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ACTPACO Reviewer Edited

ACTPACO Reviewer Edited

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Published by: Aznzdzrzezw Leonardo on Jun 13, 2011
Copyright:Attribution Non-commercial

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12/16/2013

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Introduction to Partnership Accounting
Sole Proprietorship – owned by one person
assume the profit and expensesService – oriented business – engages in rendering servicesMerchandising businesses – buy and sell goods for profitPartnership – composed of two or more persons to contribute to a common fund for aprofit that will be divided among themselvesMoney and property include: cash, investment in trading securities, trade andother receivables, prepaid expenses, PPEIndustry: service, labor, competenceCharacteristics of a partnership1.
 
mutual agency – all of them participate actively, partners act as agents of thepartnership, can attend meetings as a representative, signing of contracts2.
 
limited life – dissolution upon death, insanity, mental incapability, etc. of apartner, easily ended/terminated, change of ownership structure3.
 
unlimited liability – the liabilities are extended to the personal assets andproperties (general partner) ; liability to partnership debts (limited partner) ; allpartnerships must have at least one general partner4.
 
co-ownership of property5.
 
co-ownership of profit6.
 
legal entity – business entity principle
partners are distinct from the partnershipAdvantage of a partnership1.
 
easy to form and dissolve2.
 
greater amount of capital3.
 
freedom and flexibility in decision-making4.
 
better management5.
 
reliable from the point of view of creditorsDisadvantage of a partnership1.
 
unlimited liability of a partnership2.
 
lack of business continuity3.
 
difficulty in transferring ownership interest (approval of all partners)4.
 
limited amount of capital5.
 
likelihood of dissension and disagreementKinds of partnership1.
 
according to activitya.
 
service – rendering servicesb.
 
merchandising or trading – buy and sell of goodsc.
 
manufacturing – production of goods2.
 
according to liabilitya.
 
general – liable pro rata – all partners are general partners.b.
 
limited – one limited partner makes the partnership a limited partnership3.
 
according to object
 
 a.
 
universal partnership of all present property – contribution of all thepropertyb.
 
universal partnership of profits – assets and profits at the start of thepartnershipc.
 
particular partnership – specific purpose
usually an exercise of professionKinds of partners1.
 
according to investmenta.
 
capitalist – contributes money or propertyb.
 
industrial – labor skill or industryc.
 
capitalist industrial – both2.
 
according to liabilitya.
 
general – liability extends to personal assetsb.
 
limited – capital contribution3.
 
according to participationa.
 
nominal – in name onlyb.
 
secret – active in business but unknown to the publicc.
 
silent – doesn’t participate actively – cash investmentsd.
 
managing – manages actively – incentivesArticles of co-partnership-
 
agreement in writing among the partners governing the nature and terms of thepartnership contract-
 
the framework within which the partners are to operate or conduct partnershipbusiness-
 
will help minimize, if not eliminate, the confusion and disputes that may arisebetween or among the partners-
 
must be registered with SEC (security and exchange commission)Features of Partnership Accountinga.
 
plurality of capital and drawing accountsb.
 
partner’s loans – treated as loan or investmentc.
 
partner’s borrowings – treated as withdrawald.
 
partner’s salaries – salaries to partnerse.
 
interest on investment – interest in the asset investmentf.
 
division of profit and losses – plurality of partnersPartnership formation1.
 
formation of a partnership for the first time by individuals2.
 
conversion of a sole proprietorship to a partnershipa.
 
1 sole proprietorship + individualb.
 
2 sole proprietorshipsGeneral guidelines:
 
cash investments are recorded using their face values
 
 
 
non-cash investment is recorded at current fair market value
 
in case of a non-cash investments with assumption of liability, the capital of theowner is credited at net amount
 
accounts receivable are recorded at gross amount – allowance for bad debts iscarried forward to the partnership
 
depreciable property assets are recorded at carrying value ( cost – accumulateddepreciation)Sole proprietorship/s converted into a partnership:a.
 
adjust the books of the sole proprietorshipb.
 
close the books of the sole proprietorshipc.
 
record the investment of the partners in the partnershipPartnership operationsAccounting cycle of the partnership1.
 
prepare journal entries2.
 
post to ledgers3.
 
prepare a trial balance4.
 
prepare adjusting entries5.
 
prepare financial statements6.
 
prepare closing entries7.
 
prepare post-closing trial balance8.
 
prepare reversing entriesIncome statement: division of net income/ lossRules for dividing profit and loss1.
 
capitalist partnera.
 
profiti.
 
in accordance to the agreementii.
 
in the accordance to the capital contributionb.
 
lossi.
 
agreementii.
 
division of profits will be usediii.
 
capital contribution2.
 
industrial partnera.
 
profiti.
 
agreementii.
 
 just and equitable share of the profitsb.
 
lossi.
 
agreementii.
 
no share in the lossesMethods of dividing net income1.
 
equally2.
 
arbitrary ratio
fractions, percentages, ratio and proportion

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