Chapter 23 Vocab Test Review Try this technique… Improve recall and increase understanding: Take notes to summarize your learning and find connections. This approach is similar to the trick teachers often use of telling students they are welcome to bring one 3″ x 5″ card of notes to use during the final exam. Most students discover during the exam that they don’t need most (or all) of the information they managed to cram onto the card. Why? Because creating the card required them to reflect on the material, find connections within the material, decide what was most important, then write the essence of it all down to make it fit on one small card. The process of summarizing and finding connections, then writing them down, will help you to “understand” material. “Taking notes” may seem similar, but it all too often does not involve summarizing or finding connections. Summarizing and finding connections require reflection – you must think about the new material and how it relates (if at all)  to experiences you have had and/or other topics you already understand. The discovery of connections and/or relationships are what lead to both long term recall and understanding. . .

Lesson 23-1 Partnerships A business in which two or more persons combine their assets and skills is called a partnership. Each member of a partnership is called a partner.

Comparison of Forms of Ownership Lesson 23-1 Comparison of Forms of Ownership Form Advantages Disadvantages Sole Proprietorship 1. Ease of formation 2. Retention of all profits 3. Total control 4. Simple tax structure 1. Unlimited liability 2. Less capital available 3. Limited vision and skills 4. Terminates with life of owner Partnership 2. More capital available 3. Share work; each partner can operate in their area of expertise 2. Liable for partner’s actions 3. Must share profits 4. Hard to dissolve 5. Terminates with life of one partner Corporation 1. Limited liability 2. Ease of transfer of ownership 3. Unlimited life of the organization; does not terminate with death of investor 1. Harder/more expensive to form 2. Less control 3. Double taxation 4. More government regulations

Partnership Agreements Lesson 23-1 Partnership Agreements Partnership Agreement: A written agreement setting forth the conditions under which a partnership is to operate. Legally, a partnership agreement may be either written or oral. However, a written agreement may limit misunderstandings in the future; therefore, a partnership agreement should be in writing.

Initial Investments by Owners Lesson 23-1 Initial Investments by Owners Cash 20,000.00 January 1. Received cash from partner, Sarah Hatcher, as an initial investment, $20,000.00. Receipt No. 1. 20,000.00 Sarah Hatcher, Capital 1 Credit capital account for total investment by owner 1 2 Debit Cash for amount of cash invested by owner 1

Initial Investments by Owners Lesson 23-1 Initial Investments by Owners Office Equipment 3,000.00 January 1. Received cash, $17,000.00, and office equipment valued at $3,000.00, from partner, Parker O’Reilly, as an initial investment. Receipt No. 2. Cash 17,000.00 20,000.00 Parker O’Reilly, Capital Debit Office Equipment for value of asset invested by owner 2 Debit Cash for amount of cash invested by owner 2 Credit capital account for total investment by owner 2

Withdrawal of Cash by Partner Lesson 23-1 Withdrawal of Cash by Partner Parker O’Reilly, Drawing 750.00 January 15. Parker O’Reilly, partner, withdrew cash for personal use, $750.00. Check No. 12. 750.00 Cash 1 Debit Parker O’Reilly, Drawing 2 Credit Cash

Withdrawal of Supplies by Partner Lesson 23-1 Withdrawal of Supplies by Partner Sarah Hatcher, Drawing 450.00 January 15. Sarah Hatcher, partner, withdrew supplies for personal use, $450.00. Memorandum No. 1. 450.00 Supplies 1 Debit Sarah Hatcher, Drawing 2 Credit Supplies

Distribution of Net Income Statement Lesson 23-2 Distribution of Net Income Statement Distribution of Net Income Statement: A partnership financial statement showing net income or loss distribution to partners.

Distribution of Net Income Statement with Unequal Distribution Lesson 23-2 Distribution of Net Income Statement with Unequal Distribution The partnership earnings are distributed according to the partnership agreement.

Partners’ Capital and Drawing Accounts Lesson 23-2 Partners’ Capital and Drawing Accounts Owners’ Equity Statement: A financial statement that summarizes the changes in owners’ equity during a fiscal period. Owners examine the Owners’ Equity Statement to evaluate how their equity changed during a fiscal period.

Owners’ Equity Statement with an Additional Investment and a Net Loss Lesson 23-2 Owners’ Equity Statement with an Additional Investment and a Net Loss

Partners’ Capital and Drawing Accounts Lesson 23-2 Partners’ Capital and Drawing Accounts The Drawing account has a normal debit balance. Drawing decreases Owners’ Equity.

OE Section of Balance Sheet for a Partnership Lesson 23-2 OE Section of Balance Sheet for a Partnership

Account Balances Before Realization Lesson 23-3 Account Balances Before Realization If a partnership goes out of business, its assets are distributed to the creditors and partners. Liquidation of a Partnership: The process of paying a partnership’s liabilities and distributing remaining assets to the partners. Cash received from the sale of assets during liquidation of a partnership is called realization.

