Partnership Accounting
Close net income to capital accounts journal entry
Dr. Income Summary Cr. Partner A, capital Cr. Partner B, capital
partnership cash withdrawals journal entry
Dr. Partner A, Capital Cr. Cash
close income and expenses journal entry
Dr. Revenues Cr. Expenses Cr. Income Summary
loan accounts
a loan from a partner is shown as a payable on the partnership's books, the same as fr any other loan
capital account
a partner's initial investment, any subsequent capital contributions, profit or loss distributions, and any withdrawals of capital *usually a credit balance
entity concept
a partnership can sue or be sued and its property belongs to the partnership, not to any individual partner (the partnership is treated as separate legal entities from the owners)
Uniform Partnership Act of 1997 (UPA 1997)
after a state adopts the provisions of UPA 1997, the act regulates all partnerships formed in that state: 1. partnership agreement 2. partnership as a separate entity 3. partner as an agent of the partnership 4. statement of the partnership authority 5. partner's liability is joint and several 6. partner's rights and duties 7. partner's transferable interest in the partnership 8. partner's disassociation
Partnership
association of two or more persons who carry on an co-owners for a business for profit
limited partnerships (LP)
at least one general partner and one or more limited partners
statement of partnership authority
describes the partnership and identifies the specific authority of partners to transact specific types of business on behalf of the partnership
Limited Liability Limited Partnership (LLLP)
each partner is liable only for the business obligations of the partnerships, not for acts of malpractice or other wrong doings by the other partners in the normal course of the partnership's business
small and medium enterprises (SMEs)
entities that (1) do not have public accountability and (2) publish general-purpose financial statements for external users
salary to partners
fixed amount of company profits allocated to a given partner
limited liability partnerships (LLP)
has no general partner nor limited partner; thus, each partner has the rights and duties of a general partner but limited legal liability *partner is not personally liable for a partnership obligation
limited partners
liable only to the extent of their capital contribution but do not have any management authority
general partners
personally liable for the partnership's obligations and has management responsibility
bonuses to partners
portion of profits allocated to a partner based on a predetermined performance formula Bonus = X% (NI - Salary - Bonus)
partner's disassociation
the partner can no longer act on the firm's behalf
interest on capital balances
the partners divide some or all of the partnership amongst themselves based on the relative balances they have maintained in their capital accounts
drawing accounts
used to record the periodic withdrawals and is then closed to the partner's capital account at the end of the period
preselected ratios
usually the result of negotiations between partners *may be based on the percentage of total partnership capital, time, and effort invested in the entity, or a variety of other factors
Limited Liability Company (LLC)
-governed by the laws of the state in which it is formed -provides liability protection to its investors
Profit distribution plans
1. preselected rations 2. interest on capital balances 3. salary to partners 4. bonuses to partners
The partnership agreement should include
1. the name of the partnership and name of the partners 2. the type of business to be conducted by the partnership and duration of the partnership agreement 3. The initial capital contribution to each partner and the method by which to account for future capital contributions 4. A complete specification of the profit or loss distribution, including salaries, interest on capital balances, bonuses, limits on withdrawals in anticipation of profits, and the percentages use to distribute any residual profit or loss 5. Procedures used for changes in the partnership, such as admission of new partners and the retirement of a partner 6. Other aspects of operations the partners decide on, such as each partner's management rights and the election procedures and accounting methods to use
