JOIN KHALID AZIZCOACHING CLASSESICMAP STAGE 1,2,3,4,5ICAP MODULE A,B,C,DPIPFABBA & MBAB.COM & M.COMACCOUNTING OF O/A LEVELMA-ECONOMICS0322-3385752KARACHI, PAKISTAN.

Learning Objectives

1. Define a partnership and the major attributes of a partnership

2. State the advantages and main characteristics of the partnership structure of business

3. Explain the purpose of a partnership agreement and describe its typical contents

4. Describe the special features applicable to accounting for partnerships

Learning Objectives (cont’d)

5. Explain the accounting entries for the formation of a partnership

6. Explain the accounting entries for the allocation of profits and losses of a partnership

7. Explain the accounting entries for drawings and advances or loans made by partners

8. Describe content of the financial statements of a partnership

Partnership Defined

Partnership Act:– the relationship that ‘subsists between persons

carrying on a business in common, with a view to profit’

Necessary attributes– Must be an agreement– View to earning a profit– Co-ownership of the business

Advantages

Pooling of resources Low cost

– Formed at little or no cost– Subject to little regulation– Not required to publish financial statements

Taxation

A partnership combines

of the partners

CAPITAL

TALENT EXPERIENCE

Characteristics

Mutual Agency– Each partner:

Acts as agent for the partnershipHas authority to act on behalf of the partnership

Unlimited liability– Each partner personally responsible for all the debts

of the business– No limit to liability– Personal assets are exposed– Unattractive to wealthy individuals

Characteristics (cont’d)

Limited life– Ended if member dies, withdraws or retires, or

becomes incapacitated– Ended on the admission of a new member– Ended via bankruptcy– Ended if formation purpose is over

Transfer of partnership interest– Capital interest is personal asset

Partnership Agreement

Agreement covers:– Name, location and nature– Name, investment and duties of each partner– Sharing of profits and losses– Administrative details– Withdrawals (drawings)– Dispute resolution– Admission/withdrawal of partners– Partnership liquidation

Accounting for a Partnership

Formation Drawings Distribution of profits Change in partnership members Liquidation

Accounting for a Partnership (cont’d)

Method 1: Capital accounts which include profits and losses– Capital a/c credited with investments– Drawings a/c debited with withdrawal of assets

or personal expenses– Drawings a/c closed to capital – P&L summary closed to profit distribution and

allocated to capital a/c’s

Accounting for a Partnership (cont’d)

Method 2: Fixed capital accounts– Capital a/c credited with investments and

debited with withdrawals of capital– Drawings a/c debited with withdrawal of assets

or personal expenses– Drawings a/c closed to retained profits– P&L summary closed to profit distribution and

allocated to retained profits a/c’s

Formation of a Partnership

Formation – Investment of both assets and liabilities

Contributions– Recorded as for sole traderDate Assets XXXX

Liabilities XXXPartner’s Capital XXX

being initial investment by partner

Date Assets XXXXLiabilities XXXPartner’s Capital XXX

being initial investment by partner

Allocation of Partnership Profits and Losses

Consider for each partner:– services performed– capital invested– business risk assumed

Common methods– fixed ratio– fixed ratio based on capital balances– fixed ratio allowing for interest and salary

Allocation of Partnership Profits and Losses (cont’d)

Allocation entry — Method 1:

June 30 P & L Summary XXXProfit Distribution XXX

transfer of profit to distribution account

June 30 P & L Summary XXXProfit Distribution XXX

transfer of profit to distribution account

June 30 Profit Distribution XXXPartner A, Capital XXPartner B, Capital XX

distribution of profit to partners

June 30 Profit Distribution XXXPartner A, Capital XXPartner B, Capital XX

distribution of profit to partners

Allocation of Partnership Profits and Losses (cont’d)

Allocation entry — Method 2:June 30 P & L Summary XXX

Profit Distribution XXXtransfer of profit to distribution account

June 30 P & L Summary XXXProfit Distribution XXX

transfer of profit to distribution account

June 30 Profit Distribution XXXPartner A, Retained Earnings XXPartner B, Retained Earnings XX

distribution of profit to partners

June 30 Profit Distribution XXXPartner A, Retained Earnings XXPartner B, Retained Earnings XX

distribution of profit to partners

Allocation of Partnership Profits and Losses (cont’d)

