chapter 10 accounting for partnership 合伙企业会计. organizing a partnership partners can...

Chapter 10

Accounting for Partnership 合伙企业会计

Organizing a PartnershipPartners can invest both assets and liabilities in the

partnership.

Partners can invest both assets and liabilities in the partnership.

Assets and liabilities are recorded at an agreed-upon value, normally fair market value.

Assets and liabilities are recorded at an agreed-upon value, normally fair market value.

Contributions increase the partner’s capital account. (additional investment)

Contributions increase the partner’s capital account. (additional investment)

Withdrawals decrease the partner’s capital account.

Withdrawals decrease the partner’s capital account.

Organizing a Partnership

Drawing

Cash or other assets withdrawn by a partner

Payments from partnership funds of the personal debt

Collections on behalf of the firm by a partner but

retained by the partner personally

Drawing

Cash or other assets withdrawn by a partner

Payments from partnership funds of the personal debt

Collections on behalf of the firm by a partner but

retained by the partner personally

Choosing a Business FormProprietorship Partnership LLP LLC S Corp. Corporation

Business entity yes yes yes yes yes yesLegal entity no no no yes yes yesLimited liability no no limited* yes yes yesBusiness taxed no no no no no yesOne owner allowed yes no no yes yes yes

*A partner's personal liability for LLP debts is limited. Most LLPs carry insurance to protect against malpractice.

Many factors should be considered when choosing the proper

business form.

Many factors should be considered when choosing the proper

business form.

Dividing Income or Loss• In the absence of an agreement, the

Uniform Partnership Act says that the income or loss is shared equally by the partners.

• Four frequently used methods to divide income or loss are:– A stated ratio– Salary allowances to the partners, with the remaining net income or loss divided

in a fixed ratio– Interest allowances on partners’ capital

balance the partners, wit the remaining net income or loss divided in a fixed ratio

– Salary and interest allowances and any remainder in a fixed ratio.

Let’s look at each of these

methods!

Allocation on Stated Ratios

GENERAL JOURNAL Page 34Date Description PR Debit Credit

Prepare the closing entry for Income Summary that will allocate the income to the

partners based on their agreement.

Greene and Red agree to a three-fourths, one-fourth allocation of partnership income

and loss, respectively. For 2002, net income is $60,000.

Allocation on Stated Ratios


Income Summary 60,000

Greene, Capital 45,000

Redd, Capital 15,000

Greene and Red agree to a three-fourths, one-fourth allocation of partnership income and loss, respectively. For 2002, net income is $60,000.

Greene: $60,000 (3/4) = $45,000

Redd: $60,000 (1/4) = $15,000

Salaries to Partners, remainder in a fixed ratio


Greene receives $15,000 and Red receives $10,000 as annual salaries. Any remaining balance of income or loss is allocated equally.

Net income for 2002 is $60,000.



Allocation on Services and Stated Ratios

Greene Redd TotalNet income 60,000$ Salaries 15,000$ 10,000$ 25,000 Remainder 35,000 Equal allocation of remainder 17,500 17,500 35,000 Balance of net income -$

Income of each partner 32,500$ 27,500$

If the allowances exceed net income, the deficit would be allocated equally, just as the excess is

in the example above.

Allocation on Services and Stated Ratios

Greene Redd TotalNet income 20,000$ Salaries 15,000$ 10,000$ 25,000 Remainder (5,000) Equal allocation of remainder (2,500) (2,500) (5,000) Balance of net income -$


If the net income is 20000, the deficit would be allocated equally, just as the excess is in the

example above.

Salaries to Partners, remainder in a fixed ratio


Income summary 60,000

Creene capital 32,500

Red receivable 27,500

Greene receives $15,000 and Red receives $10,000 as annual salaries. Any remaining balance of income or loss is allocated equally.

Net income for 2002 is $60,000.

Interest to Partners, remainder in a fixed ratio


Each partner is allowed an annual interest allowance of 5% on the beginning-of-year capital balance ,Any remaining balance of income or loss is allocated equally. Green’s capital balance is $80,000 and Red’s capital balance is $40,000 .Net income

for 2002 is $60,000.



Allocation on interest and Stated Ratios

Greene Redd TotalNet income (60,000)$ Interest 4,000 2,000 6,000 Remainder (66,000) Equal allocation of remainder (33,000) (33,000) (66,000) Balance of net income -$

Income of each partner (29,000)$ (31,000)$

Greene: $80,000 *5% = $4,000

Redd: $40,000 *5% = $2,000

Interest to Partners, remainder in a fixed ratio


Income Summary 60,000

Greene, Capital 31,000

Red, Capital 29,000

Each partner is allowed an annual interest allowance of 5% on the beginning-of-year capital balance. Any remaining balance of income or loss is allocated equally. Green’s beginning capital balance is $80,000 and Red’s beginning capital balance is $40,000 .Net income for 2002 is $60,000

Greene and Red’s partnership agreement contains the following information:

• Greene receives $15,000 and Red receives $10,000 as annual salaries.

• Each partner is allowed an annual interest allowance of 5% on the beginning-of-year capital balance. Green’s beginning capital balance is $80,000 and Red’s beginning capital balance is $40,000 .

• Any remaining balance of income or loss is allocated equally.

Net income for 2002 is $60,000.What amount of the net income will be allocated to each

partner based on their agreement?

Allocation on Salary and Interest allowances, Stated Ratios

Greene Redd TotalNet income 60,000$ Salaries 15,000$ 10,000$ 25,000 Interest 4,000 2,000 6,000 Remainder 29,000 Equal allocation of remainder 14,500 14,500 29,000 Balance of net income -$


If the allowances exceed net income, the deficit would be allocated equally, just as the excess is

in the example above.



Greene Redd TotalNet income 30,000$ Salaries 15,000$ 10,000$ 25,000 Interest 4,000 2,000 6,000 Remainder (1,000) Equal allocation of remainder (500) (500) (1,000) Balance of net income -$


If the net income is 30,000, the deficit would be allocated equally, just as the excess is in the

example above.

Allocation on Salary, interest Allowances and Stated Ratios

Greene Redd TotalNet income (60,000)$ Salaries 15,000$ 10,000$ 25,000 Interest 4,000 2,000 6,000 Remainder (91,000) Equal allocation of remainder (45,500) (45,500) (91,000) Balance of net income -$

Income of each partner (26,500)$ (33,500)$

If there is a net loss 60,000

Partnership Financial Statements

TotalBeginning capital balances -$ -$ -$ Investments by owners 80,000 40,000 120,000 Net income Salary allowances 15,000$ 10,000$ Interest allowances 4,000 2,000 Balance allocated 14,500 14,500 Total net income 33,500 26,500 60,000 Less partners' withdrawals (5,000) (1,000) (6,000) Ending capital balances 108,500$ 65,500$ 174,000

Greene Redd

Greene and Redd PartnershipStatement of Changes in Partners' EquityFor the Year Ended December 31, 2002

Although most partnership financial statements are very similar to those of a proprietorship, the Statement of

Changes in Partners’ Equity is one exception.

Assignments :p256 problem 4 P237 Problem 3

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