2. Chapter 3 Partnership 1

3. Three forms of business organizations 1. Single proprietorship, or sole proprietorship 2. Partnership 3. Corporation

4. Definition of partnership A partnership may be defined as an association in which persons from two to twenty (except that there is no maximum limit for firms of accountants, solicitors. stock exchanges members or other professional bodies which receive the approval of the board of trade for this purpose)carrying on business in common with a view of profit

5. Features of a partnership The firm is Not a legal person The firm is Not a tax payer The partner should take an unlimited responsibilities for partnership’s liabilities Partners may, from time to time, withdraw money or property from the business for personal use or to engage in other business activities. And the withdrawals are made quite informally at the owner’s discretion. Uncertain capital in business.

6. Accounting for partnership Partnership capital Interest on loan capital Salaries of each partners Drawings Interest on drawings

7. Effect of interest on loan capital Capital Contribution A 90,000 B 10,000 (A) A claim interest on capital rate 12% (B) A do not claim it. Draft outline (A) Draft outline (B) Profit before interest 50,000 50,000 Interest on loan capital 9,600(80,000X12%)×12%) Profit after interest 40,400 50,000 Share profit –A 39,360 45,000 Share profit –B 4,040 5,000 Total received-A 9,600+39,360=45,960 45,000 Total received-B 4,040 5,000

8. Salaries of each partner Salaries of partner can not be included in the business expenses. Salaries of partner can be part of current capital

9. Withdrawals Any withdrawals would decrease the current capital a/c

10. Capital structure Because of changing in partnership’s capital, we always divide their capital into: Permanent capital or fixed capital and Current capital

11. Commencement of a partnership Cash as fixed capital Cash but no stipulation of permanent capital Tangible non-cash business assets as face value Tangible non-cash business assets as fair value Intangible non-cash business assets that are left in the books –Written of the intangible assets

12. Balance sheet as situation 1 Bank120,000 capital120,000 Capital structureAlisonBarnetTotal 60,000 120,000

13. Balance sheet for situation 3 Fixed assets Computer hardware60,000 Computer software60,000 120,000 Capital account AlisonBarnetTotal 60,000 120,000

14. Beginning balance sheet for the situation 4 Fixed assets Computer hardware60,000 Computer software70,000 130,000 Capital accountAlisonBarnetTotal 60,00070,000130,000

15. Balance sheet for the situation 5 Fixed assets Goodwill20,000 Computer hardware 60,000 Computer software40,000 Total120,000 Capital Alison60,000 Barnet 60,000 Total120,000

16. Beginning Balance sheet for the situation with Loan capital (or balance sheet before their operation) AssetsGoodwill20,000 Computer hardware60,000 Computer software40,000 Bank10,000 Total130,000 CapitalAlisonBarnet Capital Balance60,000 120,000 Loan capital10,000 Total130,000

17. After one year ’ s operation During this year’s operation, accounting treatment would be quite similar with that we have learned in Chinese accounting system before we prepare a draft appropriation a/c, their operating result is show as follows:

18. Profit and Loss account of A& B Fee from sale software185,000 Less: Establishment15,000 Administration18,000 Selling expenses32,000 Depreciation-Hardware6,000 - Software4,00075,000 Profit before interest110,000 Interest on loan capital1,200 Profit after interest108,800

19. Other information about Alison and Barnet A’ salary is $3,000 and $8,000 for B’ salary During this year, Alison withdraw $1,500 per month and $2,000 per month for Barnet living expenses They are agreed that interest on drawing is 10% for any exceed amount. Their profit-share ratio would be equal.

20. Draft outline profit and loss Profit after interest108,800 Interest on capital Alison 0 Barnet 0 Salaries Alison3,000 Barnet8,000 Interest on drawing Barnet(24000-18000)×10%600 Share profit Alison49,200 Barnet49,200

21. Alison ’ s current account Alison ’ s current account Drawing 18,000 Balance c/d 34,200 52,200 Salary 3,000 Share of profit 49,200 52,200 Balance b/d 34,200

22. Barnet ’ s current a/c Drawing 24,000 Interest on drawing 600 Balance c/d 32,600 57,200 Salary 8,000 share of profit 49,200 57,200 Balance b/d 32,600

23. Balance sheet of A&B at the end of 19Y0 Fixed assets Goodwill20,000 Computer H60,000 Depreciation H6,00054,000 Computer S40,000 Depreciation S4,00036,000 Current assets Bank86,800 Total assets196,800

24. Balance sheet of A&B at the end of 19Y0 Capital account Alison60,000 Barnet60,000 Loan capital Alison10,000 Current account Alison34,200 Barnet32,600 Capital employed196,800

25. Summarize what we have learned Loan capital Permanent capital Current capital Interest on loan capital Drawing Interest on drawing Prepare draft outline P/L appropriation a/c Prepare current capital a/c

26. More complex question To divide the accounting period into more parts One’s salary is guaranteed by another. Combining the partnership with departmental or branch accounts.

27. Dividing the accounting period into two or more parts If profit share ratio verified during the current year. If salaries of partners changed during the accounting period If new partner is admitted All of that, we need to dividing the accounting period into two or more parts Firs of all is decide when is dividing point.

28. How to divide accounting period into two Cost of sold goods and selling expenses, may be apportioned as a percentage of sales. Establishment, administrative costs, and depreciation should be apportioned on time basis. Of course, the allocation of depreciation should be modified according the to time period in which the fixed asset has been put in place. Allocating other financial expenses would be depend on the date the liability arose.

29. Example 3.3 After 31 December 2002, the profit-share ratio changed to 53.8% for Alison and 46.2% for Barnet. After December 31, Alison’s loan is to be treated as capital. New computer hardware is to be purchased for $16,000 on 30 June, 2003 and new office accommodations will be occupied from 1 June 2003 for an annual rental fee of $6,000. The sales have a quarterly seasonal pattern. The quarter ended 31 December, 2002 is the base period. The second quarter sales (January through March) are one and a half times greater than the first quarter. The third quarter sales are the same as the second, and the fourth quarter’s are the same as the first. The salaries are to be revised after 31 March, 2003 to $4,000 per annum for Alison and $9,000 per annum for Barnet.