Fixed ratio– split based as stated e.g. 7:3, say profit of $60 000

June 30 P & L Summary $60 000Profit Distribution $60 000

transfer of profit to distribution account

June 30 P & L Summary $60 000Profit Distribution $60 000

transfer of profit to distribution account

June 30 Profit Distribution $60 000Becker, Capital $42 000Cook, Capital $18 000

distribution of profit to partners

June 30 Profit Distribution $60 000Becker, Capital $42 000Cook, Capital $18 000

distribution of profit to partners

Allocation of Partnership Profits and Losses (cont’d)

Ratio based on capital balances– profit of $60 000Capital investment

Becker $150 000Cook 100 000

$250 000

Profit allocationBecker (150 000/250 000) x 60 000 = $36 000Cook (100 000/250 000) x 60 000 = 24 000

$60 000

Capital investmentBecker $150 000Cook 100 000

$250 000

Profit allocationBecker (150 000/250 000) x 60 000 = $36 000Cook (100 000/250 000) x 60 000 = 24 000

$60 000

Allocation of Partnership Profits and Losses (cont’d)

Ratio based on capital balances (method 1)June 30 P & L Summary $60 000

Profit Distribution $60 000transfer of profit to distribution account

June 30 P & L Summary $60 000Profit Distribution $60 000

transfer of profit to distribution account

June 30 Profit Distribution $60 000Becker, Capital $36 000Cook, Capital $24 000

distribution of profit to partners

June 30 Profit Distribution $60 000Becker, Capital $36 000Cook, Capital $24 000

distribution of profit to partners

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ICAP STUDENTS MODULE B FINANCIAL ACCOUNTING BUSINESS ECONOMICS MODULE D COST ACCOUNTING COMPLETION OF SYLLABUS IN 2 MONTHS JOIN KHALID AZIZ 0322*3385752 R1173, ALNOOR SOCIETY, BLOCK 19.

F.B.AREA, KARACHI.

Allocation of Partnership Profits and Losses (cont’d)

Ratio based on capital balances (method 2)June 30 P & L Summary $60 000

Profit Distribution $60 000transfer of profit to distribution account

June 30 P & L Summary $60 000Profit Distribution $60 000

transfer of profit to distribution account

June 30 Profit Distribution $60 000Becker, Retained Earnings $36 000Cook, Retained Earnings $24 000

distribution of profit to partners

June 30 Profit Distribution $60 000Becker, Retained Earnings $36 000Cook, Retained Earnings $24 000

distribution of profit to partners

Allocation of Partnership Profits and Losses (cont’d)

Fixed ratio allowing for interest and salariesBecker Cook Total

Interest on capital$150 000 x 10% $15 000$100 000 x 10% $10 000 $25 000

Salaries to partners 18 000 10 000 28 000Total interest & salary credited 33 000 20 000 53 000Residual to be divided equally 3 500 3 500 7 000

Equity increase $36 500 $23 500 $60 000

Becker Cook TotalInterest on capital

$150 000 x 10% $15 000$100 000 x 10% $10 000 $25 000

Salaries to partners 18 000 10 000 28 000Total interest & salary credited 33 000 20 000 53 000Residual to be divided equally 3 500 3 500 7 000

Equity increase $36 500 $23 500 $60 000

Allocation of Partnership Profits and Losses (cont’d)

Ratio based on capital balances (method 1)June 30 P & L Summary $60 000

Profit Distribution $60 000transfer of profit to distribution account

June 30 P & L Summary $60 000Profit Distribution $60 000

transfer of profit to distribution account

June 30 Profit Distribution $25 000Becker, Capital $15 000Cook, Capital $10 000

distribution of interest on capital to partners

June 30 Profit Distribution $25 000Becker, Capital $15 000Cook, Capital $10 000

distribution of interest on capital to partners

Allocation of Partnership Profits and Losses (cont’d)

