?%202003%20McGraw-Hill%20Australia%20Pty%20Ltd,%20PPTs%20t/a%20Applications%20for%20Financial%20Accounting%20by%20David%20Willis,

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PARTNERSHIPS
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• LEARNING OUTCOME
• TO PRODUCE A FULL SET OF ACCOUNTS AND FINANCIAL
  REPORTS FOR PARTNERSHIPS FROM FORMATION TO
  DISSOLUTION

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KEY TERMS

• active partner
• capital accounts
• capital adjustment account
• current account
• dissolution account (realisation account)
• fixed capital account
• Garner vs Murray ruling
• insolvency

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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

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KEY TERMS

• profit-sharing ratios
• realisation account
• realisation expenses
• retained profits
• sleeping partner

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FORMATION OF A PARTNERSHIP

• Defined in the Partnership Act as the
  relationship between two or more people engaging
  in business for profit

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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

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FORMATION OF A PARTNERSHIP

• Partnerships are separate accounting entities to
  the partners
• Owners equity accounts are kept for each
  individual partner
• Each partner has the right to share in the
  profits and manage the business

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PARTNERSHIP AGREEMENT

• Partnership agreement
• doesnt 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

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PARTNERSHIP AGREEMENT

• 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

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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

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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

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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

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PARTNERSHIP ACCOUNTS

• CURRENT ACCOUNTS
• working accounts containing details of profit,
  loss, drawings and interest on capital invested
  or on drawings
• CAPITAL ACCOUNTS
• partners original capital put into the business
  is considered to be fixed
• capital account of each partner is usually
  unchanged

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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

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ACCOUNTING FOR NEW PARTNERSHIP FORMATION
Illustration 6D (page 144)
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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

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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

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PROFIT AND LOSS APPROPRIATION ACCOUNT
Illustration 6F (page 147)
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SUMMARY PROFIT AND LOSS APPROPRIATION ACCOUNT
PROFIT AND LOSS APPROPRIATION ACCOUNT PROFIT AND LOSS APPROPRIATION ACCOUNT
DEBIT CREDIT
INTEREST ON CAPITAL NET PROFIT FROM PROFIT AND LOSS ACCOUNT
PARTNERS SALARIES OR SHARE OF LOSS
BONUS TO PARTNERS INTEREST ON DRAWINGS
SHARE OF PROFIT
CURRENT ACCOUNTS
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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

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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 partners name
• DRAWINGS
• Where a partner withdraws cash from the business
  in anticipation of profits earned, the current
  account is debited and cash is credited

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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

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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

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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

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STEPS TO ADMIT NEW PARTNER

1. Review value of assets
2. Consider inclusion of goodwill
3. Record changes in general journal
4. Open capital adjustment account and enter
   increases or decreases
5. Calculate profit or loss on adjustment and
   transfer to partners capital account
6. Prepare opening general journal for new partner
7. Calculate partners new profit-sharing ratio
8. Prepare a new Statement of Financial Position

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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

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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

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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

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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

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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

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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

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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

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REALISATION SUMMARY

1. Transfer net profit to profit and loss
   appropriation account and distribute to partners
2. Close asset accounts to realisation (include
   accumulated depreciation and provision doubtful
   debts and exclude bank)
3. Sell assets Dr Bank
   Cr Realisation
4. If partner takes asset then
   Dr Capital - Partner
   Cr Realisation

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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

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REALISATION SUMMARY PARTNER INSOLVENT

• Balance capital accounts - if partner with
  capital deficit is insolvent (cannot pay), then
  Garner vs Murray rule applies
• Dr Solvent partners capital
  Cr
  Insolvent partners capital
• Balance bank account
• Money in bank - pay partners
• Deficit in bank - paid by partners
• Bank account and all equity accounts now closed