PARTNERSHIPS partnerships.

Generally, agreement items for

income or loss allocation conform with the
LECTURE NOTES following remunerations:
a. Income allocations on the basics of capital
PARTNERSHIP FORMATION AND OPERATION balances to reward partners in proportions
1. A partnership is an association of two or more to their respective investments;
persons for the purpose of carrying a business b. Income allocations on the basics of service
and to divide the profits among themselves. The contributions to reward partners for their
person’s maybe individuals or proprietorships respective service to the partnership ;and
or partnerships. c. Any numerical ratio, e.g. 3:2:5 will apply to
the residual profit or loss after allocations
2. Accounting for the ownership of the partners in made for (a) and (b) above.
a partnerships requires the establishment of a
pair of accounts for each partner the capital 5. The financial statements prepared for
account and true initial investment, additional partnerships are similar to those prepared for
investment, withdraw of capital, as well as corporations, except for the following basics
partner’s share in net income or loss for the differences:
period. The drawing account is temporary a. In the balance sheet, ownerships equity for
owner’s equity account to record the partner’s a partnership will be partners’ capital
withdrawals of cash and other assets in balances; in a corporation, capital stocks,
anticipation of share in net profits. Excess additional paid-in capital, and retained
drawings over the agreed amount are however earnings. In lieu of a statement of retained
directly charged to the capital account. earnings done for corporations,
partnerships present a statement of
The initial investment of the partners are partners’ capital in support of its
recognized at FAIR VALUES and credited to the ownerships equity on the balance sheet.
partners’ capital accounts in the agreed b. A statement or partner’s capital balances
INTEREST RATIO. When the interest ratio is not will show initial or beginning balances,
specified nor implied, it is deemed to the additional investments, withdraw of capital,
CONTRIBUTION RATIO. This is known as the temporary drawings, share of net income or
NET INVESTMENT METHOD. The only other net loss, and partners’ compensation
method is the BONUS METHOD, because the treated as operating expenses.
GOODWILL METHOD is deemed obsolete in c. In the income statement, generally, salaries,
partnership accounting due to specific IFRS interest, and bonuses paid to partners are
provisions. excluded from the operating expenses of
partnerships although in few situations we
3. During the operations of the partnerships, loan find some partnerships treating partner’s
by a partner to partnership (Loans Payable) or remunerations as operating expenses rather
by the partnership to a partner (Loans than as distribution of net profits.
Receivable) may also be recognized in the
partnership records. In unusual situations, PARTNERSHIP DISSOLUTION AND LIQUIDATION
unpaid compensation item to partners treated 1. Any major change in partnership ownership
as operating expenses rather than as such as admission of a new partner into an
distribution of net profit are carried as items existing partnerships, or withdrawal of a partner
payable to partner. The capital account, the from an existing partnerships dissolves the
drawing account, loans to/from partners. And partnerships. Dissolution of a partnership entity
partnership liabilities to partners constitute to does not however imply liquidation, for
total interest or the partner at any given time. oftentimes the business entity continues its
operations undisturbed.
4. Partnerships income or loss is allocated to
partners in many ways and are taken up in the 2. There are two ways a new partner can get
partnership agreement to reflect compensation admitted into the partnerships:
for each partner’s contribution into the
 a. Admission by investment is one in which 4. A liquidation winds up all operations of the
the new partner transfers net assets into partnerships, converts all partnerships assets
the partnerships, Thus, the net assets of the into cash and distributes to creditors of the
partnerships increase by the amount partnership’s then to accounts with partners.
contributed which said contribution
becomes a new source of capital. Capital 5. A statement of liquidation summarizes all
credits to all partners upon admission of a liquidation activities, including payments to
new partner will depend upon admission of partners. There are two types of distribution in
a new chapter will depend upon agreement, partnerships liquidation, as follow:
which can either be net investment method a. Liquidations in which all distributions are
or the bonus method. made at a single time following the sale of
b. Admission by purchased interest is one in all non-cash assets. This is called lump-sum,
which the new partner transfers assets or total, liquidation.
directly to one or more partner (NOT TO b. Liquidation in which there are several
THE PARTNERSHIPS) in consideration for the distributions, oftentimes at points when
purchased interest. Thus the net assets of non-cash assets still remain in the records.
the partnerships remain the same even This called installment liquidation.
after the admission of new partner.
6. Distribution of partnerships cash in liquidation
3. If a partner withdraws from the partnerships, must be made to creditors first, and then to
the partnerships must liquidate the partners ‘accounts which are always based on
withdrawing partner’s ownership equity, as free-interest computations. Loan accounts are
follows; prioritized over capital balances only if they
a. Payment to withdrawing partner will not belong to the same partner.
come from partnerships assets-
The withdrawing partner may just sell his 7. Safe-payment computations is required for
interest to the remaining partner or to an every distribution to partners when non-cash
outsider with the permission of the assets remain unsold (and the profit and loss
remaining partners. In this case the entry ratio and the interest ratio at that point are not
required to be recorded in the books or the identical). The purpose of this calculation is to
partnerships is the transfer of interest from determine who among the partners have the
the drawing partner to the buying free-interests to deserve the payment from the
partner(s) account(s). partnerships. The computation starts with the
b. Payment to the withdrawing partner will total interest of each of the partners at the
come from partnerships assets- point of cash distribution and must assume that
Under this agreement, one of three all the remaining non-cash assets are worthless
situations can occur: and therefore is a total loss, and that all the
(1) Payment is equal to the interest partners are insolvent. Thus in the event of
withdrawn, capital account of the capital deficit for a partner, it is charged as
withdrawing partner and a credit for additional loss to other partners in the
the payment made, since both amount remaining profit and loss to arrive at the free
are equal. interests amounts of the partners.
(2) Payment is less than the interest
withdrawn, which is recorded with 8. To preparing the calculation for safe-payment
bonus to the remaining partners divided every time there is an installment distribution, a
in the remaining profit and loss ratio. cash distribution program to partners is
(3) Payment is more than the interest prepared. This statement is prepared just
withdrawn the excess is recorded as before the start of liquidation, i. e before any
bonus to the retiring partner and realization of assets and replaces the safe-
charged to the remaining partners in payment calculations by the use of just one
the remaining profit and loss ratio. schedule for the numerous distributions to the
partners normally occurring in liquidation. As
the timing for its preparation indicates, the
schedule is not based on realization of assets in
liquidation but rather on the partner’s relative
loss-absorption-capabilities established just
before liquidation. In essence it also uses free-
interest principles.