1. Chapter 39 Textbook P.569 http://home.sbc.edu.hk/~ykp

2. CHAPTER 39 ACCOUNTING FOR PARTNERSHIPS After attending these 2 lessons, you should be able to: 1 Identify the characteristics of the partnership form of business organization. 2 Explain the accounting entries for the formation of a partnership. 3 Explain the accounting entries for dividing net income or net loss. 4 Describe the form and content of partnership financial statements.

3. PREVIEW ACCOUNTING FOR PARTNERSHIPS Gain/loss attributable to partners Final accounts of a partnership Forming a partnership Dividing net income/loss Financial statements Partnership dissolution Accounting for changes in partnership Goodwill for partnerships Characteristics Advantages/ disadvantages Partnership agreement Partnership Form of Organization Revaluation of Partnership assets Admission/ retirement of partner(s)

4. STUDY OBJECTIVE 1................................ 1 Identify the characteristics of the partnership form of business organization.

5. PARTNERSHIP FORM OF ORGANIZATION A partnership is an association of two or more persons to carry on as co-owners of a business for a profit.

6. The principal characteristics of the partnerships are:

7. CHARACTERISTICS OF PARTNERSHIPS 1) Mutual agency each partner acts on behalf of the partnership when engaging in partnership business act of any partner is binding on all other partners (true even when partners act beyond the scope of their authority, so long as the act appears to be appropriate for the partnership)

8. CHARACTERISTICS OF PARTNERSHIPS 2) Association of individuals may be based on as simple an act as a handshake, it is preferable to state the agreement in writing A partnership legal entity for certain purposes (i.e., property can be owned in the name of the partnership) accounting entity for financial reporting purposes Net income of a partnership not taxed as a separate entity (in USA) each partner’s share of income is taxable at personal tax rates

9. CHARACTERISTICS OF PARTNERSHIPS 3) Limited life Dissolution whenever a partner withdraws or a new partner is admitted End involuntarily by death or incapacity of a partner End voluntarily through acceptance of a new partner or withdrawal of a partner

10. CHARACTERISTICS OF PARTNERSHIPS 4) Unlimited liability each partner is personally and individually liable for all partnership liabilities. creditors’ claims attach first to partnership assets if insufficient assets claims then attach to the personal resources of any partner, irrespective of that partner’s capital equity in the company

11. CHARACTERISTICS OF PARTNERSHIPS 5) Co-ownership of assets Partnership Assets assets invested in the partnership are owned jointly by all the partners Partnership Income or Loss co-owned; if the partnership contract does not specify to the contrary, net income or net loss is shared equally by the partners

12. REVIEW: Which of the following is not a characteristic of a partnership: a. The liability for debts is limited to capital. b. Co-ownership of property. c. A partner is able to engage business on behalf of the partnership. d. The life of a partnership is limited.

13. Group work 1 What are the advantages & disadvantages of a partnership? Advantages Combining skills & resources (e.g. $/property)of 2 or more individuals Ease of formation Freedom from governmental regulations & restrictions Ease of decision making

14. Group work 1 What are the advantages & disadvantages of a partnership? Disadvantages Mutual agency, other partners are able to make decision without your permission Limited life Unlimited liability, the debts of partnership could become partners’ personal liabilities.

15. THE PARTNERSHIP AGREEMENT (P.571) The written contract contains information of the name and principal location of the firm, the purpose of the business, and the date of inception. The following relationships among the partners should be specified: 1 Names and capital contributions of the partners. 2 Rights and duties of partners. 3 Procedures for the withdrawal or addition of a partner. 4 Rate of interests to be paid on partner’s capital. 5 Rate of interests to be charged on partner’s drawings. 6 Salaries to be paid to partners. 7 Ratio for sharing net income/(loss).

16. Group work 2 You are planning to run a stall in a Lunar New Year Bazaar (Flower market) at the Victoria Park with your group-mates. a) Draw up a “Partnership Agreement” between partners

17. STUDY OBJECTIVE 2................................ 2 Explain the accounting entries for the formation of a partnership.

18. STUDY OBJECTIVE 2 FORMING A PARTNERSHIP Initial investment recorded at the fair market value of the assets at the date of their transfer to the partnership values assigned must be agreed to by all of the partners

19. BOOK AND MARKET VALUE OF ASSETS INVESTED Peter and Paul combine their proprietorships to start a partnership. They have the following assets prior to the formation of the partnership: Peter Paul

20. RECORDING INVESTMENTS IN A PARTNERSHIP Entries to record the investments are: Paul, Capital (To record investment of Paul) 8,000 4,000 12,000 9,000 4,000 1,000 12,000

21. Group work 2 (continued) You are planning to run a stall in a Lunar New Year Bazaar (Flower market) at the Victoria Park with your group-mates. b) Your partnership has been formed. All of the partners have paid their capital and deposited cash into bank, prepare the Balance sheet for your partnership.

