Accounting Cycle for Service and Merchandising Businesses

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Questions and Answers

What is the primary purpose of a Statement of Financial Position (Balance Sheet)?

  • To report the firm’s profits or losses for a specific period
  • To summarize the changes in the owner's capital over a period
  • To show the value of a business in terms of its assets, liabilities, and owner's equity (correct)
  • To report the firm's receipt and disbursement of cash

A partnership agreement can be either oral or written.

True (A)

What are the three main categories of activities reported on a Statement of Cash Flows?

Operating, Investing, Financing

The ______ is a written agreement among partners that outlines the terms and conditions of the partnership.

<p>Articles of Co-Partnership</p> Signup and view all the answers

Match the financial statement with its corresponding purpose:

<p>Statement of Profit and Loss (Income Statement) = Shows the value of a business in terms of its assets, liabilities, and owner's equity. Statement of Cash Flows = Reports the firm's receipt and disbursement of cash Statement of Changes in Equity = Summarizes the changes in the owner's capital during a specific period Statement of Financial Position (Balance Sheet) = Reports the firm’s profits or losses for a specific period</p> Signup and view all the answers

Which of the following is NOT a factor considered in deciding the scheme of profit and loss sharing in a partnership?

<p>Number of years the partner has been with the firm (A)</p> Signup and view all the answers

The average capital is the most equitable basis for computing profit-sharing ratios because it recognizes the effects of changes in capital throughout the accounting period.

<p>True (A)</p> Signup and view all the answers

What are the two methods of computing average capital?

<p>The two methods are:</p> <ol> <li>Beginning Capital + Ending Capital / 2</li> <li>Peso Month Average</li> </ol> Signup and view all the answers

Partner salaries and allowances are usually treated as ______ of net income.

<p>distributions</p> Signup and view all the answers

Match the following terms with their corresponding descriptions:

<p>Interest on capital = Compensation for the amount of capital invested by a partner Salary = Compensation for personal services rendered by a partner Bonus = Additional compensation for a partner based on the partnership's performance Beginning capital = The amount of capital invested at the start of the accounting period Ending capital = The amount of capital invested at the end of the accounting period</p> Signup and view all the answers

Which of the following is NOT a characteristic of a partnership?

<p>Centralized management structure (B)</p> Signup and view all the answers

A partnership can be formed through either a written or an oral agreement.

<p>True (A)</p> Signup and view all the answers

What is the primary reason for forming a partnership?

<p>To pool resources and expertise to achieve a common goal, typically profit generation.</p> Signup and view all the answers

The legal document outlining the terms of a partnership is called the [BLANK].

<p>Article of Co-Partnership</p> Signup and view all the answers

Match the types of partners with their corresponding descriptions:

<p>General Partner = Has limited liability and is not involved in the management of the firm Limited Partner = Has unlimited liability and is actively involved in the management of the firm Silent Partner = Has limited liability and is not actively involved in the management of the firm Dormant Partner = Has unlimited liability and is not actively involved in the management of the firm Ostensible Partner = Has unlimited liability and is actively involved in the management of the firm</p> Signup and view all the answers

What type of partnership involves limited partners who are liable only to the extent of their capital contribution?

<p>Limited Partnership (B)</p> Signup and view all the answers

A partnership's income tax rate is always fixed at 25% regardless of its assets and taxable income.

<p>False (B)</p> Signup and view all the answers

List three types of contributions that can be made to a partnership.

<p>Money, property (PPE), and industry (labor, skills, or services).</p> Signup and view all the answers

A partnership that specializes in rendering ______s to clients is known as a [BLANK] partnership.

<p>service</p> Signup and view all the answers

Match the types of partnerships with their corresponding durations:

<p>Partnership at Will = A specific term is agreed upon for the partnership's existence Partnership with a Fixed Term = The partnership can be dissolved at any time by mutual agreement or by operation of law.</p> Signup and view all the answers

What type of partner contributes only capital and does not participate in the management of the business?

<p>Silent Partner (A)</p> Signup and view all the answers

A dormant partner is actively involved in the business but is not known to the public.

<p>False (B)</p> Signup and view all the answers

Name one advantage and one disadvantage of the partnership form of business organization.

<p>Advantages: Pooling resources and expertise. Disadvantages: Unlimited liability for general partners.</p> Signup and view all the answers

The process of dissolving a partnership is known as [BLANK].

<p>dissolution</p> Signup and view all the answers

Which of these is NOT a potential reason for the dissolution of a partnership?

<p>Increased profitability of the partnership (D)</p> Signup and view all the answers

Which of the following is NOT an advantage of a partnership?

<p>Partnerships are always profitable and provide high returns on investment. (B)</p> Signup and view all the answers

A partnership can be dissolved easily and inexpensively.

<p>True (A)</p> Signup and view all the answers

What is one factor that makes a partnership less attractive than a corporation in terms of raising capital?

<p>Limited Liability</p> Signup and view all the answers

The ______ of a general partner makes it reliable from the point of view of creditors.

