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Accounting for

Chapter
Partnerships

10 100 Shares

Partnership???
$1 par value

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Learning
Learning Objectives
Objectives
 Define partnership  Prepare entries for
 Identify characteristics partnership formation
of partnerships and  Dividing profit or loss
similar organizations  Preparing partnership
 Identify advantages and financial statements
disadvantages of
partnership

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Definition
Definition of
of partnership
partnership
AA partnership
partnership isis an
an unincorporated
unincorporated association
association ofof two
two or
or
more
more people
people to
to pursue
pursue aa business
business for
for profit
profit as
as co-owners.
co-owners.
In
In Malaysia,
Malaysia, this
this business
business form
form is
is governed
governed under
under the
the
Partnership
Partnership Act
Act 1961.
1961.

According
According to
to Para
Para II,II, Section
Section 3(1)
3(1) of
of the
the Partnership
Partnership Act
Act 1961,
1961,
aa partnership
partnership is
is defined
defined as:
as:

“the
“the relation
relation which
which subsists
subsists between
between persons
persons carrying
carrying on
on
business
business in
in common
common with
with aa view
view of
of profit”.
profit”.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Characteristics
Characteristics of
of Partnership
Partnership
Voluntary
Voluntary Limited
Limited
Association
Association Partnership
Partnership Life
Life
Agreement
Agreement

Taxation
Taxation

Mutual
Mutual Unlimited
Unlimited
Agency
Agency Co-
Co- Liability
Liability
Ownership
Ownership
of
of Property
Property
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Organizations
Organizations with
with Partnership
Partnership
Characteristics
Characteristics
Limited
Limited
Limited
Limited Liability
Liability
Partnerships
Partnerships Partnerships
Partnerships
(LP)
(LP) (LLP)
(LLP)

••General ••Protects
Protects innocent
innocent
General partners
partners
assume partners
partners from
from
assume management
management
duties malpractice
malpractice oror
duties and
and unlimited
unlimited
liability negligence
negligence claims.
claims.
liability for
for partnership
partnership
debts.
debts.
••Limited ••Most
Most states
states hold
hold all
all
Limited partners
partners have
have
no partners
partners personally
personally
no personal
personal liability
liability
beyond liable
liable for
for partnership
partnership
beyond invested
invested
amounts. debts.
debts.
amounts.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Choosing
Choosing aa Business
Business Form
Form
Proprietorship Partnership LLP LLC S Corp. Corporation
Business entity yes yes yes yes yes yes
Legal entity no no no yes yes yes
Limited liability no no limited* yes yes yes
Business taxed no no no no no yes
One owner allowed yes no no yes yes yes
*A partner's personal liability for LLP debts is limited. Most LLPs carry insurance to protect
against malpractice.

Many
Many factors
factors should
should be
be considered
considered when
when
choosing
choosing the
the proper
proper business
business form.
form.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Advantages
Advantages of
of Partnerships
Partnerships
Ability
Ability to
to share
share knowledge,
knowledge, expertise,
expertise, and
and experience
experience among
among co-
co-
partners
partners in
in the
the business.
business.

Easy
Easy to
to form
form the
the partnership
partnership firm
firm and
and lower
lower cost
cost of
of formation
formation as
as
compared
compared toto the
the other
other types
types of
of business
business organizations.
organizations.

Enables
Enables firm
firm to
to get
get additional
additional sources
sources of
of investment
investment capital
capital from
from
each
each partner
partner since
since more
more than
than one
one partner
partner is
is within
within the
the partnership
partnership
firm.
firm.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Advantages
Advantages of
of Partnerships…cont
Partnerships…cont
Possible
Possible tax tax advantages
advantages where
where aa partnership
partnership hashas the
the same
same tax tax
status
status asas aa sole
sole proprietorship
proprietorship and
and is,
is, therefore,
therefore, not
not subject
subject to
to taxes
taxes
on
on its
its income.
income.

Easy
Easy to
to manage
manage and
and decisions
decisions can
can be
be made
made with
with less
less bureaucracy
bureaucracy
since
since the
the owners
owners of
of the
the partnership
partnership firm
firm are
are usually
usually its
its managers.
managers.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Disadvantages
Disadvantages of
of Partnerships
Partnerships
The
The liability
liability is
is unlimited
unlimited where
where allall partners
partners are
are personally
personally liable
liable
for
for business
business debts
debts and
and liabilities.
liabilities.

ItIt is
is hard
hard to
to find
find suitable
suitable partners
partners where
where there
there is
is aa possibility
possibility of
of
conflict
conflict between
between partners
partners in
in the
the future.
future.

