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Financial Accounting
Mark Fitzpatrick

Characteristics of Partnerships 1. Co-ownership of property 2. Association of individuals 3. Unlimited liability 4. Limited life 5. Mutual agency 6. Division of income Co-ownership of Property - Assets are owned jointly by partners - If partnership is dissolved, assets are not returned to original contributor but rather gain/loss is distributed between partners Association of Individuals - partnerships can be formed legally or casually - partnerships can be legal entities - assets can be owned in the name of the partnership - partnerships cannot be taxed as a separate entity Unlimited Liability - each partner is liable for all partnership liabilities - anything one partner does, the other partner is responsible for Limited Life - any change in ownership ends the partnership - partnership dissolution occurs when a partner withdraws or a new partner is admitted - if continuing partners agree, operations can continue without interruption by forming a new partnership Mutual Agency - any actions one partner does are bonded to the other partners - each partner acts on behalf of the others when they are doing business Division of Net Income - net income/loss must be divided between partners - the amount divided is based on an income ratio previously determined Limited Partnerships - if a partner has unlimited liability, they are called a general partner - if a partner has limited liability, they are called a limited partner - limited partnerships have at least one of each type of partner - usually used by businesses that offer tax shelters for investors, real estate, rental properties, and sports ventures Limited Liability Partnerships - protects innocent partners from possible liabilities - partners have unlimited liability for their own actions but have limited liability for the actions of other partners - partners are also liable for actions of employees they supervise/control Pros & Cons of a Partnership Advantages: combines skills & resources of multiple individuals, easily formed, fewer government regulations and restrictions, and easy decision making Disadvantages: mutual agency, limited life, unlimited liability Partnership Agreement - written contract between partners - features additional information including rights, duties, and income ratio - if no partnership agreement is created, the partnership act will apply Forming a Partnership - initial investments by partners must be recorded at fair market value - journal entries are made to establish initial investments Dividing Net Income/Net Loss - shared equally unless otherwise indicated by an income ratio - closing entries are the same except net income/loss needs to be allocated to different accounts based on the income ratio - drawings must also be in separate accounts Closing Entries 1. close revenue accounts 2. close expense accounts 3. appropriately divide net income/loss and apply the changes 4. close drawings Income Ratios - income should be shared in a way that fairly reflects each partner’s investment and service to the business - income ratios may not necessarily be used to calculate income ratios - can be: fixed ratios, ratio based on capital balances, salaries to partners and the remainder in a fixed ratio, interest on capital balances and remainder in a fixed ratio, and salaries to partners, interest on capital balances, and remainder in a fixed ratio Salaries, Interest & Remainder in a Fixed Ratio - salaries are distributed, then interest distributed, and remainder issued last - entry for remainder: DR Income Summary, CR Capital Accounts - entry for negative remainder: DR Capital Accounts, CR Income Summary Partnership Financial Statements - similar to that of a proprietorship but with a few changes - division of net income/loss is often a separate schedule or note to the statement - this statement of equity is known as the statement of partners’ capital - illustrates changes in capital accounts - equity section of balance sheet is known as the section called partners’ equity Admission of a Partner - legally dissolves previous partnership and begins a new one - partners may be admitted through the purchase of the interest of an existing partner or investing assets in the partnership - purchase of the interest of a partner involves a capital transfer among partners - total capital is not affected by this - investing assets increases net assets and total capital Purchase of Interest - admission by purchase of an int
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