This form of organization is popular among personal service enterprises, as well as in the legal and public accounting professions.
The important features of and accounting procedures for partnerships are discussed and illustrated below.
If a certain amount of money is owed for the asset, the partnership may assume liability.
This determination generally is made at the time of receipt of the partnership interest.
A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner.
This treatment is for purposes of determining gross income and deductible business expenses only.
Management fees, salary and interest allowances are guaranteed payments.
The partnership generally deducts guaranteed payments on line 10 of Form 1065 as business expenses.
If partners pay themselves high salaries, net income will be low, but it does not matter for tax purposes.
Net income or loss is allocated to the partners in accordance with the partnership agreement.
Net income does not includes gains or losses from the partnership investment.
The partnership agreement specifies that after providing for salary and interest allowances the remaining income is divided equally.
Assume also that net income of the partnership was $100,000 and the two partners received allowances as indicated in the table below.
Based on the net income allocation shown above, the closing entry is: The allocation of net income and its impact on the partners' capital balances must be disclosed in the financial statements.
Statement of partners' equity starts with capital balances at the beginning of the accounting period, and reflects additional investments, made by the partners during the year, net income for the period, and withdrawals.
Additional investments and allocated net income increase capital accounts of the partners.
In this case the balance sheet for the new partner's business would serve as a basis for preparing the opening entry.
The assets listed in the balance sheet are taken over, the liabilities are assumed, and the new partner's capital account is credited for the difference.
Assume that a sole proprietor agreed to admit a single equal partner for a certain amount of money.
Bonus is the difference between the amount contributed to the partnership and equity received in return.
By agreement, a partner may retire and be permitted to withdraw assets equal to, less than, or greater than the amount of his interest in the partnership.
The balance is computed after all profits or losses have been allocated in accordance with the partnership agreement, and the books closed.
To illustrate, assume that several years after the formation of "A, B, & C" partnership Partner C decided to retire.
This difference is divided between the remaining partners on the basis stated in the partnership agreement.
Assume that the partnership agreement specifies that in such a case the difference is divided according to the ratio of their capital interests after allocating net income and closing their drawing accounts.
This difference is divided between the remaining partners on the basis stated in the partnership agreement.
Assume that the partnership agreement specifies that in such a case the difference is divided according to the ratio of their capital interests after allocating net income and closing their drawing accounts.
The gain is allocated to the partners' capital accounts according to the partnership agreement.
If non-cash assets are sold for less than their book value, a loss on the sale is recognized.
The loss is allocated to the partners' capital accounts according to the partnership agreement.