Chapter 11 - PowerPoint - F2023

Chapter 11:
Partnerships
Note:
• Information included in this presentation was taken from the 17ce

PowerPoint slides belonging to the following textbook:
Dieckmann, H.; Harris, J.; and Larson, K.D. (2022) Larson

Fundamental Accounting Principles 3.0 Print Custom Textbook with
Connect Online Access (17 Canadian ed.). McGraw-Hill Ryerson Ltd.
ISBN: 9781265230869.
Learning Objectives
6.1 Summarize the characteristics of a partnership

6.2 Record the formation of a partnership
6.3 Allocate partnership income and loss
6.4 Account for the admission and withdrawal of a partner
6.5 Account for the liquidation of a partnership
Partnerships
• A partnership is an unincorporated association of two or more parties

to pursue a business for profit as co-owners.
• Partnerships are especially common in Canada for small retail and service-
based businesses.
• Many professional practitioners such as physicians, lawyers, and accountants

also organize their practices as partnerships.

• Two forms of partnerships are recognized by Canadian
law: general partnerships and limited partnerships.
Partnership Agreements
• Forming a partnership requires that two or more legally competent parties

agree to be partners.
• In Canada a partnership can be formed between individuals, corporations,

trusts, or other partnerships.
• The agreement that is established between the parties becomes

their legally binding partnership contract.
• While it should be in writing to protect partners in the event

of disagreement or dissolution of the business, the contract is binding even
if it is only expressed orally.
Partnership Agreements
Partnership agreements normally include the partners’:

• Names and contributions
• Rights and duties
• Sharing of profit and losses
• Withdrawal provisions
• Dispute procedures
• Procedures for admission and withdrawal of partners
• Rights and duties of surviving partners in the event of a partner’s death
Limited Partnerships
• Contain a general partner and limited partner(s).
• The general partner assumes management duties and has unlimited

liability for the debts of the partnership.
• Limited partners have no personal liability beyond the amount they have
invested in the partnership.
• Limited partners have no active role except as specified in the

partnership agreement.
Limited Liability Partnerships (LLP)
• Limited partnerships protect individual partners from the actions of other

partners.
• Limited partners are only liable up to the amounts that they have invested into
the partnership.
• All limited partnerships must have a general partner who manages the
partnership and has unlimited liability for the debts of the partnership.
• Most professional firms (accountants, lawyers, architects...) are set-up as

limited partnerships
Advantages and Disadvantages of Partnerships
Advantage Disadvantages
Easy to form Unlimited liability (for general partnerships)

Low start-up costs Difficult to find suitable partners
Access to more capital sources Potential conflict between partners
Broader base of management talent Divided authority (disagreements in decisions)
Pooled talent Partners can legally bind each other
without approval
Shared business risk Limited life
Less bureaucracy than corporations Limited tax planning opportunities
Partnership Accounting
• Accounting for a partnership is the same as accounting for

a proprietorship except for transactions directly affecting equity
because ownership rights in a partnership are divided among
partners.
• Partnership accounting:
• Uses a capital account for each partner
• Uses a withdrawals account for each partner
• Allocates profit or loss to partners according to the
partnership agreement
Partnership Accounting
• Partnership accounting is similar to accounting for a proprietorship

except for:
• Each partner records their withdrawals in their own withdrawal account.
• Each individual partners' withdrawals and share of profit/loss are closed to

their individual capital account at the end of the period.
Formation of a Partnership
• When partners invest in a partnership, their capital accounts

are credited for the invested amounts.
• Partners can invest both assets and liabilities.
• Each partner’s investment is recorded at an agreed upon