Ratio based on capital balances (method 1)

June 30 Profit Distribution $7 000Becker, Capital $3 500Cook, Capital $3 500

distribution of residual profit to partners

June 30 Profit Distribution $7 000Becker, Capital $3 500Cook, Capital $3 500

distribution of residual profit to partners

June 30 Profit Distribution $28 000Becker, Capital $18 000Cook, Capital $10 000

distribution of salaries to partners

June 30 Profit Distribution $28 000Becker, Capital $18 000Cook, Capital $10 000

distribution of salaries to partners

Allocation of Partnership Profits and Losses (cont’d)

Ratio based on capital balances (method 2)June 30 P & L Summary $60 000

Profit Distribution $60 000transfer of profit to distribution account

June 30 P & L Summary $60 000Profit Distribution $60 000

transfer of profit to distribution account

June 30 Profit Distribution $25 000Becker, Retained Earnings $15 000Cook, Retained Earnings $10 000

distribution of interest on capital to partners

June 30 Profit Distribution $25 000Becker, Retained Earnings $15 000Cook, Retained Earnings $10 000

distribution of interest on capital to partners

Allocation of Partnership Profits and Losses (cont’d)

Ratio based on capital balances (method 2)

June 30 Profit Distribution $7 000Becker, Retained Earnings $3 500Cook, Retained Earnings $3 500

distribution of residual profit to partners

June 30 Profit Distribution $7 000Becker, Retained Earnings $3 500Cook, Retained Earnings $3 500

distribution of residual profit to partners

June 30 Profit Distribution $28 000Becker, Retained Earnings $18 000Cook, Retained Earnings $10 000

distribution of salaries to partners

June 30 Profit Distribution $28 000Becker, Retained Earnings $18 000Cook, Retained Earnings $10 000

distribution of salaries to partners

Drawings and Loans Made by Partners

Drawings (method 1)20 March Partner, Drawings XXX

Cash at Bank XXXcash drawings by partner

20 March Partner, Drawings XXXCash at Bank XXX

cash drawings by partner

30 June Partner, Capital XXXPartner, Drawings XXXclosing entry for partner’s drawings

30 June Partner, Capital XXXPartner, Drawings XXXclosing entry for partner’s drawings

Drawings and Loans Made by Partners (cont’d)

Drawings (method 2)20 Mar Partner, Drawings XXX

Cash at Bank XXXcash drawings by partner

20 Mar Partner, Drawings XXXCash at Bank XXX

cash drawings by partner

30 June Partner, Capital XXXPartner, Retained Earnings XXX

closing entry for partner’s drawings

30 June Partner, Capital XXXPartner, Retained Earnings XXX

closing entry for partner’s drawings

Drawings and Loans Made by Partners (cont’d)

Interest on drawings (method 1)30 June Partner, Capital XXXProfit Distribution XXXcharging interest on drawings

30 June Partner, Capital XXXProfit Distribution XXXcharging interest on drawings

• Interest on drawings (method 2)

30 June Partner, Retained Earnings XXX Profit Distribution XXXcharging interest on drawings

30 June Partner, Retained Earnings XXX Profit Distribution XXXcharging interest on drawings

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PIPFA STUDENTS INTERMEDIATE FINANCIAL ACCOUNTING PERFORMANCE MEASUREMENT COMPLETION OF SYLLABUS IN 3 MONTHS JOIN KHALID AZIZ 0322*3385752 R1173-ALNOOR SOCIETY BLOCK 19 F.B.AREA-

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Loans or Advances

Date Cash at Bank XXAdvance from partner A XX

Date Cash at Bank XXAdvance from partner A XX

Date Interest expense X Cash at bank/Interest Payable X

Date Interest expense X Cash at bank/Interest Payable X

Financial Statements

General-purpose or special-purpose report? Each partner’s equity reported separately

on the Balance Sheet Salaries, interest on capital and interest on

drawings are not expenses

Financial Statements (cont’d)

No income tax expense Profit/loss allocation disclosed

– Balance Sheet– Statement of Partner’s Equity