22. STUDY OBJECTIVE 3................................ 3 Explain the accounting entries for sharing net income or net loss.

23. Interest on capital 資本利息 (P.572) This is a means of compensating partners for funds tied up in the business that could be earning interest if invested elsewhere. Interest will be treated as a deduction (Dr.) of income in the “Profit & Loss & Appropriation A/C”. Work it out: Peter put $6,000 & Paul put $4,000 into bank as their capital on 1 Nov 2009, partners are entitled to receive 2% interest on capital per month. Today is 28 Feb 2010, please record the above transactions by double entries. Double entry for paying interest on capital is: Dr. Profit & loss A/C $15,000 Cr. Mr. Lam’s Capital$10,000 Cr. Mr. Lee’s Capital $5,000

24. Interest on Capital The double entries are: Dr. Bank$10,000 Cr. Peter’s Capital$6,000 Cr. Paul’s Capital$4,000 To record the capital injection Dr. Profit & loss & Appropriation A/C $800 Cr. Peter’s Capital ($6,000x 2% x 4mths)$480 Cr. Paul’s Capital ($4,000x 2% x 4mths) $320 To record the interests paid to partners

25. Interest on drawings 提用利息 (P.573) This is a means of discouraging partners from drawing funds from the company/ partnership. Interest will be treated as an income (Cr.) in the “Profit & Loss & Appropriation A/C”. Work it out: Peter drew $2,500 & Paul drew $3,000 from bank on 1 Dec 2009, the interest on drawings is charged to partners at 5% per month. Today is 28 Feb 2010, please record the above transactions by double entries.

26. Interest on drawings The double entries are: Dr. Peter’s Capital$2,500 Dr. Paul’s Capital$3,000 Cr. Bank$5,500 To record the capital drawn by partners Dr. Peter’s Capital ($2,500x5% x 3mths)$375 Dr. Paul’s Capital ($3,000x5% x 3mths) $450 Cr. Profit & loss & Appropriation A/C $825 To record the interests charged to partners

27. PARTNERS’ SALARIES Salaries to partners and interest on partner’s capital balances are not expenses of the partnership; therefore, these items do not enter into the matching of expense with revenues and these are deducted after the net income in the P/L Appropriation A/C. Work it out: Peter & Paul are entitled to receive $3,500 & $4,000 as salaries per month, this agreement is effective from 1 Dec 2009. Today is 28 Feb 2010, please record the above transactions by double entries.

28. PARTNERS’ SALARIES Dr. Profit & loss & Appropriation A/C $22,500 Cr. Peter’s Capital ($3,500 x 3mths)$10,500 Cr. Paul’s Capital ($4,000 x 3mths) $12,000 To record the salaries paid to partners

29. SHARING NET INCOME /(LOSS) P.572 Partnership net income or net loss isshared equally unless the partnership agreement indicates. 1 A fixed ratio, expressed as a proportion (6:4), a percentage (60% and 40%), or a fraction (3/5 and 2/5). 2 A ratio can be based on capital balances at the beginning of the year or other equitable method.

30. INCOME-SHARING RATIOS Peter and Paul are partners, they contributed the same amount of capital, but Peter expects to work full-time and Paul only part-time, a 2/3, 1/3 ratio may be equitable. The net income after charging/ paying interests is $21,000. The double entry is: 21,000 14,000 7,000

31. Group work 2 (continued) You are planning to run a stall in a Lunar New Year Bazaar (Flower market) at the Victoria Park with your group-mates. The New Year Bazaar was finished, now it’s time to calculate & report how much do we earn in the bazaar! c) Please prepare a “Profit & Loss & Appropriation Account” for your partnership.

32. Review answers on group work

33. CHARACTERISTICS OF PARTNERSHIPS The principal characteristics of the partnership form of business organization are: 1 Association of individuals 2 Mutual agency 3 Limited life 4 Unlimited liability 5 Co-ownership of property

34. Partnership Agreement Interest on capital a means of compensating partners for funds tied up in the business that could be earning interest if invested elsewhere. Interest on drawings a means of discouraging partners from drawing funds from the company/ partnership. Interest will be treated as an income (Cr.) in the “Profit & Loss & Appropriation A/C”. Partners’ salaries Salaries to partners and interest on partner’s capital balances are not expenses of the partnership Sharing of profit & loss