Partnerships. Partnerships- Definition . A partnership exists when two or more persons carry on a business jointly with the intention of making a profit.
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Sleeping or dormant partner
The most common form of partnership is one where the partners are active and each partner is personally liable for any partnership debts
In order to ensure the partners understand their obligations to each other, a partnership agreement should be drawn up. Although the agreement may be verbal it is best to have it in writing to minimise disputes later. This agreement should set out the rights, duties and liabilities of each partner including:
Note that the profit-sharing ratio is assumed to be equal if there is no agreement to the contrary.
Complete the journals for commencement and purchase of existing business
Each partner contributes cash only
Each partner contributes cash and/or other assets/liabilities
Balance Sheet on Completion
Partners contribute assets/liabilities from an existing business
Prepare journals and ledgers for the following:
May be treated as operating expenses or in the profit and loss appropriation account if paid as part of the profit-sharing agreement
Partners’ advances/ loans
Advances are treated as an asset of the partnership. Loans are treated as liabilities of the partnership.
Interest on loans and advances
Interest on advances is receivable by the partnership and is treated as income to the business and is credited to the profit and loss account
Interest on capital and drawings
Partners may be entitles to receive interest on capital (if provided for in the partnership agreement). This may be done to adjust for differing capital contributions. It is an appropriation transfer from profit and loss to profit and loss appropriation and should be adjusted before the distribution of profit. Interest on drawings may be charged in the same way as interest on capital
Refer Freeman (127-129)
Illustrative example 4 p 130-131
Homework for Friday 1/6/2012: Self test 3C p 132 Q3.7p153 and 3.16 p157, Portfolio Question 3.15p156