value, normally the fair market value of the assets and liabilities at
their date of transfer to the partnership.
On January 11, 2023, Olivia Tsang and David Breck organize as a partnership called
the Landing Zone. Their business offers year-round facilities for skateboarding
and snowboarding. Tsang’s initial net investment in the Landing Zone is $30,000, made up
of $7,000 in cash, equipment with a fair value of $33,000, and a $10,000 note
payable reflecting a bank loan for the business due in six months. Breck’s initial investment is
cash of $10,000. These amounts are the values agreed upon by both partners.
The entries to record these investments are:
Jan. 11 Cash 7,000
Equipment 33,000
Notes Payable 10,000
Olivia Tsang, Capital 30,000
To record investment of Tsang.
11 Cash 10,000
David Breck, Capital 10,000
To record investment of Breck.
The balance sheet for the partnership would appear as follows immediately after the initial
investment on January 11, 2023:
Allocating Profit or Loss
• Partners can agree to any method of dividing profit or loss.
• In the absence of an agreement, the law says that profit or loss of a

partnership is shared equally by the partners.
• If partners agree on how they share profit but say nothing about losses, then
losses are shared in the same way as profit.
• Common methods to divide profit include:

• Stated fractional basis
• Ratio of capital investments
• Salary and interest allowances and any remainder in a fixed ratio.
Allocating Profit or Loss – Stated Fractional Basis
• Divides profit or loss to each partner based on a fraction of the total.
• Partners must agree on the fractional share each receives.
• Can be expressed as a ratio, a fraction, or a percentage.
• A 3:2:6 ratio would be read as follows:

• Partner 1 gets 3/11 of the profit or loss.
Allocating Profit or Loss – Stated Fractional Basis
• Assume the partnership agreement of Olivia Tsang and David Breck
is based on a ratio of 3:2. This means Tsang receives three-fifths or
60%, and Breck two-fifths or 40%, of partnership profit and loss.
• Assume profit of $70,000 in 2023
• Allocate profit and close income summary with the following entry:

Dec. 31 Income Summary 70,000
To allocate profit and close the Income
Summary account.
Allocating Profit and Loss – Ratio of Capital Investments
• Allocates profit or loss on the ratio of the relative capital investments

of each partner.
• Example:
• Tsang invested $30,000 and Breck invested $10,000.
• Tsang receives ¾, ($30,000 / $40,000), or 75% of any profit or loss
• Breck receives ¼, ($10,000 / $40,000), or 25% of any profit or loss
Allocating Profit or Loss – Salaries, Interest, and Fixed Ratio
• The amount of work that each partner does and the capital contributions of
partners are often not equal.
• Salary allowances can make up for differences in service contributions.

• Partners can decide to always allocate a fixed amount of income to a certain partner or
partners.
• Interest allowances can make up for unequal capital contributions.

• Partners can decide to allocate an amount of income to a certain partner or partners based
on the amount of their capital contributions.
• Partnerships may use a combination of salary and interest allowances to divide

profit or loss.
Profit Allocation – Profit Exceeds Allowance
Prepare the profit allocation for the following scenario:
• Tsang originally invested $30,000; Breck invested $10,000.

• First-year profit is $70,000.
• Tsang withdrew $20,000 and Breck withdrew $18,000.
• Annual salary allowances of $40,000 for Tsang and $25,000 for Breck.
• Interest allowances = 10% of each partner's beginning-of-year capital
balance.
• Any remaining balance of profit or loss to be shared 3:1.
EXHIBIT 11.4
* The closing entry for withdrawals is as follows:

Olivia Tsang, Withdrawals 20,000
David Breck, Withdrawals 18,000
• The method of sharing agreed to by the Partners must be followed

even if profit is less than the total of the allowances.
• For example, assume profit was $50,000 instead of $70,000...

Profit Allocation – Profit is Less than Allowance
EXHIBIT 11.6
Income Summary 50,000

Profit Allocation – Loss
EXHIBIT 11.7

Income Summary 6,000
In-Class Problems
• Exercise 11-3
• Exercise 11-5
Partnership Financial Statements
• Partnership financial statements are very similar to those of a

proprietorship.
• The statement of changes in equity for a partnership differs:

• Each partners' capital balance is tracked:
• Beginning capital balances of each partner
• Investments made by each partner
• Withdrawals made by each partner
• Allocation of profit and loss to each partner
Partnership Financial Statements
EXHIBIT 11.8
Admission of a Partner
• To become an official partner, the purchaser must be accepted by the

current partners.
• If the existing partners agree to the new partner joining,

a new partnership is formed and a new partnership agreement is
created, outlining profit and loss allocations for the newly formed
partnership.
Admission of a Partner
Admission of a partner occurs with either:

