Chapter 12 Study Guide

Chapter 12 Study Guide - CHAPTER 12 Accounting for...

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CHAPTER 12 Accounting for Partnerships STUDY OBJECTIVES 1. IDENTIFY THE CHARACTERISTICS OF THE PARTNERSHIP FORM OF BUSINESS ORGANIZATION. 2. EXPLAIN THE ACCOUNTING ENTRIES FOR THE FORMATION OF A PARTNERSHIP. 3. IDENTIFY THE BASES FOR DIVIDING NET INCOME OR NET LOSS. 4. DESCRIBE THE FORM AND CONTENT OF PARTNERSHIP FINANCIAL STATEMENTS. 5. EXPLAIN THE EFFECTS OF THE ENTRIES TO RECORD THE LIQUIDATION OF A PARTNERSHIP. *6. EXPLAIN THE EFFECTS OF THE ENTRIES WHEN A NEW PARTNER IS ADMITTED. *7. DESCRIBE THE EFFECTS OF THE ENTRIES WHEN A PARTNER WITHDRAWS FROM THE FIRM.
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Partnership Form of Organization 1. (S.O. 1) A partnership is an association of two or more persons to carry on as co-owners of a business for a profit. Characteristics of Partnerships 2. The principal characteristics of the partnership form of business organization are (a) association of individuals, (b) mutual agency, (c) limited life, (d) unlimited liability, and (e) co-ownership of property. 3. The association of individuals in a partnership may be based on as simple an act as a handshake; however, it is preferable to state the agreement in writing. a. A partnership is a legal entity for certain purposes. b. A partnership is an accounting entity for financial reporting purposes. c.Net income of a partnership is not taxed as a separate entity. 4. Mutual agency means that each partner acts on behalf of the partnership when engaging in partnership business, and the act of any partner is binding on all other partners. This is true even when partners act beyond the scope of their authority, so long as the act appears to be appropriate for the partnership. 5. Partnerships have a limited life. Partnership dissolution occurs whenever a partner withdraws or a new partner is admitted. 6. Each partner has unlimited liability. a. Each partner is personally and individually liable for all partnership liabilities. b. Creditors’ claims attach first to partnership assets and then to the personal resources of any partner, irrespective of that partner’s capital equity in the company. 7. Partnership assets are co-owned by the partners. Once assets have been invested in the partnership they are owned jointly by all the partners. Advantages and Disadvantages 8. Organizations with partnership characteristics include limited partnerships, limited liability partnerships, limited liability companies, and S corporations. 9. The major advantages of a partnership are: a. Combining skills and resources of two or more individuals. b. Ease of formation. c. Freedom from governmental regulations and restrictions. d. Ease of decision making. 10. The major disadvantages of a partnership are a. mutual agency. b.
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Chapter 12 Study Guide - CHAPTER 12 Accounting for...

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