Ch13 - Chapter 13 - Partnerships CHAPTER OVERVIEW In...

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Chapter 13 - Partnerships CHAPTER OVERVIEW In Chapter 1 you were introduced to the three legal forms of business organisation: sole proprietorships, partnerships, and companies. Since then, the focus has been primarily on sole proprietorships. We now turn our attention to the concept of more than one owner: partnerships. This topic can be covered in one chapter because the differences between partnerships and proprietorships are not all that great and most of the topics covered so far apply to all three forms: sole traders, partnerships and companies. The learning objectives for this chapter are to: 1. Identify the characteristics of a partnership 2. Account for the partners’ investments in a partnership 3. Allocate profits and losses to the partners 4. Account for the admission of a new partner 5. Account for a partner’s withdrawal from the firm 6. Account for the liquidation of a partnership 7. Prepare partnership financial statements CHAPTER REVIEW Objective 1 - Identify the characteristics of a partnership. A partnership is an association of two or more persons who are carrying on a business in common with a view to profit. The definition comes from the Partnership Act which is virtually identical in every Australian state and regulates partnership practice. Partners frequently draw up a partnership agreement , also called deed of partnership . This agreement is a contract between the partners that sets forth the duties and rights of each partner. The characteristics of a partnership are: 1. Limited life . The addition or withdrawal of a partner dissolves the partnership. 2. Mutual agency . Every partner has the authority to bind the business to contracts within the scope of regular business operations. 3. Unlimited liability . If the partnership cannot pay its debts, the partners are personally responsible for payment. 4. Co-ownership . Assets of the business become the joint property of the partnership. 5. No partnership income taxes . The net profit of a partnership is divided among the partners, who individually pay income taxes on their portions of the partnership’s profit. 6. Partners’ owner’s equity accounts . Separate owner’s equity accounts will be set up for each partner, both a Capital account and Withdrawal account. Exhibit 13-2 in your text summarises the advantages and disadvantages of partnerships compared to both companies and proprietorships. Objective 2 - Account for partners’ investments in a partnership. Partnerships 1
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Partners may invest assets and liabilities in a business. The simplest investment to account for is cash: Cash XX Partner’s Name, Capital XX Assets other than cash are recorded at their current market value . Suppose Craine invests land in a partnership. The land cost $60,000 several years ago and has a current market value of $95,000. The correct entry on the partnership’s books is: Land 95,000 Craine, Capital 95,000 Objective 3 - Allocate profits and losses to the partners. If there is no partnership agreement, or the agreement does not specify how profits and losses
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This note was uploaded on 10/10/2010 for the course ECON 7300 at University of Sydney.

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Ch13 - Chapter 13 - Partnerships CHAPTER OVERVIEW In...

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