PARTNERSHIPS

1. 6 PARTNERSHIPS LEARNING OUTCOME: TO PRODUCE A FULL SET OF ACCOUNTS AND FINANCIAL REPORTS FOR PARTNERSHIPS FROM FORMATION TO DISSOLUTION  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

2. KEY TERMS • active partner • capital accounts • capital adjustment account • current account • dissolution account (realisation account) • fixed capital account • Garner vs Murray ruling • insolvency  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

3. KEY TERMS • interest on capital • interest on drawings • loan and advances • Partnership Act • partnership agreement • partnership funds • profit and loss appropriation account • profit distribution account  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

4. KEY TERMS • profit-sharing ratios • realisation account • realisation expenses • retained profits • sleeping partner  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

5. FORMATION OF A PARTNERSHIP • Defined in the Partnership Act as the relationship between two or more people engaging in business for profit  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

6. FORMATION OF A PARTNERSHIP • Three important factors must be present in a partnership: • partners must be carrying on a business, not one isolated business transaction • must be agreement between two or more legally competent people who must be the business co-owners • partners must have intent to make a profit  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

7. FORMATION OF A PARTNERSHIP • Partnerships are separate accounting entities to the partners • Owner’s equity accounts are kept for each individual partner • Each partner has the right to share in the profits and manage the business  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

8. PARTNERSHIP AGREEMENT • Partnership agreement • doesn’t always exist, making it difficult to establish if partnership exists • no formal partnership agreement – Partnership Act applies • essential because partnerships: • have unlimited liability • have a limited life • death of partner • insolvency of partner • retirement of partner  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

9. name of business details of each partner nature of business division of profit and losses capital contributions authority, rights and duties of partners details of salaries accounting methods drawings and interest rates interest for capital contribution voting and decision-making procedures admission of new partners resolution of disputes bankruptcy, death or retirement of partners PARTNERSHIP AGREEMENT  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

10. PARTNERSHIP ACT • If there is no partnership agreement in writing, or if it does not cover an area of dispute, matters may be resolved by reference to the Partnership Act • e.g. Act states all profits and losses are to be shared equally, so if profit ration is not defined in an agreement, the Act is applied  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

11. ADVANTAGES OF PARTNERSHIP • Creation and dissolution is easier than a company • Minimal statutory regulations • Resources can be pooled • Expertise can be utilised • Co-ownership of assets • Duties and responsibilities are shared  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

12. DISADVANTAGES OF PARTNERSHIP • Liability is unlimited • Partnership may cease if a partner dies, retires or becomes bankrupt • Disagreements between the partners can occur • Limits to raising large amounts of capital • Partners can be sued by creditor, jointly or individually • Partners are likely to pay higher income tax  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

13. PARTNERSHIP ACCOUNTS • CURRENT ACCOUNTS • working accounts containing details of profit, loss, drawings and interest on capital invested or on drawings • CAPITAL ACCOUNTS • partner’s original capital put into the business is considered to be ‘fixed’ • capital account of each partner is usually unchanged  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

14. PARTNERSHIP ACCOUNTS • CREATION OF NEW PARTNERSHIP - ACCOUNTING ENTRIES • Can be created in two ways • the introduction of cash only, entered in the cash receipts journal • the introduction of cash and other assets and liabilities; general entries are raised for these entries  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

15. ACCOUNTING FOR NEW PARTNERSHIP FORMATION Illustration 6D (page 144)  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

16. PROFIT DISTRIBUTION • PROFIT-SHARING RATIOS • Profits and losses are shared in the way partners feel most appropriate • Profit share can be determined in various ways: • Amounts are shared on the basis of the contribution of fixed capital of each partner • Amounts are shared on the contribution of capital balance of each partner • Higher profit may go to a partner bringing something of particular value into the business, such as specialised expertise  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

17. PROFIT DISTRIBUTION • PROFIT AND LOSS APPROPRIATION ACCOUNT • Net profit or loss transferred to this account from the profit and loss account • May be adjusted for interest paid or earned on loans • Net profit is brought in by general journal entry and is allocated to the partners at the agreed ratio  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

18. PROFIT AND LOSS APPROPRIATION ACCOUNT Illustration 6F (page 147)  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

19. SUMMARY PROFIT AND LOSS APPROPRIATION ACCOUNT CURRENT ACCOUNTS  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

20. PROFIT DISTRIBUTION • ALLOCATION AS PER PARTNERSHIP AGREEMENT • Interest on capital may be payable • Interest may be charged for drawings taken out of the business • There may be a provision for the payment of a salary of a particular partner • Interest may be payable on loans to partners by the business or loans by partners to the business  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

