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Intermediate Accounting 1

Lecture 1

Accounting for Partnerships

• Partnership Form of Organization:
• A partnership is an association of two or
more persons to carry on as co-owners of a
business for profit.

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Characteristics of Partnerships:
• The principal characteristics of the partnership form of business organization are explained
below:
• Association of Individuals:
• * Association of individuals may be based on as simple an act as a handshake, however, it
is preferable to state the agreement in writing.

• * A partnership
– legal entity for certain purposes (i.e., property can be owned in the name of the partnership).
– accounting entity for financial reporting purposes.

• * Net income of a partnership

– not taxed as a separate entity.
– each partner’s share of income is taxable at personal tax rates

• Mutual Agency:
• Mutual agency means that:
– Each partner acts on behalf of the partnership when engaging in partnership business.
– 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.
• Because of mutual agency, an individual should be extremely cautious in selecting
partners.

Characteristics of Partnerships:
• Limited Life:
• Partnerships have a limited life. It may be ended at any time either:
• a) voluntarily through acceptance of a new partner or withdrawal of a
partner, or
• b) involuntarily by death or incapacity of a partner.

• Unlimited Liability:
• Each partner is personally and individually liable for all partnership
liabilities.

• Co-Ownership of Property:
• Assets invested in the partnership are owned jointly by all the partners. If
the partnership is dissolved, each partner has a claim on total assets equal
to the balance in his or her respective capital account.
• Partnership Income or Loss:
• co-owned; if the partnership contract does not specify to the contrary, net
income or net loss is shared equally by the partners.

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Basic Partnership Accounting:

• The major accounting issues relate to:
1. Forming the partnership,
2. Dividing income or loss, and
3. Preparation of financial statements.
4. Admission of a partner
5. Withdrawal of a partner
6. Liquidation of a partnership

Forming a Partnership:
• Each partner’s initial investment in a
partnership is entered in the partnership
records at the fair market value of the assets
at the date of their transfer to the
partnership.
• The values assigned to the assets must be
agreed to by all the partners.

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Example:
• Assume that A. Rolfe and T. Shea combined their
proprietorships to start a partnership named U.S.
Software. Rolfe and Shea have the following
assets prior to the formation of partnership.

Book Value Market Value

Rolfe Shea Rolfe Shea
Cash $8000 $9000 $8000 $9000
Office Equipment 5000 4000
Accumulated Depreciation (2000)
Accounts Receivable 4000 4000
Allowance for doubtful accounts (700) (1000)
$11000 $12300 $12000 $12000

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• The journal entries to record the

investments are shown below:
Date Account Titles and Explanations Dr. Cr.
Cash 8000
Office Equipment 4000
A. Rolfe, Capital 12000
To record the initial investment of Rolfe in the
partnership.
Cash 9000
Accounts Receivable 4000
Allowance for doubtful accounts 1000
T. Shea, Capital 12000
To record the initial investment of Shea in the
partnership.

Note that:
• The office equipment is recorded at their market value. Because the
equipment has not been used by the partnership, there is no
accumulated depreciation.
• The Gross claims on customers (Accounts Receivable of $4000) are
carried forward to the partnership. The allowance for doubtful accounts
is adjusted to $1000 to arrive at a net realizable value of $3000 (the
amounts expected to be collected from customers which equals accounts
receivable less allowance for doubtful accounts ($4000 – $1000 = $3000).
A partnership may start with an allowance for doubtful accounts
because it will continue to collect existing accounts receivable, some of
which are expected to be uncollectible.
• After the partnership has been formed, the accounting for transactions is
similar to any other type of business organization.
• The steps in the accounting cycle described for a proprietorship also
apply to a partnership.

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Ex 2:
• Meissner, Cohen, and Hughes are forming a
partnership. Meissner is transferring $50,000 of
cash to the partnership.
• Cohen is transferring land worth $15,000 and a
small building worth $80,000.
• Hughes transfers cash of $9,000, accounts
receivable of $32,000 and equipment worth
$19,000. The partnership expects to collect
$29,000 of the accounts receivable.
• Instructions: Prepare the journal entries to
record each of the partners’ investments.

Answer:

• Meissner is transferring $50,000 of cash to the

partnership. Prepare the entry.

Cash 50,000
Meissner, Capital 50,000
• Cohen is transferring land worth $15,000 and a
small building worth $80,000. Prepare the entry.
Land 15,000
Building 80,000
Cohen, Capital 95,000

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• Hughes transfers cash of $9,000, accounts

receivable of $32,000 and equipment worth
$19,000. The partnership expects to collect
$29,000 of the accounts receivable.
Cash 9,000
Accounts receivable 32,000
Equipment 19,000
Allowance for doubtful accounts 3,000
Hughes, Capital 57,000

Ex3:
• Jack Herington has owned and operated a proprietorship for several
years. On January1, he decides to terminate this business and
become a partner in the firm of Herington and Kaspar. Herington’s
investment in the partnership consists of $12,000 in cash, and the
following :
• assets of the proprietorship: accounts receivable $14,000 less
allowance for doubtful accounts of $2,000, and equipment $20,000
less accumulated depreciation of $4,000. It is agreed that the
allowance for doubtful accounts should be $3,000 for the
partnership. The fair market value of the equipment is $13,500.
• Instructions:
• Journalize Herington’s admission to the firm of Kaspar and
Herington.

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Jan. 1 Cash 12,000

Accounts Receivable 14,000
Equipment 13,500
Allowance for Doubtful Accounts................ 3,000
Jack Herington, Capital .............................. 36,500

Next Lecture
Dividing income or loss (Income distribution)

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End of Lecture 1