Accounting For Partnership - Chapter 12

• Accounting For Partnership - Chapter 12
• Presented by Dr. Shorouk Esam El-Din Yassien, Lecturer in Accounting Department, Faculty of Commerce-Benha University

Partnership Form of Organization

• A partnership is an association of two or more people who co-own a business for profit.
• Types of businesses conducted as a partnership include:
  • Small retail, service, or manufacturing companies
  • Professions such as accountants, lawyers, and doctors

Characteristics of Partnerships

• The principal characteristics of a partnership ar
  • Association of individuals
  • Mutual agency
  • Limited life
  • Unlimited liability
  • Co-ownership of property

Association of Individuals

• A partnership may be based on a simple act like a handshake, though written agreements are preferable.
• A partnership is a legal entity for certain purposes
  • For example, property can be owned in the name of the partnership
  • Is an accounting entity for financial reporting purposes
• The net income of a partnership is not taxed as a separate entity, each partner's share of income is taxable at personal tax rates.

Mutual Agency

• Each partner acts on behalf of the partnership when engaging in partnership business.
• An act of any partner is binding on all other partners.
  • This is true even when partners act beyond the scope of their authority, as long as the act appears appropriate for the partnership.

Limited Life

• Partnerships have a limited life so are subject to dissolution.
• Dissolution can occur involuntarily
  • Whenever a partner withdraws or a new partner is admitted.
  • By death or incapacity of a partner
• Dissolution can occur voluntarily
  • Through acceptance of a new partner or withdrawal of a partner

Unlimited Liability

• Each partner is personally and individually liable for all partnership liabilities.
• Creditor's claims attach first to partnership assets.
• If assets are insufficient, claims then attach to the personal resources of any partner, irrespective of that partner's capital equity in the company.

Co-ownership of Property

• Assets invested in the partnership are owned jointly by all the partners.
• Partnership income or loss is co-owned.
  • If the partnership contract does not specify to the contrary, net income or net loss is shared equally by the partners.

Advantages and Disadvantages of a Partnership

• Advantages:
  • Combining skills and resources of two or more individuals
  • Ease of formation
  • Freedom from governmental regulations and restrictions
  • Ease of decision making
• Disadvantages:
  • Mutual agency
  • Limited life
  • Unlimited liability

Partnership Agreement

• The partnership agreement (Articles of co-partnership) is a written contract, including:
  • Names and capital contributions of the partners
  • Rights and duties of partners
  • Basis for sharing net income or net loss
  • Provision for withdrawals of assets
  • Procedures for submitting disputes to arbitration
  • Procedures for the withdrawal or addition of a partner
  • Rights and duties of surviving partners in the event of a partner's death

Classifying Firms by Number of Owners

• Sole Enterprise: Only one owner
• Partnerships: More than one owner
• Corporations: Large number of owners

Types of Partners

• There are two types of partners: general and limited.

General Partner

• Fully responsible for the company.
• Personal money may be used to pay off company debts.

Limited Partner

• Responsibility is limited to the amount of contribution to the company.
• Personal money cannot be used under any circumstances

Types of Partnerships

• According to the types of partners that make up the partnership, partnerships can be classified into two types:
  • General Partnership: All partners are general.
  • Limited Partnership: At least one general partner and one or more limited partners.

Partnership Life Cycle

• The partnership life cycle includes:
  • Formation
  • Allocation
  • Separation (Withdrawal)
  • Admission
  • Liquidation

Review Questions & Answers

• Partnerships have unlimited life. Corporations do not.
  • False. Corporations have unlimited life. Partnerships do not.
• A major advantage of the partnership form of organization is that the partners have unlimited liability.
  • False. Disadvantage.
• In a limited partnership, the general partners have unlimited liability.
  • True.
• Unless the partnership agreement specifically indicates an income ratio, partnership net income or loss is not allocated to the partners.
  • False. Will be allocated equally.
• Because of mutual agency, the act of any partner is binding on all other partners.
  • True.
• The withdrawal of a partner legally dissolves the partnership.
  • True.
• A partnership is an association of no more than two persons to carry on as co-owners of a business for profit.
  • False. (two or more)

Formation example

• Assume Murad started a project and deposited 1,000,000 EGP in cash on 1/1/2024 to start practicing its activities.
• Transactions are recorded in the Journal from the Company's point of view, not the Owner's.
• The journal entry is:
  • Cash 1,000,000
  • Capital 1,000,000
• The balance sheet on 1/1/2024 shows:
  • Assets: Cash 1,000,000
  • Liabilities & O.E: Capital 1,000,000

Methods of Contribution in a Partnership

• Work:
  • No entry is recorded; only a memorandum entry is prepared.
• Cash:
  • Cash xx
  • A's Capital xx
• Non-cash:
  • Asset (Fair value) xx
  • A's Capital xx
  • When a partner contributes by a sole enterprise, with its full assets and liabilities, it is another type of non-cash share

Contribution Example

• On January 1, 2020, A, B & C formed their partnership and they agreed to:
  • Partner “A”: Participate in a work share in return for a monthly salary and a percentage of the profits.
  • Partner “B”: Participate in a cash share, by presenting $200,000 on the formation date.
  • Partner "C": Participate in a non-cash share, by presenting a building which he bought from 5 years ago for $100,000, but its fair market value now is $300,000.
• The entries are:
  • Partner A: No entries. Only prepare a memorandum proving the partner's share of the profits in exchange for the works he provides.
  • Partner B: Cash 200,000, B's capital 200,000 on 1/1/2020
  • Partner C: Building 300,000, C's capital 300,000 on 1/1/2020

Formation Example 1

• On January 1, 2024, A & B formed their partnership with total capital $200,000.
• Agreed to share it according to 75% to "A" and 25% to "B".
• Each partner contributed his share in cash
• "A" paid his share on 3/1, & "B" paid his share on 5/1.
• Therefore:
  • Partner A : His share = $150,000 . Credit A's capital and debit to cash.
  • Partner B : His share = $50,000 . Credit B's capital and debit to cash.
• The balance sheet on 5/1/2020 is:
  • Assets: Cash 200,000
  • Liabilities & O.E: A's capital 150,000, B's capital 50,000

Formation Example 2

• On January 1, 2024, A & B agreed to form a general partnership with total capital $100,000.
• Divided between them at ratio of 4:1 respectively.
• Each partner paid his contribution in cash on the formation date.
• "A" paid his share on 5/1, & "B" paid his share on 7/1.
• Therefore:
  • Partner A: His share = $80,000. Debit to cash.
  • Partner B: His share = $20,000. Debit to cash.
• Balance sheet will have equal debit and credit $100,000 respectively .