21. PROFIT DISTRIBUTION • LOAN ACCOUNTS • Where a partner makes loan to business, the debit is to cash at bank and the credit to loan account in that partner’s name • DRAWINGS • Where a partner withdraws cash from the business in anticipation of profits earned, the current account is debited and cash is credited  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

22. ADMISSION OF NEW PARTNER • REASONS FOR A NEW PARTNER • New products and customers to business • Specialised expertise to organisation • Access to further capital • Desirable assets • New business contacts • Requirement due to death, retirement or bankruptcy of existing partner  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

23. ADMISSION OF NEW PARTNERNEW PARTNERSHIP AGREEMENT • ADJUSTING THE EXISTING BUSINESS • All existing partners must agree on the admission of a new partner • Assets of the business should be revalued before a new partner is admitted • Liabilities need to be reviewed for accuracy in valuation • Gains and losses to existing partners from new business value will be made at the existing profit-sharing ratio  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

24. ADMISSION OF NEW PARTNERRETIREMENT • RETIREMENT OF PARTNER • Retiring partner must give notice in writing and place advertisement stating that she or he has withdrawn from the partnership  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

25. STEPS TO ADMIT NEW PARTNER • Review value of assets • Consider inclusion of goodwill • Record changes in general journal • Open capital adjustment account and enter increases or decreases • Calculate profit or loss on adjustment and transfer to partners’ capital account • Prepare opening general journal for new partner • Calculate partners’ new profit-sharing ratio • Prepare a new Statement of Financial Position  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

26. ADMISSION OF NEW PARTNER • GOODWILL • AASB 1013 defines goodwill as future benefits from assets that can not be individually identified e.g. reputation, customer database, management ability, product, location • Goodwill is an asset  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

27. ADMISSION OF NEW PARTNER • VALUING GOODWILL • AASB 103 states that goodwill is the excess of all acquisition costs over the fair value of the net identifiable assets acquired • ACCOUNTING FOR GOODWILL • There are two methods • recording goodwill in the accounts • goodwill is not recorded in the books  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

28. PARTNERSHIP DISSOLUTION • REASONS FOR DISSOLVING PARTNERSHIP • Partners giving notice of intention to dissolve • Expiration of the time or purpose set for partnership • Insolvency of a partner • Ownership changes e.g. converting to company • Inability to trade profitably • Death of partner • Voluntary agreement by partners • Courts may also rule to terminate partnership  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

29. PARTNERSHIP DISSOLUTION • THE REALISATION ACCOUNT • When business finished, accounts are closed off and a realisation account is opened • Debits to this account include: • book values of assets to be sold (not including cash) • debts to be collected • legal and other expenses for winding up partnership • any accrued expenses • gains on realisation transferred to capital accounts  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

30. PARTNERSHIP DISSOLUTION • THE REALISATION ACCOUNT • Credits to this account include: • cash value of assets sold • details of assets taken over by partners • amounts collected for accounts receivable • existing provisions and accumulated depreciation • discount revenue from paying accounts payable • where purchaser takes over any liabilities • losses on realisation transferred to the capital accounts in the proportion that partners share profits and losses  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

31. PARTNERSHIP DISSOLUTION • WHEN A PARTNER IS INSOLVENT • A partner is unable to contribute to partnership debts because they have insufficient funds, are bankrupt or have left the partnership • The other partners are legally obliged to share the financial deficiency of the insolvent partner to insure business liabilities are paid • Amount contributed is to be covered by Garner vs Murray ruling • The loss is shared by the solvent partners in the ratio of the capital balance at the time of dissolution  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

32. PARTNERSHIP DISSOLUTION • WHEN ALL PARTNERS ARE INSOLVENT • Funds available must first be used to pay legal and other associated fees • Then funds must be used to pay staff entitlements and amounts owed for accounts payable and loans  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

33. REALISATION SUMMARY • Transfer net profit to profit andloss appropriation account and distribute to partners • Close asset accounts to realisation (include accumulated depreciation and provision doubtful debts and exclude bank) • Sell assets Dr: Bank Cr: Realisation • If partner takes asset thenDr: Capital - PartnerCr: Realisation  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

34. REALISATION SUMMARY • Pay costs of realisation Dr: Realisation Cr: Bank • Pay liabilities Dr: Liabilities Cr: Bank • Accept discounts Dr: creditors Cr: realisation • Close realisation account - distribute profit or loss on realisation to partners’ capital accounts  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson

35. REALISATION SUMMARY PARTNER INSOLVENT • Balance capital accounts - if partner with capital deficit isinsolvent (cannot pay), then ‘Garner vs Murray’ rule applies Dr: Solvent partners’ capital Cr: Insolvent partner’s capital • Balance bank account • Money in bank -pay partners • Deficit in bank-paid by partners • Bank account and all equity accounts now closed  2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Applications for Financial Accounting by David Willis, slides prepared by Kaye Watson