Partnership
Partnership is
is dissolved
dissolved upon
upon the
the death
death of
of aa partner.
partner.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Partnership
Partnership Agreement
Agreement
AA partnership
partnership is
is based
based on
on aa contract
contract between
between individuals.
individuals. ItIt isis an
an
agreement
agreement among
among thethe members
members of of aa firm
firm for
for sharing
sharing the
the profits
profits of
of
the
the business
business carried
carried on
on by
by all
all or
or any
any ofof them
them acting
acting for
for all.
all.

Partnership agreements normally include the following details:


1. Name of the firm.
2. Name of all partners and contributions made by each
partner.
3. Nature of the business.
4. Date of commencement of partnership.
5. Duration of partnership, if any.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Partnership
Partnership Agreement…cont
Agreement…cont
6. Rights and duties of all partners.
7. Sharing of profit and losses.
8. Interest charged on capital.
9. Withdrawal arrangement and interest charged on drawings.
10. Salaries, bonus, commissions, etc to the partners.
11. Interest on loan by the partner(s) of the firm.
12. Dispute procedures.
13. Admission and withdrawal of partners.
14. Rights and duties in the event of partner dies.
15. Dissolution of partnership.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
In
In the
the Absence
Absence of
of aa Partnership
Partnership
Agreement
Agreement
Profits
Profits or
or losses
losses sharing
sharing
Every
Every partner
partner should
should share
share the
the profits
profits or
or losses
losses of
of the
the firm
firm
equally
equally regardless
regardless of of the
the amounts
amounts of of the
the capital
capital
contributed
contributed by by them.
them.

Salary
Salary (remuneration)
(remuneration) and and commission
commission to
to partners
partners
No
No partner
partner is is entitled
entitled to
to any
any salary
salary or
or commission
commission for
for
acting
acting in
in the
the partnership
partnership business.
business.

Interest
Interest on
on capital
capital
No
No interest
interest on
on capital
capital is
is allowed
allowed to
to all
all partners.
partners.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
In
In the
the Absence
Absence of
of aa Partnership
Partnership
Agreement…cont
Agreement…cont
Interest
Interest on
on drawings
drawings
No
No interest
interest will
will be
be charged
charged on
on any
any drawings
drawings made
made by
by the
the
partners.
partners.
Advance/loan
Advance/loan to to the
the business
business
AA partner(s)
partner(s) is
is entitled
entitled to
to an
an interest
interest of
of 8%
8% per
per annum
annum
for
for any
any advance
advance made
made toto the
the business
business beyond
beyond the
the amount
amount
of
of capital
capital subscribed.
subscribed.
Participation
Participation in
in business
business
Every
Every partner
partner may
may take
take part
part in
in the
the management
management of
of the
the
partnership
partnership business.
business.
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
In
In the
the Absence
Absence of
of aa Partnership
Partnership
Agreement..cont
Agreement..cont
Admission
Admission ofof new
new partner(s)
partner(s)
No
No admission
admission ofof new
new partners
partners into
into the
the business
business except
except
that
that all
all partners
partners agree
agree to
to it.
it.

Books
Books of
of accounts
accounts
All
All books
books of of accounts
accounts of of the
the partnership
partnership shall
shall be
be kept
kept at
at
the
the place
place ofof the
the partnership’s
partnership’s business.
business. Each
Each partner
partner is
is
entitled
entitled to
to access
access to
to all
all of
of them.
them.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Organizing
Organizing aa Partnership
Partnership
 When
When partners
partners investinvest inin aa partnership,
partnership, their
their capital
capital accounts
accounts areare
credited
credited for
for the
the invested
invested amounts.
amounts.
 Each
Each partner’s
partner’s investment
investment is is recorded
recorded at
at an
an agreed-on
agreed-on value,
value, normally
normally
the
the market
market values
values of of the
the contributed
contributed assets
assets and
and liabilities
liabilities at
at the
the date
date of
of
contribution.
contribution.

Journal
Journal entry
entry is:
is:
Cash/
Cash/ Bank/
Bank/ Assets
Assets Accounts
Accounts XX
XX
Partner’s
Partner’s Capital
Capital Accounts
Accounts XX
XX

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Organizing
Organizing aa Partnership
Partnership
Kayla
Kayla Zayn
Zayn and
and Hector
Hector Perez
Perez organize
organize aa partnership
partnership called
called BOARDS
BOARDS
that
that offers
offers year-round
year-round facilities
facilities for
for skateboarding
skateboarding and
and snowboarding.
snowboarding.
Zayn’s
Zayn’s initial
initial investment
investment in in BOARDS
BOARDS is is $30,000,
$30,000, made
made up up of
of cash
cash
($7,000),
($7,000), boarding
boarding facilities
facilities ($33,000),
($33,000), aa note
note payable
payable reflecting
reflecting aa
bank
bank loan
loan for
for the
the new
new business
business ($10,000).
($10,000). Perez’s
Perez’s initial
initial investment
investment
is
is cash
cash of
of $10,000.
$10,000.

