Accounting Chapter 27
Accounting for Partnerships
Terms and Concepts:
- 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
- General Partnership:
- Includes only general partners
- Shared management and responsibility
- All partners equally liable
Limited Liability Partnership (LLP)
- Includes general and limited partners
- Limited partners have limited management and liability
- May just be financial investors (silent partners)
Partnership Agreement: The written terms of a partnership.
Liquidation of Partnership: When a partnership ends, the liabilities have to be paid off and the remaining funds distributed to the partners.
Realization: The money partners received when a partnership is liquidated.
- All partners have limited liability
- Have some characteristics of a corporation
A partnership agreement should be in writing and should include:
- the name of the business and each partner
- the investment (cash, merchandise, supplies, etc.) of each partner
- duties and responsibilities of each partner
- how profits and losses are to be divided between the partners
- what happens if a partner dies
- how the partnership is to be dissolved
- the duration of the partnership
Major Accounting Differences in Partnerships
- Owner’s Equity and Drawing
Profits and losses
- With a partnership, you will have an account for each partner
Merchandise withdrawals by partners treated the same way as cash withdrawals
- Shared between partners, though not always 50-50
- 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.
Steps to record the sale of an asset.
- 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.
- Record the Journal Entry for the sale that creates a Loss in Realization.
- Record a DEBIT for the amount of cash received (how much the asset was sold for).
- Record a CREDIT for the amount the asset was recorded in the General Ledger (Ex: $8000 in Truck).
- Record DEBIT for a Loss in Realization or a CREDIT for Gain in Realization.