1. Chapter  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 1 PARTNERSHIPS LEARNING OUTCOME:  TO PRODUCE A FULL SET OF ACCOUNTS AND FINANCIAL REPORTS FOR PARTNERSHIPS FROM FORMATION TO DISSOLUTION 6

2.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 2 KEY TERMS  active partner  capital accounts  capital adjustment account  current account  dissolution account (realisation account)  fixed capital account  Garner vs Murray ruling  insolvency

3.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 3 KEY TERMS  interest on capital  interest on drawings  loan and advances  Partnership Act  partnership agreement  partnership funds  profit and loss appropriation account  profit distribution account

4.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 4 KEY TERMS  profit-sharing ratios  realisation account  realisation expenses  retained profits  sleeping partner

5.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 5 FORMATION OF A PARTNERSHIP  Defined in the Partnership Act as the relationship between two or more people engaging in business for profit

6.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 6 FORMATION OF A PARTNERSHIP  Three important factors must be present in a partnership: Ùpartners must be carrying on a business, not one isolated business transaction Ùmust be agreement between two or more legally competent people who must be the business co-owners Ùpartners must have intent to make a profit

7.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 7 FORMATION OF A PARTNERSHIP  Partnerships are separate accounting entities to the partners  Owner’s equity accounts are kept for each individual partner  Each partner has the right to share in the profits and manage the business

8.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 8 PARTNERSHIP AGREEMENT  Partnership agreement Ùdoesn’t always exist, making it difficult to establish if partnership exists Ùno formal partnership agreement – Partnership Act applies Ùessential because partnerships: xhave unlimited liability xhave a limited life death of partner insolvency of partner retirement of partner

9.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 9 PARTNERSHIP AGREEMENT  name of business  details of each partner  nature of business  division of profit and losses  capital contributions  authority, rights and duties of partners  details of salaries  accounting methods  drawings and interest rates  interest for capital contribution  voting and decision- making procedures  admission of new partners  resolution of disputes  bankruptcy, death or retirement of partners

10.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 10 PARTNERSHIP ACT  If there is no partnership agreement in writing, or if it does not cover an area of dispute, matters may be resolved by reference to the Partnership Act Ùe.g. Act states all profits and losses are to be shared equally, so if profit ration is not defined in an agreement, the Act is applied

11.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 11 ADVANTAGES OF PARTNERSHIP  Creation and dissolution is easier than a company  Minimal statutory regulations  Resources can be pooled  Expertise can be utilised  Co-ownership of assets  Duties and responsibilities are shared

12.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 12 DISADVANTAGES OF PARTNERSHIP  Liability is unlimited  Partnership may cease if a partner dies, retires or becomes bankrupt  Disagreements between the partners can occur  Limits to raising large amounts of capital  Partners can be sued by creditor, jointly or individually  Partners are likely to pay higher income tax

13.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 13 PARTNERSHIP ACCOUNTS  CURRENT ACCOUNTS Ùworking accounts containing details of profit, loss, drawings and interest on capital invested or on drawings  CAPITAL ACCOUNTS Ùpartner’s original capital put into the business is considered to be ‘fixed’ Ùcapital account of each partner is usually unchanged

14.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 14 PARTNERSHIP ACCOUNTS  CREATION OF NEW PARTNERSHIP - ACCOUNTING ENTRIES ÙCan be created in two ways xthe introduction of cash only, entered in the cash receipts journal xthe introduction of cash and other assets and liabilities; general entries are raised for these entries

15.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 15 ACCOUNTING FOR NEW PARTNERSHIP FORMATION Illustration 6D (page 144)

16.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 16 PROFIT DISTRIBUTION  PROFIT-SHARING RATIOS ÙProfits and losses are shared in the way partners feel most appropriate ÙProfit share can be determined in various ways: xAmounts are shared on the basis of the contribution of fixed capital of each partner xAmounts are shared on the contribution of capital balance of each partner xHigher profit may go to a partner bringing something of particular value into the business, such as specialised expertise

17.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 17 PROFIT DISTRIBUTION  PROFIT AND LOSS APPROPRIATION ACCOUNT ÙNet profit or loss transferred to this account from the profit and loss account ÙMay be adjusted for interest paid or earned on loans ÙNet profit is brought in by general journal entry and is allocated to the partners at the agreed ratio

18.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 18 PROFIT AND LOSS APPROPRIATION ACCOUNT Illustration 6F (page 147)

19.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 19 SUMMARY PROFIT AND LOSS APPROPRIATION ACCOUNT PROFIT AND LOSS APPROPRIATION ACCOUNT DEBITCREDIT INTEREST ON CAPITALNET PROFIT FROM PROFIT AND LOSS ACCOUNT PARTNERS’ SALARIESOR: SHARE OF LOSS BONUS TO PARTNERSINTEREST ON DRAWINGS SHARE OF PROFIT CURRENT ACCOUNTS

20.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 20 PROFIT DISTRIBUTION  ALLOCATION AS PER PARTNERSHIP AGREEMENT ÙInterest on capital may be payable ÙInterest may be charged for drawings taken out of the business ÙThere may be a provision for the payment of a salary of a particular partner ÙInterest may be payable on loans to partners by the business or loans by partners to the business

