Accounting for partnership

بسم الله الرحمن الرحيم

السالم عليكم ورحمة الله

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PartnershipAccounting for

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Fauzi Ilmi

Arifin

Bazari Azhar Azizi

Dian Paisal Putra

Eko Kurniadi

Introduction of us

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• Characteristic• Organizations with partnership• Advantages/disadvantages• Partnership agreement

Partnership Form of

Organization

• Forming a partnership• Dividing net income/loss• Financial statements

Basic Partnership Accounting

Accounting for Partnership

A partnership is an association of two or more

persons to carry on as co-owners of a business for profit.

Type of Business:Small retail, service, or manufacturing companies.Accountants, lawyers, and doctors.

Partnership Form of Organization

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Characteristic of

Partnership

Association of

Individuals

Mutual Agency

Limited Life

Unlimited Liability

Co-Ownership

of Property

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Association of Individuals

The voluntary association of two or more individuals in a partnership may be based on as simple an act as a handshake

It is preferable to state the agreement in writing, so a partnership is a legal entity for certain purpose

A partnership also is an accounting entity for financial reporting purposes, the personal assets is excluded from accounting records for partnership

The net income of a partnership is not taxed as a separate entity

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Mutual Agency

Mutual Agency means that each partner acts

on behalf of the partnership when engaging in

partnership business.

Act of any partner is binding on all other

partners, so long as the act appears to be

appropriate for the partnership.

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Limited Life

It may be ended voluntarily at any time

Dissolution occurs whenever a partner

withdraws or a new partner is admitted

Dissolution does not mean the business ends

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Co-Ownership of Property

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

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Unlimited Liability

Each partner is personally and individually

liable for all partnership liabilities.

Each partner is responsible for all the debts of

the partnership

Each partner is said to have unlimited

liability

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Limited PartnershipLimited Liability

Partnership

Limited Liability Companies

Regular Partnership

Organizations

ORGANIZATIONS WITH PARTNERSHIP CHARACTERISTICS

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Regular Partnership

Major Advantages

Simple and

inexpensive to create

and operate.

Major Disadvantages

Owners (partners)

personally liable for

business debts.

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Limited Partnership (Ltd. Or LP)

Major Advantages

Limited partners have limited personal liability for business debts as long as they do not participate in management.

General partners can raise cash without involving outside investors in management of business.

Major Disadvantages

General partners personally liable for business debts.

More expensive to create than regular partnership.

Suitable for companies that invest in real estate.

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Limited Liability Partnership (LLP)

Major Advantages

Mostly of interest to partners in old-line professions such as law, medicine, and accounting.

Owners (partners) are not personally liable for the malpractice of other partners.

Major Disadvantages

Unlike a limited liability company, partners remain personally liable for many types of obligations owed to business creditors, lenders, and landlords.

Often limited to a short list of professions..

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Limited Liability Company (LLC)

Major Advantages

Owners have limited

personal liability for

business debts even if they

participate in management.

Major Disadvantages

More expensive to create than

regular partnership.

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Advantages for Partnership are:

Combining skill and resources of two or more individual

Ease of formation

Freedom from governmental regulations and restrictions

Ease of decision making

Advantages and Disadvantages

Disadvantages for

Partnership are:

Mutual agency

Limited life

Unlimited liability

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Partnership Agreement

The Partnership Agreement or Articles of Co-partnership:

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 deathBac

k

Forming a

Partnership

Dividing net income/loss

Financial statements

Basic Partnership Accounting

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Partner’s initial investment should be recorded at the fair

market value of the assets at the date of their transfer to the partnership.

E12-2 Fauzi, Ical, and Eko are forming a partnership. Fauzi is transferring $50,000 of cash to the partnership. Ical is transferring land worth $15,000 and a small building worth $80,000. Eko transfers cash of $9,000, accounts receivable of $32,000 and equipment worth $19,000. The partnership expects to collect $29,000 of the accounts receivable.

Instructions: Prepare the journal entries to record each of the partners’ investments.

Forming a Partnership

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E12-2 Fauzi is transferring $50,000 of cash to the partnership. Prepare the entry.


Fauzi, Capital

50,000

Cash 50,000

Ical is transferring land worth $15,000 and a small building worth $80,000. Prepare the entry.

Ical, Capital

95,000

Land 15,000

Building 80,000

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E12-2 Eko transfers cash of $9,000, accounts receivable of $32,000 and equipment worth $19,000. The partnership expects to collect $29,000 of the accounts receivable. Prepare the entry.


Eko, Capital

57,000

Cash 9,000

Accounts receivable 32,000

Equipment 19,000

Allowance for doubtful accounts

3,000Back

Partners equally share net income or net loss unless

the partnership contract indicates otherwise.

Closing Entries:Close all Revenue and Expense accounts to Income Summary.

Close Income Summary to each partner’s Capital account for his or her share of net income or loss.

Close each partners Drawing account to his or her respective Capital account.

Dividing Net Income or Net Loss

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Income Ratios

Partnership agreement should specify the basis for sharing net income or net loss. Typical income ratios:

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.


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Exercise F. Astaire and G. Rogers have capital balances on January 1 of $50,000 and $40,000, respectively. The partnership income-sharing agreement provides for (1) annual salaries of $20,000 for Astaire and $12,000 for Rogers, (2) interest at 10% on beginning capital balances, and (3) remaining income or loss to be shared 60% by Astaire and 40% by Rogers.

Instructions

(a) Prepare a schedule showing the distribution of net income, assuming net income is (1) $55,000 and (2) $30,000.

(b) Journalize the allocation of net income in each of the situations above.


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Exercise Prepare a schedule showing the distribution of net income, assuming net income is (1) $55,000 and (2) $30,000.


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Exercise Journalize the allocation of net income in each of the situations above.

F. Astaire, Capital

33,400

Income summary 55,000(1)

G. Rogers, Capital

21,600

F. Astaire, Capital

18,400

Income summary 30,000(2)

G. Rogers, Capital

11,600Back

Partnership Financial Statements

The income statement for a partnership is identical to the income statement for a proprietorship, except for the division of net income. Back

Partnership Financial Statements

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Thank You

Syukron Katsiron

Terima Kasih

Arigatou Gozaimasu

Danke

Merci

Matur Nuhun

والسالم عليكم ورحمة الله وبركاته

Accounting for partnership

Economy & Finance

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