accounting 1b chapter 12 appendix partnerships

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two types of partnership

general and limited.

partnership agreement

a contract between the partners and is governed by contract law.

what is partnership agreement also called

articles of partnership

the articles of partnership should specify

1. name, location, and nature of the business.
2 name investment and duties of each partner
3. procedures for admitting a new partner
4. method of sharing profits and losses among the partners
5. withdrawals of assets but the partners
6. procedures for settling up with a partner who withdraws from the firm
7. procedures for liquidating the partnership-selling the assets, paying the liabilities and giving any remaining cash to the partners.

partnership has a limited of unlimited life?

a limited life. if a partner withdraws, the old partnership dissolves.

dissolution

the ending of a partnership. the addition of a new partner dissolves the old partnership and creates a new one.

mutual agency

every partner is a mutual agent of the firm meaning that any partner can bind the business to a contract within the scope of its operations.

X&Y partnership example: if x signs a contract to to pay a debt then x and y owes the liability. personal matters are not liable for partnerships.

unlimited personal liability

each partner has this for the debts of the business. when a partnership can't pay its debts then they must pay with their personal assets.

co -ownership of property

in partnerships there is no sole owner. any asset that a partner invests in the partnership becomes a joint property of all partners.

no partnership income tax

a partnership pays no business income tax. instead, the net income of the business flows through and becomes the taxable income of the partners.

ex. : a 2-person partnership earns 200k. they divvy it up to 100k each. they pay income tax on the 100k of the partnership income. they partnership does not pay income tax as a business entity (the whole 200k)

partners' capital accounts

the partnership need a separate capital and withdrawal account for each partner.

what are features of a proprietorship that apply to a partnership

limited life, unlimited liability, no business income tax.

partnership advantages vs proprietorships

-can raise more capital
-brings together the abilities of more than one person
- partners working well together can add more value than by working alone.

partnership advantages vs corporations

-partnership is less expensive to organize than a corp. which requires a charter from the state.
- no double taxation.

partnership disadvantages

- partnership agreement may be difficult to formulate. each time a new partner is admitted or a partner withdraws, the business needs a new partnership agreement.
- relations among partners may be fragile
- mutual agency and unlimited liability create personal obligations for each partner.

WHICH FORM OF PARTNERSHIP IS THE BASIC FORM?

general partnership

general partnership

each partner is a co-ower of the business with all the privileges and risks of ownership. the profits and losses of the partnership pass through to the partners who then pay personal income tax on their income.

what does a limited partnership has to have?

at least 2 classes of partners and limited liability for partnership debts. there must be one who takes primary responsibility

who takes primary responsibility

general partner.

what does a general partner also do?

they take most of the risk if the partnership goes bankrupts. usually they are the last to receive a share of profits and losses but they often get all the excess profit after the limiter partners get a share of the income.

limited partners

have first claim to profits and losses but only to a certain limit. in exchange for this limited liability their potential for profits is also limited.

most accounting firms are organized as?

limited liability partnerships (LLP)

what is LLP?

each partner's personal liability for business debts is limited to a certain amount. these LLPs must carry a large insurance policy to protect the public in case the partnership is found guilty for malpractice.

a limited liability company (LLC) is neither

a partnership or a corporation. it is both. this form is the most flexible way to organize a business because the owners called members have numerous choices.

features of a limited liability company that is parallel to a corporation

-LLC must file articles of organizations with the state
- the business name must include LLC or a similar designation to alert the public about the limited liability of the members
- the members are not personally liable for the business's debts. this is one of the chief advantages of an LLC compared to a proprietorship or a partnership

the features of an LLC similar to a partnership

- the LLC can elect not to pay business income tax. the income of the LLC can be taxed to the members as though they were partners. this is the other big advantage compared to a corp. corps. pay a corp. income tax then the stockholders pay personal income tax on any dividends they receive from the corp. the corps face double taxation.
- the owners of the LLC can participate actively in management of the business.
- the accounting for an LLC follows the pattern for a partnership

S corporation

a corporation taxed as a partnership.

