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© 2009 The McGraw-HillCompanies, Inc.,
ACCOUNTING FOR PARTNERSHIPS
Chapter 12
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McGraw-Hill/Irwin Slide 2McGraw-Hill/Irwin Slide 2
PARTNERSHIP FORM OF
ORGANIZATION
Partnership
Agreement
Voluntary
Association
Limited
Life
Taxation
Unlimited
Liability
Mutual
Agency Co-
Onership
of Property
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ORGANIZATIONS WITH
PARTNERSHIP CHARACTERISTICS
Limited
Partnerships
!LP"
•General partners
assue ana!eent
"ut#es an" unl##te"
l#a$#l#t% &'r partnersh#p
"e$ts(•)##te" partners ha*e
n' pers'nal l#a$#l#t%
$e%'n" #n*este"
a'unts(
Limited
Liability
Partnerships
!LLP"
•Pr'te+ts #nn'+ent
partners &r'
alpra+t#+e 'r
ne!l#!en+e +la#s(
•M'st states h'l" all
partners pers'nall%
l#a$le &'r partnersh#p
"e$ts(
Limited
Liability
Corporations
!LLC"
•O,ners ha*e sae
l##te" l#a$#l#t% &eature
as ',ners '& a
+'rp'rat#'n(
• A l##te" l#a$#l#t%
+'rp'rat#'n t%p#+all%
has a l##te" l#&e(
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CHOOSING A -USINESS FORM
Man% &a+t'rs sh'ul" $e +'ns#"ere" ,henMan% &a+t'rs sh'ul" $e +'ns#"ere" ,hen
+h''s#n! the pr'per $us#ness &'r(+h''s#n! the pr'per $us#ness &'r(
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ORGANIZING A PARTNERSHIP
Partners +an #n*est $'th assets an" l#a$#l#t#es #n
the partnersh#p(
Assets an" l#a$#l#t#es are re+'r"e" at an a!ree".up'n *alue/ n'rall% &a#r ar0et *alue(
Asset +'ntr#$ut#'ns #n+rease the partners +ap#tal
a++'unt(
W#th"ra,als &r' the partnersh#p "e+rease the
partners +ap#tal a++'unt(
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ORGANIZING A PARTNERSHIP
In a++'unt#n! &'r partnersh#psIn a++'unt#n! &'r partnersh#ps
1(1(Partners ,#th"ra,als are "e$#te" t' the#r ',n separatePartners ,#th"ra,als are "e$#te" t' the#r ',n separate
,#th"ra,als a++'unt(,#th"ra,als a++'unt(
2(2(Partners +ap#tal a++'unts are +re"#te" 3'r "e$#te"4 &'rPartners +ap#tal a++'unts are +re"#te" 3'r "e$#te"4 &'r
the#r shares '& net #n+'e 3'r net l'ss4 ,hen +l's#n! thethe#r shares '& net #n+'e 3'r net l'ss4 ,hen +l's#n! thea++'unts at the en" '& the per#'"(a++'unts at the en" '& the per#'"(
5(5(Ea+h partners ,#th"ra,al a++'unt #s +l'se" t' thatEa+h partners ,#th"ra,al a++'unt #s +l'se" t' that
partners +ap#tal a++'unt( Separate +ap#tal an" ,#th"ra,alspartners +ap#tal a++'unt( Separate +ap#tal an" ,#th"ra,als
a++'unts are 0ept &'r ea+h partner(a++'unts are 0ept &'r ea+h partner(
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6I7I6ING INCOME OR )OSS
Three &re8uentl% use" eth'"s t' "#*#"eThree &re8uentl% use" eth'"s t' "#*#"e
#n+'e 'r l'ss are all'+at#'n 'n#n+'e 'r l'ss are all'+at#'n 'n
1(1( State" rat#'s(State" rat#'s(
2(2( Cap#tal $alan+es(Cap#tal $alan+es(
5(5( Ser*#+es/ +ap#tal an" state" rat#'s(Ser*#+es/ +ap#tal an" state" rat#'s(
Partners are n't epl'%ees '& the partnersh#p $ut are #tsPartners are n't epl'%ees '& the partnersh#p $ut are #ts
',ners( Th#s eans there are n' salar#es rep'rte" as',ners( Th#s eans there are n' salar#es rep'rte" as
e9pense 'n the #n+'e stateent( Pr'ts 'r l'sses '& thee9pense 'n the #n+'e stateent( Pr'ts 'r l'sses '& the
partnersh#p are "#*#"e" 'n s'e a!ree" up'n rat#'(partnersh#p are "#*#"e" 'n s'e a!ree" up'n rat#'(
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A6MISSION AN6 WITH6RAWA) OF
