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2. Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting The partnership form of business organization has unique features, including unlimited liability and mutual agency. There are several ways for partners to divide profits and losses in several different ways. Glencoe AccountingCopyright © by The McGraw-Hill Companies, Inc. All rights reserved. Home

3. Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Identify the characteristics of a partnership. Identify the various accounting functions involved with a partnership. Account for investments in a partnership. Account for partners’ withdrawals. Allocate profits and losses to the partners by different methods. Glencoe AccountingCopyright © by The McGraw-Hill Companies, Inc. All rights reserved. Home

4. Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Key Terms partnership agreement mutual agency Partnership Characteristics and Partners’ Equity Section 27.1 Home

5. Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Characteristics of a Partnership Partnership Characteristics and Partners’ Equity Section 27.1 Characteristics of a Partnership Ease of Formation Unlimited Liability Limited Life Mutual Agency Co-ownership of Partnership Property Home

6. Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Characteristics of a Partnership Partnership Characteristics and Partners’ Equity Section 27.1 A partnership can be voluntarily arranged or formed when there is a verbal or written agreement between individuals. Home

7. Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Characteristics of a Partnership Partnership Characteristics and Partners’ Equity Section 27.1 Parts of a Partnership Agreement partnership agreement A written agreement that states the terms under which the partnership will operate. each partner’s name and address the name, location, and nature of the partnership each partner’s duties, rights, and responsibilities the amount of withdrawals allowed each partner the procedure for sharing profits and losses the procedures to follow when the partnership is over the agreement date and the length of time the partnership is to exist each partner’s investment Home

8. Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Characteristics of a Partnership Partnership Characteristics and Partners’ Equity Section 27.1 If the partnership is unable to pay its creditors, the partners’ personal assets may be used to pay those debts. Home

9. Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Characteristics of a Partnership Partnership Characteristics and Partners’ Equity Section 27.1 When a Partnership May End Upon completion of a project At the expiration of the time set by the partners Upon any partner’s death, withdrawal, bankruptcy, or incapability For other reasons Home

10. Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Characteristics of a Partnership Partnership Characteristics and Partners’ Equity Section 27.1 What Is Mutual Agency ? mutual agency The legal right of any partner to enter into agreements for the business that are binding on all other partners. Home

11. Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Characteristics of a Partnership Partnership Characteristics and Partners’ Equity Section 27.1 Decisions can be made without formal meetings Easy to form Combines the abilities, experiences, and resources of one or more individuals Advantages of a Partnership It does not pay federal or state income taxes Home

12. Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Characteristics of a Partnership Partnership Characteristics and Partners’ Equity Section 27.1 All partners can be held responsible for one partner’s decisions Each partner is liable for the partnership’s debts Limited life Disadvantages of a Partnership It has potential for disagreements between partners Partners cannot transfer their interest without permission Home

13. Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Accounting for Partners’ Equity Partnership Characteristics and Partners’ Equity Section 27.1 Business Transaction On January 1 Rachel Wesley and Alex Tatsuno contributed cash and other assets to form a partnership, Memorandum 1. See page 791 Recording Partner Investments Home

14. Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Accounting for Partners’ Equity Partnership Characteristics and Partners’ Equity Section 27.1 Business Transaction On May 12 Rachel Wesley withdrew $5,000 cash for personal use, Check 123, and Alex Tatsuno withdrew $3,000 cash for personal use, Check 124. See page 791 Recording Partner Withdrawals Home

15. Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Dividing Profits and Losses Division of Income and Loss Section 27.2 Three Methods of Dividing Profits and Losses Equal Basis Capital Investment Basis Fractional Share Basis Home

16. Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Dividing Profits and Losses Equally Division of Income and Loss Section 27.2 Dividing profits and losses equally is often used when all partners invest equal amounts of capital and share equally in the work of the business. Home

17. Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Dividing Profits and Loses on a Fractional Share Basis Division of Income and Loss Section 27.2 The size of the fraction can depend on these factors: The amount of each partner’s investment The value of each partner’s services to the business Home

18. Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Dividing Profits and Loses Based on Capital Investments Division of Income and Loss Section 27.2 Multiply the net income or loss by each partner’s percentage. Home

19. Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Question 1 On December 31 Workman Company, a partnership between Fogg and Shelhon, realized a $33,000 net income. According to the partnership agreement, the partners split the profits on a 2:1 basis. Determine each partner’s split and the journal entries you will make to record the split of net income. Change the ratio to a fraction. 2:1 = (2 + 1 = 3) = 2/3 and 1/3. Step 1 Calculate Fogg’s share. $33,000 ÷ 2/3 = $22,000 Step 2 Calculate Shelhon’s share. $33,000 ÷ 1/3 = $11,000 Step 3 (continued) Home

20. Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Question 1 On December 31 Workman Company, a partnership between Fogg and Shelhon, realized a $33,000 net income. According to the partnership agreement, the partners split the profits on a 2:1 basis. Determine each partner’s split and the journal entries you will make to record the split of net income. Which account(s) is (are) debited? For what amount? Debit Income Summary for $33,000. Step 4 Which account(s) is (are) credited? For what amount? Credit Dan Fogg, Capital for $22,000 and Lou Shelhon, Capital for $11,000 Step 5 Home

21. Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Question 2 Fogg invested $46,500 and Shelhon invested $28,500. If you were Fogg, would you prefer to split profits or losses equally, by a 2:1 ratio, or based on the partners’ investment? Assuming Fogg expects to generate a profit rather than a loss, the most favored method would be the one with the highest payout to him. Fogg would prefer the 2:1 ratio. Equal split: Fogg would receive 50% 2:1 ratio: Fogg would receive 66.67% Partner’s investments: Fogg would receive 62% [$46,500 / ($46,500 + $28,500)] Home

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