ACCT B8008 Lecture Notes - Lecture 7: Financial Statement, Limited Liability, Capital Account

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30 Apr 2016
Department
Professor
CH (12) Accounting for
partnerships
Partnership from of
organization
A
par
t
ne
r
s
h
i
p
:
is an association of two or more persons to carry on as co-owners of a business
for
profit.
A no t
her
de
f
i
n
i
t
i
on:
In Egypt, the civil law defines a partnership
as:
*Accompany between two or more persons with intention of trading as
co-partner
on certain address or name of this
company
.
"Characteristics of partnerships"
It consists of five characteristics as follow
:
1- Association of
individual.
2- Mutual
agency.
3- Limited
life.
4- Unlimited
liability.
5- Co-ownership of
property.
( 1)
A s
s o c
ia t ion
o f
i nd ivi d u als :
* A partnership is a legal entity and also an accounting entity. Thus, the
personal
asset, liabilities, and transaction of partners are excluded from the
accounting
recorded of the
partnership.
* A partnership unlike corporation doesn't pay income tax but each partner pays
tax
on his or her share of the partner ships taxable income. "his personal tax
rate
depends
on his
income.
( 2)
M
u tu al
Ag
e
n
c
y:
Each partner acts as an agent of the partnership with authority of contract
for
purchase, sales of goods and services within the scope of normal operation the act
of
any partner is binding on all other
partners
.
( 3)
L
i
m i t e
d
l i f
e:
According to partnership contract it possible to be ended at any time by
admission
of new partner or retirement of a partner, and also death of any
partner.
( 4)
U n li m i t e
d
l
ia
b
il
i
t
y:
* Each partner is personal for all partnership liabilities "debts
claims".
* If partnership assets are insufficient to pay its creditors the creditors claims
take
from personal resources of any
partners.
( 5)
Co - o w
n e
rs
h i
p
o f
p a r
tn e
r
sh ip
p
r
o
p
er
t
y:
A partner invested Assets like Building, Inventory or other property in
partnership
he or she doesn't
retain any personal right to asset contributed, the
property
becomes jointly owned by all partners
according to his/her share on
capital
.
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*
A d
v a
nt a g
es
a
n d
d isa
d va
n
t a
g
e s
o f
p a
r t n
er s
h
i
p*
*
A
d
v
an
tag
es:
(1) Combining skills and resources of two or more
persons.
(2) Easy of
formation.
(3) Freedom from government regulations and restrictions like
"tax".
(4) Each partner has all power and
authority.
(5) Sharing profit and
losses.
*
D
i s
a d
v
a n
t ag
e s:
(1) Mutual
agency.
(2) The life of partnership is
limited.
(3) The partners have unlimited
liability.
*T
he
pa
rt
ners
hi
p
Agreement*
*The agreement of two or more person to from a partnership should be expressed
in
a written contract called "partnership"
agreement".
*The partnership agreement contains basic information as name and address
of
company and purpose and date of
inception.
Some specify relationship among the
partners:
(1) Name and capital contributions of
partner.
(2) Rights and duties of
partner.
(3) Share of wet income and vet
loss.
(4) Provision for withdrawals of
assets.
(5) Procedures for submitting disputes to
arbitration.
(6) Procedures for withdrawals or addition of
partner.
(7) Right and duties of surviving partners in the event of partners
death.
*
B asi
c P a
r t n
er s
h i
p
A
c c o
u n
t i
n g
*
The major accounting issues related
to:
(1) Forming the
partnership.
(2) Dividing income and
loss.
(3) Preparing financial
statement.
(1
)
Fo
r
m in
g
a
p
a
r t
n
e
r s h
ip
:
There is more than one ways to form partnership, partner may pay their shares
in
cash (Assets) a group of assets and liabilities or in transfer an exiting
sole
proprietorship to
partnership.
(A) By
cash:
Forming a partnership using cash is considered as the simplest and most
clear-cut
case in partnership
formation.
Ex:
"A"and"B" form a partnership and each partner according to the
partnership
agreement, contributes L.E50000
cash.
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