Financial accounting IFRS 4 kieoso appf PPT
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Financial Accounting
IFRS 4th Edition
Weygandt ● Kimmel ● Kieso
Appendix F
Accounting for Partnerships
Appendix Preview
In this appendix, we discuss reasons why businesses select the partnership form of
organization.
We also explain the major issues in accounting for partnerships.
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Appendix Outline
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Learning Objective 1
Discuss and account for the formation of a partnership.
LO 1
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Partnership Form of Organization
Partnership: An association of two or more persons to carry on as co-owners of a business for
profit.
Types of businesses:
LO 1
•
Small retail, service, or manufacturing companies
•
Accountants, lawyers, and doctors
ã
Other professionals
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Characteristics of Partnerships (1/4)
Association of individuals
•
Legal entity
•
Accounting entity
•
Net income not taxed as a separate entity. Each partner’s share is taxable income at personal tax rates.
Mutual agency
•
Each partner acts on behalf of the partnership, so long as the act appears to be appropriate for the
partnership.
LO 1
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Characteristics of Partnerships (2/4)
Association of individuals
•
Legal entity
•
Accounting entity
•
Net income not taxed as a separate entity. Each partner’s share is taxable income at personal tax rates.
Mutual agency
•
Each partner acts on behalf of the partnership, so long as the act appears to be appropriate for the
partnership.
LO 1
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Characteristics of Partnerships (3/4)
Limited life
•
Dissolution occurs whenever a partner withdraws or a new partner is admitted.
•
Dissolution does not mean the business ends.
Unlimited liability
•
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Each partner is personally and individual liable for all partnership liabilities.
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Characteristics of Partnerships (4/4)
Ownership of Property
•
Each partner has a claim on total assets.
•
This claim does not attach to specific assets.
•
All net income or net loss is shared equally by the partners, unless otherwise stated in the partnership
agreement.
LO 1
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Advantages and Disadvantages of Partnerships
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Organizations with Partnership Characteristics
Special partnership forms are:
LO 1
1.
Limited partnerships
2.
Limited liability partnerships
3.
Limited liability companies, and
4.
“S” Corporations
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The Partnership Agreement
A written agreement is strongly encouraged.
It should specify:
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1.
Names and capital contributions of partners.
2.
Rights and duties of partners.
3.
Basis for sharing net income or net loss.
4.
Provision for withdrawals of assets.
5.
Procedures for submitting disputes to arbitration.
6.
Procedures for the withdrawal or addition of a partner.
7.
Rights and duties of surviving partners in the event of a partner’s death.
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Basic Partnership Accounting
Forming a Partnership (1/2)
Assume: A. Lau and T. Song combine their proprietorships to start a partnership named Lau-Song Software. The firm will specialize in
developing financial modeling software. Lau and Song have the following assets prior to the formation of the partnership (amounts in
thousands).
LO 1
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Forming a Partnership (2/2)
Present: How does the partnership record the investments?
LO 1
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Learning Objective 2
Explain how to account for net income or net loss of a partnership.
LO 2
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Dividing Net Income or Net Loss
Partners equally share partnership net income or net loss unless the partnership contract indicates otherwise.
Closing Entries
1.
Debit each revenue account for its balance, and credit Income Summary for total revenues.
2.
Debit Income Summary for total expenses, and credit each expense account for its balance.
3.
Debit Income Summary for its balance, and credit each partner’s capital account for his or her share of net income. Or, credit
Income Summary, and debit each partner’s capital account for his or her share of net loss.
4.
Debit each partner’s capital account for the balance in that partner’s drawings account, and credit each partner’s drawings
account for the same amount.
LO 2
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Dividing Net Income or Net Loss
Assume: AB Company has net income of €32,000 for 2020. The partners, L. Arbor and D. Barnett, share net
income and net loss equally. Drawings for the year were Arbor €8,000 and Barnett €6,000.
Present: What are the last two closing entries?
LO 2
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Dividing Net Income or Net Loss
Income Ratios
To be specified in the partnership agreement. Different ratios may be applied to income and loss.
Typical income ratios:
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Fixed ratio
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Ratio based on capital balances
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Salaries to partners and remainder on a fixed ratio
•
Interest on partners’ capital balances and the remainder on a fixed ratio
•
Salaries to partners, interest on partners’ capital, and the remainder on a fixed ratio
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Dividing Net Income or Net Loss
Assume: Sara King and Ray Lee are co-partners in the Kingslee Company.
The partnership agreement provides for (1) salary allowances of $8,400 to King and $6,000 to Lee, (2) interest
allowances of 10% on capital balances at the beginning of the year, and (3) the remaining income to be divided
equally.
Capital balances on January 1 were King $28,000, and Lee $24,000. In 2020, partnership net income is $22,000.
LO 2
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Dividing Net Income or Net Loss
Demonstrate: How do you divide the net income between the partners?
Continues on next slide
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Dividing Net Income or Net Loss
Demonstrate: How does Kingslee record the division of net income?
LO 2
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Dividing Net Income or Net Loss
Assume: Kingslee Company’s net income is only $18,000.
Demonstrate: How do you divide the net income between the partners?
LO 2
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Partnership Financial Statements
Assume: Kingslee Company’s net income is only $22,000.
Demonstrate: How do you prepare the partners’ capital statement?
Continues on next slide
LO 2
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Partnership Financial Statements
Assume: Kingslee Company’s net income is only $22,000.
Demonstrate: How do you prepare the partners’ capital statement?
Continues on next slide
LO 2
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Partnership Financial Statements
Demonstrate: How do you prepare the equity section of the statement of financial position?
A partnership’s income statement is identical to that of a sole proprietor, except for the division of net
income.
LO 2
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