Basic Partnership Accounting

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10 Nov 2010
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Basic Partnership Accounting
¾ Forming a Partnership
Initial investments are to be entered in the partnership records. These investments
should be recorded at the fair market value of the assets at the date of their transfer to
the partnership (no amortization should be included). However, investments of A/R
should be recorded at full value, with the addition of doubtful accounts
¾ Dividing Net Income or Net Loss
The division of net income or loss is known as the income ratio
Closing Entries: DR ± 5HYHQXH&5,6'5,6&5([S'5,6&5SDUWQHUV¶
FDSLWDODFFRUGLQJWRLQFRPHUDWLR'5SDUWQHUV¶FDpital for drawings CR
drawings. It is necessary to divide income and loss among the numerous
capital accounts
Income Ratios: fixed ratio (i.e. 2:1), ratio based on capital balances or average
capital during the year, salaries and then a fixed ratio, interest and then fixed
ratio, salariesÆinterest and then fixed ratio. The objective is to agree to a
EDVLVWKDWZLOOHTXLWDEO\UHIOHFWWKHSDUWQHUV¶FDSLWDOLQYHVWPHQWDQGVHUYLFHWR
the partnership. Division of salaries or interest to partners are not expenses
Salaries, Interest, and Remainder in a Fixed Ratio: salaries and interest must
be allocated before the remainder is divided according to the specified fixed
ratio, even if these provisions exceed net income. Any remaining excess of
deficiency is then allocated to the partners
¾ Partnership Financial Statements
The financial statements of a partnership are similar to those of a proprietorship, with
the difference of number of owners involved. The statement of equity for a
partnership is called the statement oISDUWQHUV¶FDSLWDODQGRZQHVHTXLW\EHFRPHV
SDUWQHUV¶HTXLW\
¾ Admission of a Partner
The admission of a new partner results in the legal dissolution of the existing
partnership and the beginning of a new one. To recognize the economic effects, it is
only necessary to open a new capital account for each new partner
3XUFKDVHRID3DUWQHV,QWHUHVW: This is a personal transaction between one or
PRUHH[LVWLQJSDUWQHUVDQGWKHQHZSDUWQHU7KHSXUFKDVHRIDSDUWQHU¶V
interest is simply a debit to the old partQHVFDSLWDODFFRXQWIRUWKHRZQHUVKLS
FODLPVWKDWKDYHEHHQUHOLQTXLVKHG7KHQHZSDUWQHVFDSLWDODFFRXQWLV
credited with the ownership interest purchased. Regardless of the amount
paid by the new partner, the entry would still be a DR to the old Capital
accounts, CR to the new Capital account
Investment of Assets in a Partnership: This type of investment increases both
the net assets and the total capital of the partnership
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Document Summary

Initial investments are to be entered in the partnership records. These investments should be recorded at the fair market value of the assets at the date of their transfer to the partnership (no amortization should be included). However, investments of a/r should be recorded at full value, with the addition of doubtful accounts. The division of net income or loss is known as the income ratio. It is necessary to divide income and loss among the numerous capital accounts. Income ratios: fixed ratio (i. e. 2:1), ratio based on capital balances or average capital during the year, salaries and then a fixed ratio, interest and then fixed ratio, salariesinterest and then fixed ratio. Division of salaries or interest to partners are not expenses. Salaries, interest, and remainder in a fixed ratio: salaries and interest must be allocated before the remainder is divided according to the specified fixed ratio, even if these provisions exceed net income.

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