PARTNERS
When the a0eup '& the partnersh#p +han!es/
the e9#st#n! partnersh#p #s "#ss'l*e"(
A ne, partnersh#p a% $e #e"#atel%&'re"(
Ne, partner a+8u#res partnersh#p #nterest $%
1( Pur+has#n! #t &r' the 'ther partners/ 'r 2( In*est#n! assets #n the partnersh#p(
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PURCHASE OF PARTNERSHIP
INTEREST
A ne, partner +an pur+hase A ne, partner +an pur+hase
partnersh#p #nterest "#re+tl% &r'partnersh#p #nterest "#re+tl% &r'
the e9#st#n! partners(the e9#st#n! partners(The +ash !'es t' the partners/ n'tThe +ash !'es t' the partners/ n't
t' the partnersh#p(t' the partnersh#p(
T' $e+'e a partner/ the ne,T' $e+'e a partner/ the ne,
partner ust $e a++epte" $% thepartner ust $e a++epte" $% the
+urrent partners(+urrent partners(
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IN7ESTING ASSETS IN A PARTNERSHIP
The ne, partner +an !a#n
partnersh#p #nterest $%
+'ntr#$ut#n! assets t' thepartnersh#p(
The ne, assets ,#ll #n+rease
the partnersh#ps net assets(
A&ter a"#ss#'n/ $'th assets
an" e8u#t% ,#ll #n+rease(
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-ONUS TO O)6 OR NEW PARTNERS
#onus to Old
Partners
$hen the current %alue of a
partnership is greater than the
recorded amounts of e&uity' the old
partners usually re&uire a ne partner
to pay a bonus hen (oining)
#onus to *e
Partners
The partnership may grant a bonus to
a ne partner if the business is in
need of cash or if the ne partner has
exceptional talents)
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6EATH OF A PARTNER
A partners "eath "#ss'l*es a partnersh#p( A "e+ease" A partners "eath "#ss'l*es a partnersh#p( A "e+ease"
partners estate #s ent#tle" t' re+e#*e h#s 'r her e8u#t%( Thepartners estate #s ent#tle" t' re+e#*e h#s 'r her e8u#t%( The
partnersh#p a!reeent sh'ul" +'nta#n pr'*#s#'ns &'rpartnersh#p a!reeent sh'ul" +'nta#n pr'*#s#'ns &'r
settleent( These pr'*#s#'ns usuall% re8u#resettleent( These pr'*#s#'ns usuall% re8u#re
1(1(Cl's#n! the $''0s t' "eter#ne #n+'e 'r l'ss s#n+e theCl's#n! the $''0s t' "eter#ne #n+'e 'r l'ss s#n+e theen" '& the pre*#'us per#'"/ an"en" '& the pre*#'us per#'"/ an"
2(2(6eter#n#n! an" re+'r"#n! +urrent ar0et *alues &'r $'th6eter#n#n! an" re+'r"#n! +urrent ar0et *alues &'r $'th
assets an" l#a$#l#t#es(assets an" l#a$#l#t#es(
Settleent '& the "e+ease" partners estate +an #n*'l*eSettleent '& the "e+ease" partners estate +an #n*'l*esell#n! the e8u#t% t' rea#n#n! partners 'r t' an 'uts#"er/ 'rsell#n! the e8u#t% t' rea#n#n! partners 'r t' an 'uts#"er/ 'r
#t +an #n*'l*e ,#th"ra,al '& assets(#t +an #n*'l*e ,#th"ra,al '& assets(
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)I;UI6ATION OF A PARTNERSHIP
A partnersh#p "#ss'lut#'n re8u#res &'ur steps
N'n+ash assets are s'l" &'r +ash an" a !a#n 'r
l'ss 'n l#8u#"at#'ns #s re+'r"e"(
Ga#n 'r l'ss 'n l#8u#"at#'n #s all'+ate" t' partners
us#n! the#r #n+'e.an".l'ss rat#'(
)#a$#l#t#es are pa#" 'r settle"(
An% rea#n#n! +ash #s "#str#$ute" t' partners $ase"
'n the#r +ap#tal $alan+es(
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McGraw-Hill/Irwin Slide 15McGraw-Hill/Irwin Slide 15
PARTNER RETURN ON E;UIT<
Partner return
on e&uity
Partner net income
A%erage partner e&uity+
A4
,./0!123,4,"/,5 + ,1).6
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McGraw-Hill/Irwin Slide 16McGraw-Hill/Irwin Slide 16
EN6 OF CHAPTER 12