Zayn’s investment
Cash 7,000
Boarding facilities 33,000
Note payable 10,000
K. Zayn, Capital 30,000
Perez’s investment
Cash 10,000
H. Perez, Capital 10,000

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Partner’s
Partner’s Capital
Capital Account
Account
 The capital accounts of partners can be maintained
based on two methods, namely:
• Fixed Capital Method, and
• Fluctuating Capital Method

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
(1)
(1) Fixed
Fixed Capital
Capital Method
Method
 Under this method, the amount of capital of the partners
remains fixed unless there is some additional capital
brought in or there is any capital withdrawn by the partners
during the period. This method requires two types of
accounts to be opened. These accounts are:
• Capital Account, and
• Current Account
 Any accounts that reflect the changes in the partners’
capital accounts such as additional capital (increase
capital) and drawings of capital (decrease capital) will be
shown in the partner’s capital account as below:

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
(1)
(1) Fixed
Fixed Capital
Capital Method
Method (Cont…)
(Cont…)
Partner’s Capital Account

Date Description Ref Amount Date Description Ref Amount

Drawings of capital $ XX Beginning balance $ XX

Ending balance * XX Additional capital XX

$ XXX $ XXX

* balancing figure
Note: Separate capital account is kept for each partner in the business.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
(1)
(1) Fixed
Fixed Capital
Capital Method
Method (Cont…)
(Cont…)
Partner’s Current Account
Date Description Ref Amount Date Description Ref Amount

Beginning balance $ XX Beginning balance $ XX


Drawings XX Interest on capital XX
Interest on drawings XX Salary to partners XX

Share of loss – P & L XX Commission/bonus XX


Appropriation
Share of profit – P & L XX
Appropriation
Ending balance * XX Ending balance * XX

$ XXX $ XXX

* balancing figure
Note: In Partners' Current Account, beginning balance and ending balance can be either debit or credit
side.
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Example:
Example:
 On 1 July 2006, Aidiel and Fitrie commenced a
partnership where they contributed RM60,000 and
RM45,000 each. P/L sharing ratio is 2:1.
Additional information:
i) Salary for Aidiel and Fitrie RM10,000 per annum and
RM 8,000 per annum respectively and the interest
for the capital was 8% per year.
ii) Aidiel and Fitrie also made a withdrawal of RM 3,000
and RM6,000 respectively.
iii) The profit of the firm after providing Aidiel and
Fitrie’s salary as well as interest of capital was
RM16,500.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
(1)
(1) Fixed
Fixed Capital
Capital Method
Method (Cont…)
(Cont…)
Partner’s Capital Account (Aidiel)

Date Description Ref Amount Date Description Ref Amount

30/6/07 Ending balance 60,000 1/7/06 Cash 60,000

60,000 60,000

* balancing figure
Note: Separate capital account is kept for each partner in the business.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
(1)
(1) Fixed
Fixed Capital
Capital Method
Method (Cont…)
(Cont…)
Partner’s Current Account (Aidiel)
Date Description Ref Amount Date Description Ref Amount

Beginning balance -

Drawings 3,000 Interest on capital 4800


Salary to partners 10,000

Share of profit – P & L 11,000


Appropriation
(2/3 x 16,500)
Ending balance * 22,800

25,800 25,800

* balancing figure
Note: In Partners' Current Account, beginning balance and ending balance can be either debit or credit
side.
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
(2)
(2) Fluctuating
Fluctuating Capital
Capital Method
Method
 This method is not similar to the fixed capital method.
 Only one capital account for each partner will be opened.
 Any items that reflect the partner’s account such as
interest on capital, drawings, interest on drawings,
salary/remuneration, commission, and share of profits or
losses of partners for the period will be recorded in the
partner’s capital account.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
(2)
(2) Fluctuating
Fluctuating Capital
Capital Method
Method (Cont…)
(Cont…)
Partner’s Capital Account
Date Description Ref Amount Date Description Ref Amount
Drawings $ XX Beginning balance $ XX
Interest on drawings XX Additional capital XX
Share of loss – P & L XX Interest on capital XX
Appropriation
Salary to partners XX
Commission/bonus XX
Ending balance * XX Share of profit – P & L XX
Appropriation

$ XXX $ XXX

* balancing figure
Note: A Partners' Capital Account usually shows a credit balance. However, under certain situations, it
can show a debit balance, such as over withdrawal or insolvency of the partner.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Example:

 On 1 July 2006, Aidiel and Fitrie commenced a partnership


where they contributed RM60,000 and RM45,000 each. P/L
sharing ratio is 2:1.

