Introduction to Partnerships&

Financial Statements and Liquidation of a Partnership

Chapters 27 & 28

Characteristics of a PartnershipPartnership – an association of two or more persons

as co-owners to operate a business for profit.• Ease of Formation • Unlimited Liability • Limited Life• Mutual Agency• Co-ownership of Partnership Property• Advantages and Disadvantages of a Partnership

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• Ease of Formation– No special legal requirements must be met to form a

partnership. – Voluntary Arrangement – Can’t be force into or to stay involved

with a partnership.– Partnership Agreement

• Can be an oral agreement• Advisable to be in writing. Including

– Each partner’s name and address– Name, location, and nature of the partnership– Agreement date and length of time the partnership is to exist– Each partner’s investment– Each partner’s duties, rights, and responsibilities– Amount of withdrawals allowed each partner– Procedure for sharing profits and losses– Procedures to cease the existence of the partnership

• Unlimited Liability – each person is legally liable for the partnership’s debts. Pg 786

• Limited Life – A partnership can end for many reasons:– Partner’s death– Withdrawal– Bankruptcy– Incapacity– Completion of the project– Expiration of time pre set by partners

• Mutual Agency – any partner has the legal right, in the name of the firm, to enter into agreements that are binding on all other partners.

• Co-ownership of Partnership Property – When a partner invests assets in the partnership, he or she gives up all personal rights of ownership.

Pgs 786-787

• Advantages of Partnership– Combines abilities, experiences, and resources of two or more

individuals– Easy to form requiring only a partnership agreement– Decision making without formal meetings– Does not pay federal or state taxes because each partner pays

person income taxes on his/her share of the net income of the business

• Disadvantages of Partnership– Limited Life– Each partner is personally liable for all debts– All partners are held responsible for the decisions of each of the

other partners– A partner cannot transfer his/her share of the business without

the other partners’ consent– Arguments/disagreements could end the business

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Accounting for Partners’ Equity• A separate capital account is set up for each

partner’s investment• A separate withdrawal account is set up for

each partner’s drawingsGill Putman

Cash $12,000

Office Supplies 1,000

Office Equipment 12,000

Building $30,000

Land 15,000

$45,000 $25,000

Pg 787• When assets other than cash are invested in a partnership, the assetaccounts are debited for the market value of the asset.

Initial Investment Transaction

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Any additional investments by the partners are recorded in a similar manner. For example, in April each partner agreed to invest $5000 cash. Cash is debited for $10,000 and the two partners’ capital accounts are credited for $5,000 each

Recording Partner Withdrawals

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Division of Income and Loss

• At the end of each accounting period, the net income or net loss from partnership operations is divided among the partners.

• Partners may divide the income or loss among themselves in any way the choose. The specific method should be defined in the partnership agreement. If it is not, the law provides that net income or net loss be divided equally.

• Ways to divide profit/loss– Equal basis– Fractional share basis– Capital investment basis

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Dividing Profits and Losses Equally

Pg 791

Dividing Income and Losses on a Fractional Share Basis

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Net Income

Net Loss

Dividing Incomes and Losses Based on Capital Investments

Net Income

Net Loss

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• Do Working Papers 27-4 through 27-10

Financial Statements for a Partnership

• It is not required that the division of income or loss be shown on the Income Statement. But if it is, this is how it is done. Pg 808

Statement of Changes in Partnership Equity

Pg 809

The Statement of Changes in Partners’ Equity reports the change in each partner’s capital account resulting from business operations, investments, and withdrawals.

Partnership Balance Sheet

The owners’ equity section of the balance sheet for a partnership is called the Partners’ Equity section. This section lists each partner’s capital account separately. The capital account amounts on the balance sheet are the ending capital amounts from the statement of changes in partners’ equity.

Pg 809

Ending a Partnership• A partnership does not have an unlimited life. • A partnership can be dissolved or liquidated

– Dissolution occurs when the partners change, but the partnership continues operation.• When a new partner is admitted, the partnership dissolves and a new

partnership begins

– Liquidation occurs when the business ceases to exist.• The liquidation sells all partnership assets to cash and pays all partnership

debts. The individual partners then are paid any remaining cash. The process involves 4 steps

1. Sell all noncash assets for cash2. Add all gains (or deduct all losses) resulting from the sale of noncash

assets to or from the capital accounts of the partners based on the partnership agreement

3. Pay all partnership creditors4. Distribute any cash remaining to the partners based on the final balance in

their capital accounts.

Pg 811

The Liquidation Process

• Molly Gill and Don Putman share profits and losses equally and agree to end the partnership baaed on the April 15 balance sheet.

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Sale of Partnership Accounts Receivable at a Loss

• On April 20 Surfside sold its $33,000 in accounts receivable to a finance broker for $29,000. The receivables sale resulted in a $4,000 loss to the partnership.

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Sale of Partnership Merchandise at a Loss

Sale of Partnership Equipment at a Gain

Pg 813

Payments of Partnership Liabilities

Final Distribution of Cash

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