Accounting Chapter 27 Teacher Notes

Accounting for Partnerships

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Terms and Concepts:

1. Partnership: a business privately owned by two or more unique owners.
   • Each owner is personally responsible for all of the debts of the partnership
   • Partnership agreements recommended but not required by law
   • Partners may share capital, time, ideas, contacts and more.
   • Partnerships may be equal (50 / 50) or unequal where one partner gains a larger share
2. General Partnership:
• Includes only general partners
• Shared management and responsibility
• All partners equally liable
3. Limited Partnership:
• Includes general and limited partners
• Limited partners have limited management and liability
  • May just be financial investors (silent partners)
4. Limited Liability Partnership (LLP)
• All partners have limited liability
• Have some characteristics of a corporation
5. Partnership Agreement: The written terms of a partnership.
6. Liquidation of Partnership: When a partnership ends, the liabilities have to be paid off and the remaining funds distributed to the partners.
7. Realization: The money partners received when a partnership is liquidated.

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A partnership agreement should be in writing and should include:

1. the name of the business and each partner
2. the investment (cash, merchandise, supplies, etc.) of each partner
3. duties and responsibilities of each partner
4. how profits and losses are to be divided between the partners
5. what happens if a partner dies
6. how the partnership is to be dissolved
7. the duration of the partnership

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Major Accounting Differences in Partnerships

1. Owner’s Equity and Drawing
• With a partnership, you will have an account for each partner
2. Profits and losses
• Shared between partners, though not always 50-50
3. Merchandise withdrawals by partners treated the same way as cash withdrawals
   • DEBIT drawing to reduce OE
   • CREDIT Purchases (not Merchandise Inventory)
     • Merchandise purchases recorded as DEBITs to the Purchases account. Withdrawals require a CREDIT to reduce the Purchases account balance.

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Steps to record the sale of an asset.

1. Calculate the actual value of the asset.
   • Subtract the amount recorded as the value of the asset sold (Ex: $8000 in truck) minus the Accumulated
   • If the cash received for the asset is greater than the value, record a Gain on Realization, a CREDIT because it increases equity.
   • If the cash received if less than the value, record a Loss on Realization, a DEBIT because it decreases equity.
2. Record the Journal Entry for the sale that creates a Loss in Realization.
   1. Record a DEBIT for the amount of cash received (how much the asset was sold for).
   2. Record a CREDIT for the amount the asset was recorded in the General Ledger (Ex: $8000 in Truck).
   3. Record DEBIT for a Loss in Realization or a CREDIT for Gain in Realization.