21.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 21 PROFIT DISTRIBUTION  LOAN ACCOUNTS ÙWhere a partner makes loan to business, the debit is to cash at bank and the credit to loan account in that partner’s name  DRAWINGS ÙWhere a partner withdraws cash from the business in anticipation of profits earned, the current account is debited and cash is credited

22.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 22 ADMISSION OF NEW PARTNER  REASONS FOR A NEW PARTNER ÙNew products and customers to business ÙSpecialised expertise to organisation ÙAccess to further capital ÙDesirable assets ÙNew business contacts ÙRequirement due to death, retirement or bankruptcy of existing partner

23.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 23 ADMISSION OF NEW PARTNER NEW PARTNERSHIP AGREEMENT  ADJUSTING THE EXISTING BUSINESS ÙAll existing partners must agree on the admission of a new partner ÙAssets of the business should be revalued before a new partner is admitted ÙLiabilities need to be reviewed for accuracy in valuation ÙGains and losses to existing partners from new business value will be made at the existing profit-sharing ratio

24.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 24 ADMISSION OF NEW PARTNER RETIREMENT  RETIREMENT OF PARTNER ÙRetiring partner must give notice in writing and place advertisement stating that she or he has withdrawn from the partnership

25.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 25 STEPS TO ADMIT NEW PARTNER 1.Review value of assets 2.Consider inclusion of goodwill 3.Record changes in general journal 4.Open capital adjustment account and enter increases or decreases 5.Calculate profit or loss on adjustment and transfer to partners’ capital account 6.Prepare opening general journal for new partner 7.Calculate partners’ new profit-sharing ratio 8.Prepare a new Statement of Financial Position

26.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 26 ADMISSION OF NEW PARTNER  GOODWILL ÙAASB 1013 defines goodwill as future benefits from assets that can not be individually identified e.g. reputation, customer database, management ability, product, location ÙGoodwill is an asset

27.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 27 ADMISSION OF NEW PARTNER  VALUING GOODWILL ÙAASB 103 states that goodwill is the excess of all acquisition costs over the fair value of the net identifiable assets acquired  ACCOUNTING FOR GOODWILL ÙThere are two methods xrecording goodwill in the accounts xgoodwill is not recorded in the books

28.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 28 PARTNERSHIP DISSOLUTION  REASONS FOR DISSOLVING PARTNERSHIP ÙPartners giving notice of intention to dissolve ÙExpiration of the time or purpose set for partnership ÙInsolvency of a partner ÙOwnership changes e.g. converting to company ÙInability to trade profitably ÙDeath of partner ÙVoluntary agreement by partners ÙCourts may also rule to terminate partnership

29.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 29 PARTNERSHIP DISSOLUTION  THE REALISATION ACCOUNT ÙWhen business finished, accounts are closed off and a realisation account is opened ÙDebits to this account include: xbook values of assets to be sold (not including cash) xdebts to be collected xlegal and other expenses for winding up partnership xany accrued expenses xgains on realisation transferred to capital accounts

30.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 30 PARTNERSHIP DISSOLUTION  THE REALISATION ACCOUNT ÙCredits to this account include: xcash value of assets sold xdetails of assets taken over by partners xamounts collected for accounts receivable xexisting provisions and accumulated depreciation xdiscount revenue from paying accounts payable xwhere purchaser takes over any liabilities xlosses on realisation transferred to the capital accounts in the proportion that partners share profits and losses

31.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 31 PARTNERSHIP DISSOLUTION  WHEN A PARTNER IS INSOLVENT ÙA partner is unable to contribute to partnership debts because they have insufficient funds, are bankrupt or have left the partnership ÙThe other partners are legally obliged to share the financial deficiency of the insolvent partner to insure business liabilities are paid ÙAmount contributed is to be covered by Garner vs Murray ruling ÙThe loss is shared by the solvent partners in the ratio of the capital balance at the time of dissolution

32.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 32 PARTNERSHIP DISSOLUTION  WHEN ALL PARTNERS ARE INSOLVENT ÙFunds available must first be used to pay legal and other associated fees ÙThen funds must be used to pay staff entitlements and amounts owed for accounts payable and loans

33.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 33 REALISATION SUMMARY 1.Transfer net profit to profit and loss appropriation account and distribute to partners 2.Close asset accounts to realisation (include accumulated depreciation and provision doubtful debts and exclude bank) 3.Sell assets Dr: Bank Cr: Realisation 4.If partner takes asset then Dr: Capital - Partner Cr: Realisation

34.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 34 REALISATION SUMMARY 5.Pay costs of realisation Dr: Realisation Cr: Bank 6.Pay liabilities Dr: Liabilities Cr: Bank 7.Accept discounts Dr: creditors Cr: realisation 8.Close realisation account - distribute profit or loss on realisation to partners’ capital accounts

35.  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson 35 REALISATION SUMMARY PARTNER INSOLVENT 1.Balance capital accounts - if partner with capital deficit is insolvent (cannot pay), then ‘Garner vs Murray’ rule applies Dr: Solvent partners’ capital Cr: Insolvent partner’s capital 2.Balance bank account Money in bank - pay partners Deficit in bank - paid by partners 3.Bank account and all equity accounts now closed