1) Purchase of partnership interest, or
2) Investing assets in the partnership
• The partner needs to be accepted by all existing partners and a new

partnership agreement is formed.
Admission of a Partner – Purchase of partnership interest
• An existing partner’s capital is obtained by the new partner

• Assume that at the end of the Landing Zone’s third year David Breck has a
capital balance of $20,000 and he sells one-half of his partnership interest to
Cris Davis for $18,000 on January 4, 2023. Breck is selling a $10,000 recorded
interest (= $20,000 × 1/2) in the partnership. The partnership records this as:
2023
Jan. 4 David Breck, Capital 10,000
Cris Davis, Capital 10,000
To record admission of Davis by purchase.
Admission of a Partner – Purchase of partnership interest
The effect of this transaction on equity is as follows:

• The $18,000 Davis paid to Breck is not recorded by the partnership. The partnership’s
assets, liabilities, and total equity are not affected by this transaction.
• Tsang and Breck must agree if Davis is to become a partner.
Admission of a Partner – Investing Assets
The invested assets become property of the partnership.
The amount invested may or may not equal the share of equity obtained.
Three possibilities:
1. Investments is equal to share of equity (no bonus)
2. Investment is greater than share of equity (bonus to original partners)
3. Investment is less than share of equity (bonus to new partner)
If Tsang ($52,000 equity) and Breck ($20,000 equity) agree to accept Davis as
a partner in the Landing Zone and Davis invests $28,000.
The entry to record Davis’s investment is:

2023
Jan. 4 Cash 28,000
To record admission of Davis byinvestment.
52% 20% 28% = 100%
• Even though Davis now has 28% equity in the net assets of the business, she does not
necessarily have a right to 28% of profit. Profit and loss allocations are a separate matter
documented in the partnership agreement.
Admission of a Partner – Bonus to Original Partners
• When the current market value of a partnership is greater than

the recorded amounts of equity, the partners usually require a new
partner to pay a bonus (premium) for the privilege of joining.
• This situation exists when the market value of net assets exceeds
their book value, which is often the case once a partnership has
established customers and has a proven track record of profitable
growth.
• Assume Tsang and Breck accept Davis as a partner with a 25%

interest, but they require Davis to invest $48,000.
• Tsang's equity is $52,00 and Breck's equity is $20,000.
• Davis' equity is determined as follows:

• Davis paid $48,000, however, received equity of $30,000.

• The $18,000 excess paid is called a bonus.
• A bonus is allocated to the existing partners according to their profit/loss
sharing ratio.
• If Tsang and Olivia split the bonus 50:50, the JE for this transaction is:
Jan. 4 Cash 48,000
To record admission of Davis and bonus to original partners; $18,000 x ½ = $9,000.
Admission of a Partner – Bonus to New Partner(s)
• Existing partners can give a bonus to a new partner so that the new
partner’s equity is larger than their amount invested.
• This usually occurs when additional cash is needed or the new

partner has exceptional talents or business connections.
Tsang and Breck agree to accept Davis as a partner with a 25% interest in
total equity, but they require Davis to invest only $18,000. Davis’s equity is
determined as:
$52,000
$52,000 + $20,000
+ 20,000
• Davis paid $18,000 but received equity of $22,500 (a bonus of $4,500 to

Davis).
The entry to record Davis' investment is:

2023
Jan. 4 Cash 18,000
To record David’s admission and bonus;
$4,500 x ½ = $2,250.
In-Class Problems
• Problem 11-4A
• Problem 11-6A
Withdrawal of a Partner
Withdrawal of a partner occurs when:
1. The withdrawing partner sells their interest to another person, or

2. The withdrawing partner receives cash or other assets of the
partnership in settlement of their equity interest.
Withdrawal of a Partner – Partnership assets used in settlement
Similar to the possible bonus arising from the admission of a partner:
Three possibilities:
1. No bonus
2. Bonus to remaining partners
3. Bonus to withdrawing partner
• Breck withdraws from the partnership.

