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Introduction to Partnerships & Financial Statements and Liquidation of a Partnership Chapters 27 & 28.

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Presentation on theme: "Introduction to Partnerships & Financial Statements and Liquidation of a Partnership Chapters 27 & 28."— Presentation transcript:

1 Introduction to Partnerships & Financial Statements and Liquidation of a Partnership Chapters 27 & 28

2 Characteristics of a Partnership Partnership – an association of two or more persons as co-owners to operate a business for profit. Ease of Formation Unlimited Liability Limited Life Mutual Agency Co-ownership of Partnership Property Advantages and Disadvantages of a Partnership Pgs 786 - 787

3 Ease of Formation – No special legal requirements must be met to form a partnership. – Voluntary Arrangement – Can’t be force into or to stay involved with a partnership. – Partnership Agreement Can be an oral agreement Advisable to be in writing. Including – Each partner’s name and address – Name, location, and nature of the partnership – Agreement date and length of time the partnership is to exist – Each partner’s investment – Each partner’s duties, rights, and responsibilities – Amount of withdrawals allowed each partner – Procedure for sharing profits and losses – Procedures to cease the existence of the partnership Unlimited Liability – each person is legally liable for the partnership’s debts. Pg 786

4 Limited Life – A partnership can end for many reasons: – Partner’s death – Withdrawal – Bankruptcy – Incapacity – Completion of the project – Expiration of time pre set by partners Mutual Agency – any partner has the legal right, in the name of the firm, to enter into agreements that are binding on all other partners. Co-ownership of Partnership Property – When a partner invests assets in the partnership, he or she gives up all personal rights of ownership. Pgs 786-787

5 Advantages of Partnership – Combines abilities, experiences, and resources of two or more individuals – Easy to form requiring only a partnership agreement – Decision making without formal meetings – Does not pay federal or state taxes because each partner pays person income taxes on his/her share of the net income of the business Disadvantages of Partnership – Limited Life – Each partner is personally liable for all debts – All partners are held responsible for the decisions of each of the other partners – A partner cannot transfer his/her share of the business without the other partners’ consent – Arguments/disagreements could end the business Pg 787

6 Accounting for Partners’ Equity A separate capital account is set up for each partner’s investment A separate withdrawal account is set up for each partner’s drawings GillPutman Cash$12,000 Office Supplies 1,000 Office Equipment 12,000 Building$30,000 Land 15,000 $45,000$25,000 Pg 787 When assets other than cash are invested in a partnership, the asset accounts are debited for the market value of the asset.

7 Initial Investment Transaction Pg 788 Any additional investments by the partners are recorded in a similar manner. For example, in April each partner agreed to invest $5000 cash. Cash is debited for $10,000 and the two partners’ capital accounts are credited for $5,000 each

8 Recording Partner Withdrawals Pg 788

9 Division of Income and Loss At the end of each accounting period, the net income or net loss from partnership operations is divided among the partners. Partners may divide the income or loss among themselves in any way the choose. The specific method should be defined in the partnership agreement. If it is not, the law provides that net income or net loss be divided equally. Ways to divide profit/loss – Equal basis – Fractional share basis – Capital investment basis Pg 790

10 Dividing Profits and Losses Equally Pg 791

11 Dividing Income and Losses on a Fractional Share Basis Pgs 792 - 793 Net Income Net Loss

12 Dividing Incomes and Losses Based on Capital Investments Net Income Net Loss Pgs 793-794

13 Do Working Papers 27-4 through 27-10

14 Financial Statements for a Partnership It is not required that the division of income or loss be shown on the Income Statement. But if it is, this is how it is done. Pg 808

15 Statement of Changes in Partnership Equity Pg 809 The Statement of Changes in Partners’ Equity reports the change in each partner’s capital account resulting from business operations, investments, and withdrawals.

16 Partnership Balance Sheet The owners’ equity section of the balance sheet for a partnership is called the Partners’ Equity section. This section lists each partner’s capital account separately. The capital account amounts on the balance sheet are the ending capital amounts from the statement of changes in partners’ equity. Pg 809

17 Ending a Partnership A partnership does not have an unlimited life. A partnership can be dissolved or liquidated – Dissolution occurs when the partners change, but the partnership continues operation. When a new partner is admitted, the partnership dissolves and a new partnership begins – Liquidation occurs when the business ceases to exist. The liquidation sells all partnership assets to cash and pays all partnership debts. The individual partners then are paid any remaining cash. The process involves 4 steps 1.Sell all noncash assets for cash 2.Add all gains (or deduct all losses) resulting from the sale of noncash assets to or from the capital accounts of the partners based on the partnership agreement 3.Pay all partnership creditors 4.Distribute any cash remaining to the partners based on the final balance in their capital accounts. Pg 811

18 The Liquidation Process Molly Gill and Don Putman share profits and losses equally and agree to end the partnership baaed on the April 15 balance sheet. Pg 812

19 Sale of Partnership Accounts Receivable at a Loss On April 20 Surfside sold its $33,000 in accounts receivable to a finance broker for $29,000. The receivables sale resulted in a $4,000 loss to the partnership. Pg 812

20 Sale of Partnership Merchandise at a Loss Sale of Partnership Equipment at a Gain Pg 813

21 Payments of Partnership Liabilities Final Distribution of Cash Pg 814

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