<p>unlimited liability</p> Signup and view all the answers

What is the primary reason for a written agreement in a partnership?

<p>To avoid misunderstandings and disputes among partners. (C)</p> Signup and view all the answers

An Article of Co-partnership is required for all partnerships, regardless of capital amount.

<p>False (B)</p> Signup and view all the answers

Describe the relationship between the Capital Account and Drawing Account.

<p>The Capital Account reflects the partner's net investment in the business, while the Drawing Account tracks the partner's withdrawal of profits or share of the partnership's net income or loss.</p> Signup and view all the answers

A partner's equity can be increased due to their ______, ______, or ______.

<p>Initial Investment; Additional Investment; Share in Net Income</p> Signup and view all the answers

Which of the following is NOT a method of dividing profits and losses among partners?

<p>According to the wishes of the creditors (C)</p> Signup and view all the answers

In the absence of a specific agreement, profits and losses are divided equally among partners.

<p>False (B)</p> Signup and view all the answers

Explain how the concept of 'interest on investment' affects profit and loss sharing in a partnership.

<p>Interest on investment is a way to compensate partners for their capital contributions, and it is usually paid before any profits are distributed. This means that the partners with larger capital contributions will receive a higher interest payment, potentially affecting the final distribution of profits.</p> Signup and view all the answers

When no agreement exists regarding profit and loss distribution, the share of an industrial partner in the profits is determined by what is considered ______ and ______ under the circumstances.

<p>just; equitable</p> Signup and view all the answers

Which of the following is an example of a situation that would increase a partner's capital account?

<p>Paying off partnership liabilities using personal funds. (A)</p> Signup and view all the answers

The Drawing Account is a temporary account that is closed at the end of each accounting period.

<p>True (A)</p> Signup and view all the answers

What is the primary difference between a partnership's Capital Account and its Drawing Account?

<p>The Capital Account represents the partner's permanent investment in the business. The Drawing Account reflects the temporary withdrawals made by the partner for personal use or for sharing of profits.</p> Signup and view all the answers

Match the following accounting terms with their respective accounts:

<p>Partner's Investment = Capital Account Partner's Loan to the Partnership = Loans Payable to Partner Partnership Loan to the Partner = Receivable from Partner Partner's Share of Profit = Drawing Account</p> Signup and view all the answers

Flashcards

Accounting Cycle

The process of recording financial transactions and preparing financial statements.

Statement of Profit and Loss

A financial statement summarizing revenues and expenses to show profit or loss over a period.

Partnership

A business arrangement where two or more individuals share profits and responsibilities.

Articles of Co-Partnership

A written agreement detailing the terms and conditions of a partnership business.

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Statement of Financial Position

A balance sheet showing the business's assets, liabilities, and owner's equity at a specific time.

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Factors in Profit Sharing

Elements influencing how profits and losses are distributed among partners, including capital, services, and abilities.

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Average Capital

A method for computing equity by averaging the beginning and ending capital, recognizing investments and withdrawals.

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Salary Allowances to Partners

Payments to partners for their services, treated as distributions from net income and debited to drawing accounts.

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Bonus for Partners

Extra compensation for a partner managing the business, tied to the firm's net income.

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Journalizing Net Income Distribution

Recording the distribution of net income or loss among partners through journal entries in accounts.

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Types of Business Organizations

Forms of businesses classified by ownership: sole proprietorship, partnership, corporation, cooperative.

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Characteristics of Partnership

Key features include mutual agency, limited life, and unlimited liability.

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General Partnership

Partnership where all partners have unlimited personal liability for debts.

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Limited Partnership

Includes general partners and limited partners; limited partners have restricted liability.

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Co-ownership of Properties

Assets contributed to the partnership become joint property of the partnership.

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Legal Entity in Partnership

A partnership is a distinct entity separate from the individual partners.

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Mutual Agency

Each partner can act on behalf of the partnership in business transactions.

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Unlimited Liability

General partners are personally responsible for all business debts.

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Profit Sharing in Partnership

Partners share profits based on their contributions and agreement.

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Partnership Dissolution

Ending a partnership can occur under numerous circumstances like withdrawal or death of a partner.

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Classes of Partners by Activity

Partners may be classified based on their activity: general, limited, silent, managing, etc.

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Service Concern

A partnership primarily rendered to provide a service rather than goods.

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Capital Contribution

Money, property, or skills invested by partners into the partnership.

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Partnership Taxation

Partnerships face income tax rates of 20% or 25% based on assets and income criteria.

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Advantages of Partnership

Benefits include easy formation, capital pooling, and better management.

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Disadvantages of Partnership

Challenges include lack of business continuity and unlimited liability.

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Partner's Equity

The net investment and profits distributed among partners.

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Capital Account

Records a partner's net investment and capital changes.

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Drawing Account

Shows a partner's temporary withdrawals from profits.

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Withdrawal of Partners

Ending partnership due to a partner leaving or new partner joining.

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Dissension Risks

Potential conflicts due to equal management authority among partners.

