Accounting for Partnerships

A partnership is a form of company

A partnership is a form of company run by two or more people who agree to contribute assets to the formation of the company (Hoyle, Schaefer & Doupnik, 2015). At the end of the agreed fiscal year, shareholders typically share in net profit or loss. Accounting for assets and liabilities in a partnership arrangement is the same as for other types of companies. However, there are significant differences in accounting for shareholder contributions or equity. Apparently he has two or more owners in partnership. Therefore, separate capital accounts must be maintained for each. Again, withdrawals, income distribution, the entrance of a new partner, retirement of a partner, and for the liquidation of the partnership (Needles, Powers & Crosson, 2013).

Accounting for Contributions and Distribution of Profits

Every partner contributes an asset to the formation of the business. A credit and a debit entry of the property provided is made in the partners’ capital and current account respectively. Each partner’s initial contribution is recorded at a fair market value of the assets (Hoyle, Schaefer & Doupnik, 2015). The net profit is distributed by debiting the partner’s income summary account and crediting the capital accounts with salaries if entitled, interests of capital balance and the partner’s respective share of the net profit of the business (Hoyle, Schaefer & Doupnik, 2015).

Admission and Withdrawal of Partners

New members may join the business through an agreement among the existing partners. In such a case, they contribute new assets or buy some shares from the original shareholders. The capital accounts are credited with the amount of the stock or assets purchased. Similarly, a debit entry of the partnership cash account is recorded. However, when a partner exits a partnership agreement, their shares are acquired by other members, or else, the partner may decide to withdraw his/her assets from the business (Needles, Powers & Crosson, 2013).

Liquidation of a Partnership

Finally, the liquidation of a partnership agreement involves selling the business assets. The liquidation results to crediting the partner’s capital account in case of net profit after the sales of the property, or a debit entry in their capital accounts when there is a loss of the sales of the assets (Hoggett, et.al, 2014). When any of the partners has a final negative capital balance, he/she contributes his assets to cover the deficit. To some extent, if the partner is unable to cover the debt, it may be charged as a loss to the other partners.

References

Hoggett, J., Edwards, L., Medlin, J., Chalmers, K., Hellmann, A., Beattie, C., & Maxfield, J. (2014). Financial accounting.

Hoyle, J. B., Schaefer, T., & Doupnik, T. (2015). Advanced accounting. McGraw Hill.

Needles, B. E., Powers, M., & Crosson, S. V. (2013). Principles of accounting. Cengage Learning.