• The partners share profit and loss equally per the partnership
agreement.
Withdrawal of a Partner - Example
1) No bonus
• If Breck withdraws and receives cash of $38,000:
Oct. 31 David Breck, Capital 38,000
Cash 38,000
2) Bonus to Remaining Partners

• If Breck withdraws and receives cash of $34,000. Bonus of $4,000 (38K-34K) is
shared equally.
Cash 34,000
Withdrawal of a Partner - Example
3) Bonus to Withdrawing Partner

• If Breck withdraws and receives cash of $40,000. Bonus is $2,000 (40K-38K).
Thus, equity of original partners is reduced by the same amount.

Cash 40,000
• Why would a partner take less than the recorded value of their equity?
• They may want to exit the partnership and will do what it takes to leave
it.
•Why would the remaining partners give a bonus to the one withdrawing?
• The remaining partners may want to remove a partner which requires
giving them an 'incentive' to leave.
In-Class Problem
• Problem 11-7A
Partnership Liquidation
Partnership liquidation is the process of closing down a business; it involves selling

partnership assets, paying business debts, and distributing any remaining cash to
owners.
Four Step Process

1. Non-cash assets are sold for cash and a gain or loss on liquidation is recorded.
2. Gain or loss on liquidation is allocated to partners using their profit-and-loss ratio.
3. Liabilities are paid.
4. Remaining cash is distributed based on the total balances in the capital accounts.
Partnership Liquidation – Capital Deficiencies
• No capital deficiency means that all partners have credit balances in their
capital accounts before the final distribution of cash.
• Capital deficiency means that at least one partner has a debit balance in
their capital account before the final distribution of cash.
• Capital deficiencies can arise from liquidation losses, excessive withdrawals, or
recurring losses in prior periods.
• The final distribution of cash depends on whether the deficient partner

can pay the deficiency or not.
No Capital Deficiency - Example
Assume Tsang, Breck, and Davis agree to liquidate their partnership.

Assets = Liabilities + Equity
Cash Sporting Accum. Land Accounts Olivia David Cris Davis,
Facilities
Deprec. Payable Tsang, Breck, Capital
Sporting Capital Capital
Facilities
Account $168,000 $33,000 $18,000 $25,000 $20,000 $70,000 $66,000 $52,000
balances
immediately
prior to
liquidation
Step 4: Distribute the Remaining Cash:

• Creditors have claim to partnership assets before the partners do.
EXHIBIT 11.10
Step 1: Record the sale of non-cash assets:

• Assume the partnership received cash of $46,000 for the assets.
Jan. 15 Cash 46,000
Accumulated Depreciation, 18,000
Sporting Facilities
Sporting Facilities 33,000
Land 25,000
Gain from Liquidation 6,000
Sold non-cash assets at a gain.
Step 2: Allocate the Gain from Liquidation to the capital accounts:
Jan. 15 Gain from Liquidation 6,000

To allocate liquidation gain to partners.
Step 3: Pay debts liabilities

• Creditors have claim to partnership assets before the partners do.
Jan. 15 Accounts Payable 20,000

Cash 20,000
To pay claims of creditors.
Step 4: Distribute the Remaining Cash
• Notice the final balances are now $0.
EXHIBIT 11.10
Step 4: Distribute the Remaining Cash
EXHIBIT 11.10
Capital Deficiency – Partner Pays Deficiency
• Assume Davis' capital account has a $3,000 deficiency immediately

before the final distribution of cash.
• This means that Davis owes the partnership $3,000.
• If Davis is willing and able to pay the deficit, the capital balances are:
Capital Deficiency – Partner Pays Deficiency
The entry to record the payment of the deficiency and the final cash
distributions to the partners:
Jan. 15 Cash 3,000

Cash 27,000

Capital Deficiency – Partner Cannot Pay Deficiency
• If Davis is NOT willing and able to pay, the other partners must cover
the deficiency using their capital account.
• The capital balances are:
Capital Deficiency – Partner Cannot Pay Deficiency
• Since partnerships have unlimited liability, a partners' unpaid deficiency is

absorbed by the remaining partners who have credit capital balances.
• If Davis is unable to pay the $3,000 deficiency, it is shared based on the profit-
and-loss-sharing ratio.
Jan. 15 Olivia Tsang, Capital 1,500
David, Breck, Capital 1,500
Cash 24,000