S corp offers?

it offers its owners the benefits of a corp- no personal liability for business debts. and of a partnership - no double taxation.

ordinary corporations has double taxation

yes.

taxation of S corporation

they pay no corporate income tax. instead the corporation income flows through to the stockholders who pay personal income tax on their share of the corporations income as in a partnership.

assets minus liabilities measures?

each partner's capital.

when recording an item you record at

the current market value ( should be given )

arrangements for profit and loss sharing

1. sharing of profits and losses based on a stated fraction for each partner such as 50/50, 2/1, 4:3:3 [40%, 30%,30% ]
2. sharing based on each partner's investment
3. sharing based on each partner's service.
4. sharing based on a combination of stated fractions, investments, and service.

what happens if the partners have no agreement as to how to divide profits and losses?

they share equally.

sharing losses

if the agreement specifies a method for sharing profits but not losses then losses are shared the same way are profits.

closing net income

income summary debit
x,capital(s) credit

closing net loss

x,capital debit
income summary credit

what happens when one partner invests more capital or puts more work into the business?

to reward the more valuable person, the profits and losses may be divided based on a combination of partner capital balances and services.

how are drawings recorded?

they are recorded exactly as for a proprietorship.
x,drawing debit
cash credit

closing withdrawal accounts

closed at the end of the period. credit each partner's drawing account and debit his or her capital account.

admitted a new partner

dissolves the old partnership and begins a new one. often, the new partnership continues the old one's business.

how can someone come in?

1. admission by purchasing a partner's interest
2. admission by investing in the partnership.

admission by purchasing a partner's interest.

the new person MUST gain approval of the other partners. you record the transfer of capital interest with this entry
A, capital debit
B, capital credit.

to transfer A's equity to B.
( this closes A's account )
also, the partnership doesn't receive cash because it was between A and B. if A charged more money for the interest than it was worth then you still record what it was worth not what B paid.

what happens if the new partner is not liked or accepted

then the new partner gets no voice in the management but under the Uniform Partnership Act, the new partner shares in the profit and losses of the firm and in its assets as liquidation.

admission by investing in the partnership

you can have:
bonus to old partner
bonus to new partner.

no bonus to any partner-take the partnership capital before new partner is admitted and add it with the new partner's investment. then multiple the total with the interest in the partnership and that will be the new partner's capital.

bonus to old partner(s) - take the new partner investment and subtract with the capital you get after the above process and divide by contract or equally.

bonus to new partner. - when the capital of the new partnership is bigger than the old partner investment.

withdrawal of a partner

-when a partner leaves you have to revaluate all the assets at market value so the partners share any market-value changes in their profit and loss ratio.

you record the revaluations of all the assets and then you add or subtract it to the capital they has before.

-the partner can also withdraw at book value by receiving cash.

-the partner can also withdraw at less than book value. the remaining partners share the difference as a bonus.

-withdrawal at more than book value : the partner may receive assets worth more than the book value of his or her equity.

the withdrawing partner gets a bonus and there is a decrease in the remaining partners' capital accounts.

**** when this happens, the remaining partner's capital accounts are debited because the are paying a bonus to the withdrawing partner.

when a person withdraws

a new agreement and a new profit and loss ratio is needed.

death of a partner

this also dissolves a partnership. the accounts are adjusted to measure net income or loss for the period up to the date of feather. the accounts are closed to determine all partners' capital balances on that date.
* there may or may not be an asset revaluation.

liquidation

this shuts down the firm by selling its assets and paying its liabilities.

the final step of liquidation

to distribute any remaining cash to the owners. before a business is liquidated its books should be adjusted and closed

liquidation has 3 steps

1.sell the assets. allocate the gain or loss to the partner's capital accounts based on the profit-and loss ratio.
2. pay all partnership liabilities
3. pay the remaining cash to the partners based on their capital balances.

how long can the liquidation of a business can stretch?

over weeks,months, a year or longer.

partnership liquidation- sale of assets at a gain

cash + noncash assets = liabilities + the capital of all partners.

final cash payment to the partners is based on

capital balances

upon liquidation, gains and losses on the sale of assets are divided according to

the profit and loss ratio.

after payment of cash to the partners , the business has?

no assets, liabilities or equity. all final balances are zero.

sale of assets are a loss.

when a loss occurs, the partner capital accounts are debited based on the profit and loss ratio.

partnership financial statements differences than a proprietorship

a partnership income statement shows the division of net income to the partners. and a partnership balance sheet reports a separate capital account for each partner.

how are partnership profits and losses shared among the partners

stated fractions, capital contributions, service to the partnership, any combination of the above.

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