Additional information:
i) Salary for Aidiel and Fitrie RM10,000 per annum and RM 8,000
per annum respectively and the interest for the capital was 8%
per year.
ii) Aidiel and Fitrie also made a withdrawal of RM 3,000 and
RM6,000 respectively.
iii) The profit of the firm after providing Aidiel and Fitrie’s salary
as well as interest of capital was RM16,500.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
(2)
(2) Fluctuating
Fluctuating Capital
Capital Method
Method (Cont…)
(Cont…)
Partner’s Capital Account (Aidiel)

Date Description Ref Amount Date Description Ref Amount

Drawings 3,000 1/7/ Cash 60,000


06
Interest on capital 4,800

Salary to partners 10,000

30/6/07 Ending balance * 82,800 Share of profit – P & L 11,000


Appropriation
(2/3 x 16,500)

85,800 85,800
* balancing figure
Note: A Partners' Capital Account usually shows a credit balance. However, under certain situations, it
can show a debit balance, such as over withdrawal or insolvency of the partner.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Dividing
Dividing Profit
Profit or
or Loss
Loss
Before the preparation of the Profit and Loss Appropriation,
an income statement should be prepared first whereby at the
end, the profit or loss for the period is calculated and then
transferred to the Profit and Loss Appropriation.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Dividing
Dividing Profit
Profit or
or Loss
Loss (Cont…)
(Cont…)
In preparing the Profit and Loss Appropriation, the
following adjustments need to be considered:

1. Interest on Capital
Partners can agree to allocate “interest allowance (or interest on
capital)” based on the amounts invested by each partner. Expense
to partnership firm but gain for partners.

2. Drawings
Similar to other business types of organizations, the partners in the
partnership firm can make a withdrawal of cash or goods from the
business. -NO EFFECT ON PROFIT AND LOSS APPROPRIATION-

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Dividing
Dividing Profit
Profit or
or Loss
Loss (Cont…)
(Cont…)
3. Interest on Drawings
Gain to the partnership firm.

4. Partner's Salary/Remuneration
Gain to partners but an expense to the partnership firm.

5. Partner's Commission
Any commission paid to the partners is a gain to partners but an
expense to the partnership firm.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Dividing
Dividing Profit
Profit or
or Loss
Loss (Cont…)
(Cont…)
6. Transfer to Reserve
Reduction of profit to the partnership firm.

 7.
7. Share
Share of
of Profits
Profits or
or Losses
Losses

 Partners
Partners can
can agree
agree toto any
any method
method of
of dividing
dividing profits
profits or
or losses.
losses.
 In
In the
the absence
absence of of an
an agreement,
agreement, the
the law
law says
says that
that the
the partners
partners
share
share profits
profits or
or losses
losses of
of aa partnership
partnership equally.
equally.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Example
Example of
of Profit
Profit and
and Loss
Loss
Appropriation
Appropriation
 Farid and Fara are in partnership named Waja Ent. since 1st January
2006, sharing profit for the ratio 2:1. For the year ended 31 December
2006, Waja Ent. managed to obtained a profit of RM16,855. The
partners entitled to interest on capital and drawings at 10% and 5%
per annum respectively based on their agreement. Farid also entitled
to receives a salary of RM 200 per month.

 Additional info:
i) Farid and Fara contributed capital of RM78,000 and RM48,000
respectively.
ii) Farid withdrawn RM4,800 while Fariq RM 3,600.
iii) Farid also received a commission of RM 1,000 from the partnership.

Prepare profit and loss appropriation for Waja Enterprise.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
RM

Profit as per I/S 16,855


Interest on drawings
Farid (5% x 4,800) 240
Fara (5% x 3,600) 180
Interest on capital
Farid (10% x 78,000) (7,800)
Fara (10% x 48,000) (4,800)
Salary
Farid (200x12) (2,400)
Fara -
Commission
Farid (1,000)
Fara - .
1,275
Share of profit:
Farid (2/3 x RM 1,275) RM850
Fara (1/3 x RM 1,275) RM425 1,275

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
Death
Death of
of aa Partner
Partner
A partner’s death dissolves a partnership. A deceased
partner’s estate is entitled to receive his or her equity. The
partnership contract should contain provisions for
settlement in this case.

These
Theseprovisions
provisionsusually
usuallyrequire:
require:
(1)
(1)Closing
Closingthe
thebooks
bookstoto determine
determineprofit
profit or
or loss
losssince
sincethe
theend
end of
of
the
theprevious
previousperiod,
period,and
and
(2)
(2)Determining
Determiningand
andrecording
recording current
currentmarket
market values
valuesfor
forboth
both
assets
assetsand
andliabilities.
liabilities.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
End of Chapter 10

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007

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