Chapter 2 Accounting For Partnerships
Chapter 2 Accounting For Partnerships
Chapter 2 Accounting For Partnerships
To learn the accounting and reporting
for limited liability partnerships (LLPs)
including:
a. the organization,
b. the income-sharing plans,
c. the financial statements, and
d. the changes in ownership.
To learn the accounting for limited
partnerships
Partnerships: Organization and Operation
2
Partnerships
The Uniform Partnership Act defines a
partnership as: "an association of two
or more persons to carry on, as co-
owners, a business for profit".
Partnerships generally are associated
with the practice of law, medicine,
public accounting and other
professions, and also with small
business enterprises.
Partnerships: Organization and Operation
3
Partnerships (contd.)
General partnership: in which all
partners have unlimited personal liability
for debts of the partnership.
Limited liability partnerships (LLPs):
individual partners of LLPs are
personally responsible for their own
actions and for the actions of
employees under their supervision.
Partnerships: Organization and Operation
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Partnerships (contd.)
The LLPs as a whole, like a general
partnership, is responsible for the
actions of all partners and employees.
Since the LLPs are the prevalent form
of partnerships and the issues of
organization, income-sharing plans and
changes in ownership of LLPs are
similar to those of general partnerships,
LLPs are discussed in this chapter.
Partnerships: Organization and Operation
5
Organization of a Limited Liability
Partnership (LLP)
Basic Characteristics of the LLP:
1. Ease of Formation.
2. Limited Life.
3. Mutual Agency.
4. Co-Ownership of Partnership Assets
and Earnings.
Gains or losses from disposal of
noncash assets invested by the
partners is measured as:
The disposal price – the current fair
value of the assets when invested
adjusted for any depreciation or amortization to the date
of disposal.
These gains (losses) are divided based
on the income sharing plan of the LLP.
entry is recorded:
Income Summary 300,000
Alb, Capital 150,000
Bay, Capital
150,000
At the end of 1999, the drawing accounts are to be closed
to Income Summary as follows: Alb,
Capital 60,000
Bay, Capital 60,000
Alb,Drawing 60,000
Bay,Drawing 60,000
Partnerships: Organization and Operation
29
Income-Sharing Plans for LLP-
Examples (contd.)
The entire income/loss can be shared at
divided as follows:
Note: the average capital balances for Alb
and Bay are $475,000 and $775,000,
respectively.
Partnerships: Organization and Operation
34
Interest on Partner's Capital account balances with
Remaining Divided in Specified Ratio (contd.)
Alb Bay Combined
Interest on average capital
account balances:
Alb: $475,000X0.15 $71,250 $71,250
Bay: $775,000X0.15 $116,250 116,250
Subtotal $187,500
Remainder ($300,000- 56,250 56,250 112,500
$187,500) divided
equally
Total $127,500 $172,500 $300,000
Partnerships: Organization and Operation
35
Interest on Partner's Capital account balances with
Remaining Divided in Specified Ratio (condt.)
The provision of allowing interest on
capital balance should be carried out
even in the case of net loss unless
otherwise indicated in the contract.
Example (with net loss): assume that
$10,000 net loss incurred for the year of
1999, the following table presents the
division of the net loss for the year of
1999:
Land 80,000
Zell, Capital 80,000
To record admission of Zell to partnership.
Partnerships: Organization and Operation
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Admission of a New Partner-
Examples(contd.)
Bonus to Existing Partners:
Assume that in Cain & Duke LLP, the
to $150,000 ($45,000+$45,00+$60,000).
The following entry should be recorded for the