1 Overview of Partnerships

2 Learning Objectives What is Partnership? Types of Partnerships and its characteristics. Accounting Practices in Partnerships.

3 Definition A partnership is an unincorporated business owned by two or more partners. A partnership often is referred to as a firm.

4 Basic Characteristics of Partnerships For accounting purposes partnership is treated as separate entity from owners. But under law partnership is not separate from its owners. The assets of partnership belong jointly to all of the partners, not to the business. Each partner has unlimited personal liabilities for the debts of business.

5 Basic Characteristics (cont.) Partnerships end upon withdrawal or death of an existing partner. Admission of a new partner also terminates current partnership and creates new legal entity. The partnership itself pays no income taxes but partners include their shares of firm’s income in their personal income tax returns.

6 Types of Partnership There are three types of partnership. General Partnerships Limited Partnerships Limited Liability Partnerships

7 In this type of Partnership, each partner has equal rights and responsibilities. Each partner has full authority of an owner as that of Sole Proprietor. This concept is called Mutual Agency. Each general partner has unlimited personal liability also. General Partnerships

8 A Limited partnership has a one or more general partners and one or more limited partners. General partners have unlimited personal liabilities for debts of business and right to make managerial decisions. The limited partners share in profit and losses of business but don’t actively participate in management. Limited Partnerships

9 Limited Liability Partnerships In this type of partnership, each partner has unlimited personal liabilities for his or her professional activities, but not for actions of other partners. While in other types of partnerships, one partner can be responsible for actions of other partners.

10 A separate capital account and a separate drawing account are maintained for each partner. The statement of owners equity is replaced by statement of partners equity. In partnerships, the firm’s net income is allocated among its partners i.e. Computing each partner’s share of total net income (loss) and crediting (or debiting) the amount to the capital account of partners. Common Accounting Practices In Partnerships

11 Financial Statements of Partnerships Like sole proprietorship, the net income of partnership represents partners compensation for: Personal services rendered Invested capital Assuming risks for ownership The balance sheet of partnership is more meaningful than that of proprietorship

12 Importance of Partnership Contract Every Partnership needs a formal partnership contract before business begins operations. This is an agreement among partners which spells out the responsibilities of individual partners.

13 Supplemental Topic Salaries Allowances To The Partners, With Remaining Net Income Or Loss Divided In A Fixed Ratio.

14 Methods Of Allocating Net Income About Partners Partners can share net income or loss in partnership according to any of following profit sharing agreements: A fixed ratio Salary Allowances with remainder in a fixed ratio Interest Allowances on partners’ capital with remainder in fixed ratio Salary allowances, Interest on capital with remainder in fixed ratio

15 Salaries Allowances With Reminder In Fixed Ratio Partnership agreements often provide the partners their salaries as a factor in division of profit. Profit and loss sharing agreement also specify a fixed ratio for dividing any profit or loss remaining after salary allowances.

16 Salaries Allowances (cont:) These salary allowances are simply a device for dividing net income of partnerships among the partners. These allowances are not expenses of business and cannot be recorded in any ledger account. A partner is considered an owner, not a employee. The allowances are assumed to be profit for his/her services rendered, not a salary.

17 Credits Ayaz Aijazs103 Farrukh Askaris261 Kamran Ahmeds075 Muhammad Baksh s046 Moiz Mazhar Marvis007 Nabeel Siddiquis203 Wasiq Rashid s213 Yousuf Haneef s009

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