1. Partnerships: Characteristics, Formation, and Accounting for Activities13

2. Learning Objectives
Explain the basic characteristics of a partnership.
Identify basic components that should be included in a partnership agreement.
Describe the relationship between a partner’s drawing and capital accounts.
Demonstrate an understanding of the various bases that could be used to allocate profits or losses among partners.
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3. Characteristics of a Partnership
Relationship of partners
Fiduciary responsibility
Mutual agency
Legal liability
General
Limited
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4. Characteristics of a Partnership
Underlying equity theories
Proprietary theory
Entity theory
Formation and agreements
Articles of partnership
Uniform Partnership Act, revised (RUPA)
gives supremacy to the partnership
Accounting principles
GAAP or OCBOA
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5. Characteristics of a Partnership
Partner dissociation
Voluntary or involuntary
Partnership not dissolved
Sale of partnership interest
Partnership dissolved
Express will, agreed-upon event, judicial determination
Tax considerations
A conduit of taxable income or operating losses to the tax returns of the individuals partners
Files an information return
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6. The Capital Account A permanent account
Measures a partner’s interest in the net assets of the partnership
Does not report fair value or tax basis
Capital Account
Debit
Withdrawals in excess of a specified amount
Closing of a net debit balance in the partner’s drawing account
Partner’s share of partnership losses
Credit
Initial and subsequent investments of capital
Partner’s share of partnership profits
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7. The Drawing Account A temporary account
Periodically closed to respective capital account
Drawing Account
Debit
Periodic withdrawals of partnership assets up to a specified amount
Credit
Closing of balance to partner's capital account
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8. Allocation of Profits According to a ratio/percentage
Assumed to be equal if not otherwise stated
According to capital investments of the partners
Important to define how capital is measured
According to the labor/service rendered by partners
Typically involving a salary and/or bonus
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9. Basic Schedule for Allocating Profits
Net income: $33,000
Interest: 6% on ending capital in excess of $100,000
Bonus to C: 10% of income after the bonus
Salaries: $13,000 to A; $12,000 to C
Balance: allocate 2-to-1-to-1
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10. Allocation of Profit Deficiencies and Losses
Completely satisfy all provisions of the profit and loss agreement and use the profit and loss ratios to absorb any deficiency or additional loss caused by such action or
Satisfy each of the provisions to whatever extent is possible
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11. Allocating Deficiency
Income: $22,000
Interest: 6% on ending capital in excess of $100,000
Bonus to C: 10% of income after the bonus
Salaries: $13,000 to A; $12,000 to C
Balance: allocate 2-to-1-to-1
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12. Deficiency Allocated by Priority
Income: $22,000 allocated to whatever extent possible
Interest: 6% on ending capital in excess of $100,000
Bonus to C: 10% of income after the bonus
Salaries: $13,000 to A; $12,000 to C
Income is insufficient for full distribution; allocate proportionally
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