In-Class Problem
• Problem 11-9A
Summary
• Partnerships have many advantages and many disadvantages.
• Partners may be given salary and interest allowances.
• Journal entries are recorded to start-up the partnership, record

investments, withdrawals, allocate profit and loss, admission and withdrawal of a
partner, and for partnership liquidation.
• A bonus may arise with the admission or withdrawal of a partner

• Liquidation differs slights in its treatment depending on whether partners have
capital or deficit positions in their capital accounts.

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Chapter 11:

• Information included in this presentation was taken from the 17ce

Dieckmann, H.; Harris, J.; and Larson, K.D. (2022) Larson

6.1 Summarize the characteristics of a partnership

• A partnership is an unincorporated association of two or more parties

• Many professional practitioners such as physicians, lawyers, and accountants

• Forming a partnership requires that two or more legally competent parties

• In Canada a partnership can be formed between individuals, corporations,

• The agreement that is established between the parties becomes

• While it should be in writing to protect partners in the event

Partnership agreements normally include the partners’:​

• Contain a general partner and limited partner(s).

• The general partner assumes management duties and has unlimited

• Limited partners have no active role except as specified in the

• Limited partnerships protect individual partners from the actions of other

• Most professional firms (accountants, lawyers, architects...) are set-up as

Easy to form Unlimited liability (for general partnerships)

• Accounting for a partnership is the same as accounting for

• Partnership accounting is similar to accounting for a proprietorship

• Each partner records their withdrawals in their own withdrawal account.

• Each individual partners' withdrawals and share of profit/loss are closed to

• When partners invest in a partnership, their capital accounts

• Partners can invest both assets and liabilities.

• Each partner’s investment is recorded at an agreed upon

• Partners can agree to any method of dividing profit or loss.

• In the absence of an agreement, the law says that profit or loss of a

• Common methods to divide profit include:

• Divides profit or loss to each partner based on a fraction of the total.

• Partners must agree on the fractional share each receives.

• Can be expressed as a ratio, a fraction, or a percentage.

• A 3:2:6 ratio would be read as follows:

• Allocates profit or loss on the ratio of the relative capital investments

• Salary allowances can make up for differences in service contributions.

• Interest allowances can make up for unequal capital contributions.

• Partnerships may use a combination of salary and interest allowances to divide

Prepare the profit allocation for the following scenario:

• Tsang originally invested $30,000; Breck invested $10,000.

* The closing entry for withdrawals is as follows:

Olivia Tsang, Capital 20,000

• The method of sharing agreed to by the Partners must be followed

• For example, assume profit was $50,000 instead of $70,000...

Income Summary 50,000

Olivia Tsang, Capital 13,250

• Partnership financial statements are very similar to those of a

• The statement of changes in equity for a partnership differs:

• To become an official partner, the purchaser must be accepted by the

• If the existing partners agree to the new partner joining,

Admission of a partner occurs with either:

• The partner needs to be accepted by all existing partners and a new

• An existing partner’s capital is obtained by the new partner

The effect of this transaction on equity is as follows:​

The invested assets become property of the partnership.

The entry to record Davis’s investment is:

52% 20% 28% = 100%

• When the current market value of a partnership is greater than

• Assume Tsang and Breck accept Davis as a partner with a 25%

• Tsang's equity is $52,00 and Breck's equity is $20,000.

• Davis' equity is determined as follows:

• Davis paid $48,000, however, received equity of $30,000.

• This usually occurs when additional cash is needed or the new

• Davis paid $18,000 but received equity of $22,500 (a bonus of $4,500 to

The entry to record Davis' investment is:

Withdrawal of a partner occurs when:

Partnership agreements normally include the partners’:

The effect of this transaction on equity is as follows:

Oct. 31 David Breck, Capital 38,000

Jan. 15 Gain from Liquidation 6,000

Jan. 15 Accounts Payable 20,000

Olivia Tsang, Capital 19,000