1. Characteristics, Formation,
Chapter 13
Partnerships:
Characteristics, Formation,
and Accounting for Activities

2. Characteristics of a Partnership
Often governed by the Uniform Partnership Act (UPA)
Voluntary association of individuals with a fiduciary relationship
Mutual agency - each partner is an agent for other partners and the partnership
Legal liability - general or limited partnerships
Underlying equity theories - proprietary theory is a major influence
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3. Characteristics of a Partner, continued
Articles of partnership - a written partnership agreement is advisable
Acceptable accounting principles - GAAP or OCBOA
Not a taxable entity - a conduit to the individual partners
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4. Accounts Used for a Partner’s Capital Investment
Drawing account
a temporary account
periodically closed to capital accounts
Capital account
a permanent account
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5. The Drawing Account Illustrated
Debit
Periodic withdrawals of partnership assets up to a specified amount
Credit
Closing of balance to partner’s capital account
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6. The Capital Account Illustrated
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. Division of Profits
According to a ratio/percentage - assumed to be equal if not otherwise stated, and/or
According to capital investments of the partners - important to define how capital is measured and/or
According to the labor/service rendered by partners - typically involving a salary and/or bonus
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8. Basic Schedule for Allocating Profits

9. 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.
for example, the allocation of salaries would be satisfied to whatever extent possible before the allocation of interest is begun
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10. Basic Schedule for Allocating Deficiencies and Losses

11. Tax Basis of a Partner’s Interest
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12. Tax Basis of a Partner’s Interest, continued

13. Subsequent Changes in a Partner’s Tax Basis
Factors Increasing Basis:
Additional contributions of individual assets
The partner’s share (based on profit and loss ratios) of increases in partnership liabilities resulting from:
assuming partners’ personal liabilities
direct liabilities of the partnership
The partner’s share of partnership taxable income
The partner’s share of separately identified items of income not included in tax income (loss)
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14. Subsequent Changes in a Partner’s Tax Basis, continued
Factors Decreasing Basis:
Distribution of partnership assets
The portion of the partner’s additional personal liabilities assumed by the partnership
The partner’s share of partnership tax losses
The partner’s share of separately identified items of loss not included in taxable income (loss)
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15. Alternative Organizational Forms
Subchapter S Corporations
Limited Liability Corporations
Limited Liability Partnerships
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