PARTNERSHIP FORMATION: AFAR

credit to Loans Payable to Partners

A partner may make a cash payment to the partnership that is considered a loan rather an increase in the partner's capital account balance. This transaction is recorded by a

drawing, drawing allowances, or sometimes salary allowances and they are usually charged to the partners' drawing accounts.

Active partners commonly withdraw regular amounts of money on a weekly or monthly basis.

Partnership

An association of two or more persons who contribute money, property or industry to a common fund with the intention of dividing the profits among themselves.

partner's capital accounts

At the end of each accounting period, the net income or loss in the partnership's income summary ledger account is transferred to the

current exchange rate

Cash denominated in foreign currency is valued at the

estimated recoverable amount

Cash in bank under receivership should be shown at its

fair value most often known as face value as far as cash valuation is concerned

Cash investment in accordance with the current standards being a financial asset are recorded at

Mutual Agency

Every partner is an agent and has the authority to act for the partnership and to enter into contracts on its behalf.

1) Ease of formation 2) Limited life 3) Assignment of Partner's interest 4) Unlimited liability 5) Mutual Agency 6) Separate Legal Personality 7) Sharing Profits and Losses

Features of General Partnerships

Bonus approach

If there is no specification as to what approach may be used,

Limited partnership

In this kind of partnership, only one partner needs to be a general partner.

agreed value prevails

It should be noted that in case there is a conflict between agreed value and fair value,

present value(fair value) of the remaining cash flows

Liabilities assumed by the partnership should be valued at the

Liabilities

Loans payable to partners are displayed as

Assets

Loans receivable from partners are displayed as

Interest income

Loans should bear interest, and this is recognized on the partnership's income statement.

Small or medium-sized entities

Most partnerships are

agreed value which is normally the fair value

Noncash property is recorded at the

deficiency or sometimes called a deficit

On occasion, a partner's capital account may have a debit balance.

Separate legal personality

Partnership law provides that partnership has a juridical personality separate and distinct from that of each partner.

Bonus approach and goodwill approach

The 2 approach/method in partnership formation:

Operating expense

The partnership records interest on loans as an

Limited Life

The possibility that the operations of a partnership could not continue after the withdrawal or death of a partner was considered a major pitfall of this form of business organization.

Unlimited Liability

The term "general partnership" as previously discussed refers to a firm in which all the parties are responsible for liabilities and have all the authority to act on his behalf.

Personal withdrawal or temporary withdrawal or drawing accounts

These are initially recorded in a drawing account. More often these are drawings from share of profits which will eventually be closed to capital accounts.

Capital withdrawal or permanent withdrawal

They directly affect the capital account balance because they arise mostly from withdrawals of investment be it original or additional.

1) Capital accounts 2) Drawings or personal accounts, and 3) Accounts for loans to and from partners.

Three partnership accounts consist of:

Proprietary and entity theories

Underlying equity theories

1. General Partnership 2. Limited Partnership

What are the 2 different types of partnerships?

1) Capital withdrawal or permanent withdrawal 2) Personal withdrawal or temporary withdrawal or drawing accounts.

What are the two classes of withdrawal?

SMEs

are defined as those entities that: 1) Do not have public accountability (i.e., do not have stock or issue bonds in a public capital market) and 2) Publish general-purpose financial statements.

Partnership profits

are the business rewards of partners.

General Partnerships

are those in which each partner is personally liable to the partnership's creditors if partnership assets are not sufficient to pay such creditors.

written agreement

called the articles of a partnership.

Partner's capital interest

claim against the net assets of the partnership as shown by the balance in the partner's capital accounts

Fair value of noncash assets

determined by agreement of all partners.

Interest in profit and loss

determines how the partner's capital interest will increase or decrease as a result of subsequent operations.

Deficiency

is usually eliminated by additional capital contributions.

Proprietary theory

looks at the entity through the eyes of the owner. It views the assets of a business as belonging to the proprietor. The liabilities of a business are debts of the proprietor.

major advantage of a partnership

permits the pooling of capital and other resources without the complexities and formalities of a corporation

Persons

refers to natural or juridical which may either be an individual, a corporation, and even other partnerships.

Equity theories

relate to how an entity can be viewed from the accounting and legal point of view. These theories deal with the question of who the entity is.

Drawing accounts

should be closed to the capital accounts at the end of each accounting period before a partnership balance sheet is prepared.

Fair value

should be determined by independent valuations

Noncash drawing

should be valued at their market values at the date of the withdrawals.

Entity theory

views the business as a separate and distinct entity processing its own existence apart from the individual partners.