Account Balances Before Realization Lesson 23-3 Account Balances Before Realization Cash Bal. 28,000.00 Accounts Payable Bal. 8,500.00 Supplies Bal. 2,000.00 Gerald Bakkan, Capital Bal. 22,000.00 Bal. 25,000.00 Machinery Bal. 19,500.00 Jon Bakken, Capital Realization: Cash received from the sale of assets during liquidation of a partnership. Bal. 5,000.00 Accumulated Depreciation—Machinery

Calculating Gain on Realization Lesson 23-3 More cash was received than the book value = Gain 1 Determine Book Value of Asset Sold Value of Asset Received − Book Value of Asset Sold = Gain on Realization Cost $25,000.00 Accum. Depr. - 5,000.00 Cash $21,500.00 − Book Value $20,000.00 = $1,500.00 2 Subtract Book Value from Cash Received 3 Amount of Gain Gain recorded as a credit Gain on Realization

Recording Gain on Realization Lesson 23-3 Recording Gain on Realization July 1. Received cash from sale of machinery, $21,500.00: original cost, $25,000.00; total accumulated depreciation recorded to date, $5,000.00. Receipt No. 712. Cash Bal. 28,000.00 Sold Machinery 21,500.00 Machinery Bal. 25,000.00 25,000.00 5,000.00 Accumulated Depreciation—Machinery Bal. 5,000.00 Sold Machinery 1,500.00 Gain on Realization

Calculating Loss on Realization Lesson 23-3 Calculating Loss on Realization When noncash assets are liquidated and the amount received is less than the book value of the asset being sold, you debit the Loss on Realization Account. 1 Determine Book Value of Asset Sold Value of Asset Received − Book Value of Asset Sold = Loss on Realization Cash $1,700.00 − Supplies $2,000.00 = $(300.00) 2 Subtract Book Value from Cash Received 3 Amount of Loss You expected to get the book value, but only received 1,700. You lost $300. Loss recorded as a debit Loss on Realization

Recording a Loss on Realization Lesson 23-3 Recording a Loss on Realization July 1. Received cash from sale of supplies, $1,700.00; balance of Supplies account, $2,000.00. Receipt No. 713. Bal. 28,000.00 Sold Machinery 21,500.00 Sold Supplies 1,700.00 Cash Supplies Bal. 2,000.00 2,000.00 Sold Supplies 300.00 Loss on Realization

Liquidating Liabilities Lesson 23-3 Liquidating Liabilities Bal. 28,000.00 Sold Machinery 21,500.00 Sold Supplies 1,700.00 Cash Paid Acct. Pay. 8,500.00 July 1. Paid cash to all creditors for the amounts owed, $8,500.00. Check No. 825. Accounts Payable Bal. 8,500.00

Lesson 23-3 Account Balances after Liquidation of Noncash Assets and Payment of Liabilities Paid Acct. Pay. 8,500.00 Bal. 28,000.00 Sold Machinery 21,500.00 Sold Supplies 1,700.00 (New Bal. 42,700.00) Cash Bal. 22,000.00 Gerald Bakken, Capital Jon Bakken, Capital Bal. 19,500.00 Sold Machinery 1,500.00 Bal. 1,500.00 Gain on Realization Sold Supplies 300.00 Bal. 300.00 Loss on Realization

Distributing Loss or Gain on Realization Lesson 23-3 Distributing Loss or Gain on Realization Sold Machinery 1,500.00 Bal. 1,500.00 Gain on Realization Sold Supplies 300.00 Bal. 300.00 Loss on Realization Balance of Gain on Realization × Fixed Percentage = Share of the Balance of Gain on Realization G. Bakken $1,500.00 × 60% = $ 900.00 J. Bakken $1,500.00 40% 600.00 Total $ 1,500.00 Balance of Loss on Realization × Fixed Percentage = Share of the Balance of Loss on Realization G. Bakken $300.00 × 60% = $ 180.00 J. Bakken $300.00 40% 120.00 Total $ 300.00

Distributing Loss or Gain on Realization Lesson 23-3 Distributing Loss or Gain on Realization July 6. Recorded distribution of gain on realization: to Gerald Bakken, $720.00; to Jon Bakken, $480.00. Recorded distribution of loss on realization: to Gerald Bakken, $180.00; to Jon Bakken, $120.00. Memorandum Nos. 531 and 532. Bal. 22,000.00 Share of gain 900.00 (New Bal. 22,720.00) Gerald Bakken, Capital Share of loss 180.00 1,500 Gain minus -300 Loss 1,200 to be split between the partners according to partnership agreement. Jon Bakken, Capital Bal. 19,500.00 Share of gain 600.00 (New Bal. 19,980.00) Share of loss 120.00 Sold Machinery 1,500.00 Gain on Realization Distribution 1,500.00 Sold Supplies 300.00 Loss on Realization Distribution 300.00

Distributing Loss or Gain on Realization Lesson 23-3 Distributing Loss or Gain on Realization Closes Gain on Realization account. Closes Loss on Realization account.

Distributing Remaining Cash to Partners Lesson 23-3 Distributing Remaining Cash to Partners The last step in liquidating a partnership: Bal. 42,700.00 (New Bal. 0.00) 22,720.00 19,980.00 Cash July 6. Recorded final distribution of remaining cash to partners: to Gerald Bakken, $22,720.00; to Jon Bakken, $19,980.00. Check Nos. 826 and 827. 22,720.00 Bal. 22,720.00 (New Bal. 0.00) Gerald Bakken, Capital Bal. 19,980.00 (New Bal. 0.00) Jon Bakken, Capital 19,980.00 Debit each partner’s capital account for the amount of the account balance Credit Cash for the amounts distributed

Work at Understanding  Chapter 23 Vocab Test Review Test Review Strategy The End Remember: Work at Understanding  .