Chapter 19 Lecture Notes

Chapter 19 Lecture Notes

This chapter discusses accounting for a Partnership. A partnership is defined as “an association of two or more persons who carry on, as co-owners, a business for profit.” A partnership will use the same types of journals, ledgers, and asset, liability, revenue, and expense accounts as a sole proprietorship – the difference is that each partner will have a capital and drawing account.

At the end of a period the closing procedures are similar to those of a sole proprietorship – except instead of closing income summary to one capital account it is distributed among partners. The distributive share must be determined; this refers to the division of the net income or net loss among partners and does not refer to cash distributions. Determining the division may be based on the amount of capital invested, the amount of time spent in the business, or each partner’s skills, expertise, and experience. If there is an agreed upon ratio then it must be converted to a percentage, which will then be multiplied by the balance in the income summary account to determine how much will be closed to each capital account. If the net income (or loss) is allocated based on the balances in the capital accounts, then those percentages will be multiplied by the income summary total. The drawing accounts will then be closed to each individual’s capital account.

Note that salary allowances for the partners are a cash payment to a partner which is debited to their drawing account; they do not represent an expense of the partnership and are not subject to payroll taxes or withholdings.

Financial statement preparation is similar to that of a sole proprietorship. On the income statement the only difference is that it is customary to show the allocation of net income. On the balance sheet the capital account for each partner will be shown in the Partners’ Equity section. See figure 19-2 for how to create a Statement of Partners’ Equity (similar to the Statement of Owner’s Equity for the sole proprietor).

When there are changes in partners, for example a new partner will be investing or an old partner withdraws, there must be a dissolution of the old partnership and a new one must be formed. At this point the assets and liabilities are revalued; assets are revalued to their fair market value which will not necessarily agree with the book value carried in the previous records. Previously recorded depreciation is irrelevant and is not carried forward, it begins anew with the new partnership based on the current value and estimated life of the asset.