F-7
Partners’ capital statement
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LO 4
Partnership Financial Statements
Illustration F-8
Equity section of a
partnership statement
of financial position
The income statement for a partnership is identical to the income
statement for a proprietorship, except for the division of net
income.
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LO 4
Liquidation of a Partnership
Ends both the legal and economic life
of the entity.
Learning Objective 5
Explain the effects of the entries
to record the liquidation of a
partnership.
In liquidation, sale of non-cash assets for cash is called
realization. To liquidate, it is necessary to:
1. Sell non-cash assets for cash and recognize a gain or loss on
realization.
2. Allocate gain/loss on realization to the partners based on their
income ratios.
3. Pay partnership liabilities in cash.
4. Distribute remaining cash to partners on the basis of their
capital balances.
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LO 5
Liquidation of a Partnership
Illustration: Ace Company is liquidated when its ledger shows the
assets, liabilities, and equity accounts are reported as follows:
Illustration F-9
Account balances prior to liquidation
F-24
LO 5
Liquidation of a Partnership
No Capital
Deficiency
Illustration: Ace Company agree to liquidate the partnership on the
following terms. (1) The non-cash assets of the partnership will be
sold to Jackson Enterprises for €75,000 cash. (2) The partnership
will pay its partnership liabilities. The income ratios of the partners
are 3:2:1, respectively.
Step 1 - Record the realization of noncash assets.
Cash
Accumulated Depreciation—Equipment
Accounts Receivable
Inventory
Equipment
Gain on Realization
F-25
75,000
8,000
15,000
18,000
35,000
15,000
LO 5
Liquidation of a Partnership
No Capital
Deficiency
Illustration: Ace Company agree to liquidate the partnership on the
following terms. (1) The non-cash assets of the partnership will be
sold to Jackson Enterprises for €75,000 cash. (2) The partnership
will pay its partnership liabilities. The income ratios of the partners
are 3:2:1, respectively.
Step 2 – Allocate the gain to the partners.
Gain on Realization
R. Arnet, Capital (€15,000 x 3/6)
P. Carey, Capital (€15,000 x 2/6)
W. Eaton, Capital (€15,000 x 1/6)
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15,000
7,500
5,000
2,500
LO 5
Liquidation of a Partnership
No Capital
Deficiency
Illustration: Ace Company agree to liquidate the partnership on the
following terms. (1) The non-cash assets of the partnership will be
sold to Jackson Enterprises for €75,000 cash. (2) The partnership
will pay its partnership liabilities. The income ratios of the partners
are 3:2:1, respectively.
Step 3 – Creditors are paid in full.
Notes Payable
Accounts Payable
Cash
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15,000
16,000
31,000
LO 5
Liquidation of a Partnership
No Capital
Deficiency
Step 4 – Record distribution of cash to the partners.
Illustration F-10
Ledger balances before
distribution of cash
R. Arnet, Capital
22,500
P. Carey, Capital
22,800
W. Eaton, Capital
3,700
Cash
49,000
Caution: Cash should not be distributed to partners on the basis of
their income-sharing ratios.
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LO 5
Liquidation of a Partnership
No Capital
Deficiency
Some accountants prepare a SCHEDULE OF CASH PAYMENTS
to determine the distribution of cash to the partners.
Illustration F-11
Schedule of cash payments, no capital deficiency
F-29
LO 5
Liquidation of a Partnership
Capital
Deficiency
Illustration: Ace Company is on the brink of bankruptcy. The
partners decide to liquidate by having a “going-out-of-business”
sale. Merchandise is sold at substantial discounts, and the
equipment is sold at auction. Cash proceeds from these sales and
collections from customers total only €42,000.
Step 1 - Record the realization of non-cash assets.
Cash
Accumulated Depreciation—Equipment
Loss on Realization
Accounts Receivable
Inventory
Equipment
F-30
42,000
8,000
18,000
15,000
18,000
35,000
LO 5
Liquidation of a Partnership
Capital
Deficiency
Illustration: Ace Company is on the brink of bankruptcy. The
partners decide to liquidate by having a “going-out-of-business”
sale. Merchandise is sold at substantial discounts, and the
equipment is sold at auction. Cash proceeds from these sales and
collections from customers total only €42,000.
Step 2 – Allocate the loss to the partners.
R. Arnet, Capital (€18,000 x 3/6)
P. Carey, Capital (€18,000 x 2/6)
W. Eaton, Capital (€18,000 x 1/6)
Loss on Realization
F-31
9,000
6,000
3,000
18,000
LO 5
Liquidation of a Partnership
Capital
Deficiency
Illustration: Ace Company is on the brink of bankruptcy. The
partners decide to liquidate by having a “going-out-of-business”
sale. Merchandise is sold at substantial discounts, and the
equipment is sold at auction. Cash proceeds from these sales and
collections from customers total only €42,000.
Step 3 – Creditors are paid in full.
Notes Payable
Accounts Payable
Cash
F-32
15,000
16,000
31,000
LO 5
Liquidation of a Partnership
Capital
Deficiency
Step 4 – Record distribution of cash to the partners.
The distribution of cash to the partners will vary
depending on how Eaton’s deficiency is settled.
Illustration F-12
Ledger balances before
distribution of cash
Deficiency
PAYMENT OF DEFICIENCY
Cash
W. Eaton, Capital
F-33
1,800
1,800
LO 5
Liquidation of a Partnership
Capital
Deficiency
PAYMENT OF DEFICIENCY
Step 4 – Record distribution of cash to the partners.
R. Arnet, Capital
6,000
P. Carey, Capital
11,800
Cash
F-34
Illustration F-13
Ledger balances after
paying capital deficiency
17,800
LO 5
Liquidation of a Partnership
Capital
Deficiency
Step 4 – Record distribution of cash to the partners.
The distribution of cash to the partners will vary
depending on how Eaton’s deficiency is settled.
Illustration F-12
Ledger balances before
distribution of cash
Deficiency
NON-PAYMENT OF DEFICIENCY
R. Arnet, Capital (€1,800 x 3/5)
P. Carey, Capital (€1,800 x 2/5)
W. Eaton, Capital
F-35
1,080
720
1,800
LO 5
Liquidation of a Partnership
Capital
Deficiency
NON-PAYMENT OF DEFICIENCY
Step 4 – Record distribution of cash to the partners.
R. Arnet, Capital
4,920
P. Carey, Capital
11,080
Cash
F-36
Illustration F-14
Ledger balances after
nonpayment of capital
deficiency
16,000
LO 5
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