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Profit and Loss Distribution

How profits and losses are shared as per partner agreement.

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Arbitration Provision

Clause in agreement for resolving partnership disputes.

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Conditions for Withdrawal

Terms under which partners can withdraw funds or assets.

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Division of Profits Option

Ways to split profits as agreed: equally, ratios, etc.

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Industrial Partner

A partner who contributes services rather than capital.

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Study Notes

Chapter 1: Accounting Cycle for Service and Merchandising Businesses

  • Journalizing: Recording business transactions.
  • T-accounts: Analyzing transactions using visual representations.
  • Trial Balance: Summarizing accounts balances.
  • Worksheet (Optional): Prepares statements prior to financial statement preparation.
  • Adjusting Entries: Making changes in accounts to match accounting period.
  • Financial Statement Preparation:
    • Statement of Profit and Loss (Income Statement): Summarizes profit or loss over a period.
    • Statement of Comprehensive Income: Reports comprehensive income items.
    • Statement of Changes in Equity: Shows changes in owner's capital.
    • Statement of Financial Position (Balance Sheet): Shows assets, liabilities, and owner's equity.
    • Statement of Cash Flows: Reports cash inflows and outflows categorized by operation, investment, and financing activities.
  • Closing Entries: Resetting income and expense account balances to zero.
  • Post-Closing Trial Balance: Verifying after closing entries.
  • Reversing Entries: (Optional) Used to simplify accounting processes for some transactions.

Chapter 2: Nature and Formation of Partnership

  • Partnership: Two or more individuals join to operate a business for profit. Agreements may be oral or written.
  • Articles of Co-Partnership: Formal written agreement outlining partnership terms.
    • Key Elements: Partnership name, partner details, business purpose, capital contributions, rights/duties, profit/loss distribution, withdrawal procedures, accounting methods, dispute resolution.
  • Business Organizations:
    • Sole Proprietorship: One owner.
    • Partnership: Two or more owners.
    • Corporation: Legally distinct entity from owners (stockholders).
    • Cooperative: Member-owned and democratically run.
  • Partnership Characteristics:
    • Contractual Basis: Formed by agreement.
    • Voluntary Association: Parties join willingly.
    • Mutual Agency: Partners can act on behalf of the partnership.
    • Limited Life: Dissolution if partner leaves or dies.
    • Unlimited Liability (General Partners): Personal assets at risk to satisfy debts.
    • Co-ownership of Property: Partnership, not individual, owns assets.
    • Co-ownership of Profit: Profits shared based on agreed ratios.
    • Legal Entity: Separate legal identity from partners.
    • Income Tax: Partnership taxed differently than individual income.
  • Partnership Contributions: Money, property, or labor.
  • Partnership Purposes: Profit, service, social good.
  • Partner Classification (by Liability):
    • General: Unlimited liability.
    • Limited: Liability limited to investment.
  • Partner Classification (by Activity): Service, merchandising, manufacturing.
  • Partner Classification (by Object): Universal (all assets), particular (specific assets).
  • Partner Classification (by Duration): At will, fixed term.
  • Partner Classification (by Contribution): Capitalist, industrial, capitalist-industrial.
  • Partner Classification (by Liability): General, Limited (involves both general and limited partners).
  • Partner Classification (by Management): Managing, silent, nominal, secret, dormant, ostensible.
  • Partnership Advantages: Simplicity, higher capital, more flexibility, combined expertise.
  • Partnership Disadvantages: Limited longevity, restricted capital flow, liability risks, disputes, difficulty transferring ownership.
  • Articles of Co-partnership:
  • Partner's Equity:
    • Multiple capital and drawing accounts (one per partner).
    • Partner loans (credit Partner, Loan).
    • Partner borrowings (debit from partner).
    • Partner salaries (debit to Partner, Drawing).

Chapter 3: Partnership Operation

  • Financial Statement Differences (Partnership vs. Sole Proprietorship):
    • Multiple capital accounts.
    • Statement of changes in partners' equity.
  • Partner's Capital Account: Represents investment; increases with initial/additional investments, payments of partnership liabilities using personal funds, and share in the net income.
    • Decreases with withdrawals and share in net loss.
  • Partner's Drawing Account: Reflects partner withdrawals.
  • Profit/Loss Distribution Methods:
  • By agreement; equally, fractionally, proportionally to capital, interest on capital plus remainder.
    • In absence of agreement, proportional to contributions. (Industrial partners get equitable share.)
  • Considering Profit/Loss Scheme Factors: Capital investment, services rendered, entrepreneurial ability.
  • Average Capital: A more reliable basis than beginning or ending capital; reflects changes during the period.
  • Calculating Average Capital: (Beginning Capital + Ending Capital)/2.
  • Partner Salaries: Allowances recognized as distributions of net income or net loss.
  • Partner Bonuses: Recognition for special management contributions based on firm’s earnings.
  • Journalizing Profit/Loss Distribution: Entries transfer income/loss to partner drawing accounts.

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