Introduction to Partnership Accounting

Sole Proprietorship owned by one person assume the profit and expenses Service oriented business engages in rendering services Merchandising businesses buy and sell goods for profit Partnership composed of two or more persons to contribute to a common fund for a profit that will be divided among themselves Money and property include: cash, investment in trading securities, trade and other receivables, prepaid expenses, PPE Industry: service, labor, competence Characteristics of a partnership 1. mutual agency all of them participate actively, partners act as agents of the partnership, can attend meetings as a representative, signing of contracts 2. limited life dissolution upon death, insanity, mental incapability, etc. of a partner, easily ended/terminated, change of ownership structure 3. unlimited liability the liabilities are extended to the personal assets and properties (general partner) ; liability to partnership debts (limited partner) ; all partnerships must have at least one general partner 4. co-ownership of property 5. co-ownership of profit 6. legal entity business entity principle partners are distinct from the partnership Advantage of a partnership 1. easy to form and dissolve 2. greater amount of capital 3. freedom and flexibility in decision-making 4. better management 5. reliable from the point of view of creditors Disadvantage of a partnership 1. unlimited liability of a partnership 2. lack of business continuity 3. difficulty in transferring ownership interest (approval of all partners) 4. limited amount of capital 5. likelihood of dissension and disagreement Kinds of partnership 1. according to activity a. service rendering services b. merchandising or trading buy and sell of goods c. manufacturing production of goods 2. according to liability a. general liable pro rata all partners are general partners. b. limited one limited partner makes the partnership a limited partnership 3. according to object

a. universal partnership of all present property contribution of all the property b. universal partnership of profits assets and profits at the start of the partnership c. particular partnership specific purpose usually an exercise of profession Kinds of partners 1. according to investment a. capitalist contributes money or property b. industrial labor skill or industry c. capitalist industrial both 2. according to liability a. general liability extends to personal assets b. limited capital contribution 3. according to participation a. nominal in name only b. secret active in business but unknown to the public c. silent doesnt participate actively cash investments d. managing manages actively incentives Articles of co-partnership - agreement in writing among the partners governing the nature and terms of the partnership contract - the framework within which the partners are to operate or conduct partnership business - will help minimize, if not eliminate, the confusion and disputes that may arise between or among the partners - must be registered with SEC (security and exchange commission) Features of Partnership Accounting a. plurality of capital and drawing accounts b. partners loans treated as loan or investment c. partners borrowings treated as withdrawal d. partners salaries salaries to partners e. interest on investment interest in the asset investment f. division of profit and losses plurality of partners Partnership formation 1. formation of a partnership for the first time by individuals 2. conversion of a sole proprietorship to a partnership a. 1 sole proprietorship + individual b. 2 sole proprietorships General 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 the owner is credited at net amount accounts receivable are recorded at gross amount allowance for bad debts is carried forward to the partnership depreciable property assets are recorded at carrying value ( cost accumulated depreciation)

Sole proprietorship/s converted into a partnership: a. adjust the books of the sole proprietorship b. close the books of the sole proprietorship c. record the investment of the partners in the partnership Partnership operations Accounting cycle of the partnership 1. prepare journal entries 2. post to ledgers 3. prepare a trial balance 4. prepare adjusting entries 5. prepare financial statements 6. prepare closing entries 7. prepare post-closing trial balance 8. prepare reversing entries Income statement: division of net income/ loss Rules for dividing profit and loss 1. capitalist partner a. profit i. in accordance to the agreement ii. in the accordance to the capital contribution b. loss i. agreement ii. division of profits will be used iii. capital contribution 2. industrial partner a. profit i. agreement ii. just and equitable share of the profits b. loss i. agreement ii. no share in the losses Methods of dividing net income 1. equally 2. arbitrary ratio fractions, percentages, ratio and proportion

3. capital ratio a. original / initial investment b. beginning capital balance c. ending capital balance d. average capital 4. allowing salaries, interest and bonus ideal method a. salaries services b. interest investments c. bonus excellent managerial skills General guidelines: 1. salary allowances, interest allowance, and bonus are not expenses 2. provisions on salaries and interest whether we earned profit / incurred loss 3. bonus is enforced only when we result to profit 4. capital balances Withdrawals 1. permanent withdrawal return OF investments 2. temporary withdrawal: return ON investments Partnership dissolution without liquidation Dissolution change in the relation of the partners caused by any partner ceasing to be associated in the carrying out of the business 2 types of dissolution 1. Formation of a new partnership without liquidation 2. Liquidation winding up of partnership affairs going out of the business Conditions resulting to partnership dissolution 1. admission of a new partner 2. withdrawal of a partner 3. incorporation of a partnership conversion to corporation change the kind of partner (general or limited), share of profit and loss

Admission of new partner: 1. consent of ALL the partners is necessary 2. cancels the old agreement 3. update the capital balances a. determining the profit share Income Summary A, Drawing B, Drawing A, Drawing B, Drawing

xxx xxx xxx xxx xxx

A, Capital B, Capital

xxx xxx

b. adjust/revaluate partnership assets and liabilities to the capital adjustment account Asset xxx Capital Adjustment xxx Types of admission of a new partner 1. by purchase of interest a. you have a buyer (incoming) and a seller (outgoing) b. it is a personal transaction between the buyer and seller c. the cash paid by the buyer is not recorded in the books of the partnership d. gain or loss: personal gain or loss of the selling partner e. transfer of capital only f. no increase in total assets and no increase in total partners equity 2. by investment or asset contribution a. between the partnership and the new partner b. there must be an asset investment c. total assets and total equity will increase d. record the investment (contributed capital) of the new partner e. agreed capital: total agreed capital of the firm x % of interest of new partner f. compare contributed capital and agreed capital: distribute bonus to either old or new partners

Bonus it is an amount partners are willing to allow as additional credit to a partners capital in excess of his actual capital contribution it is transfer of capital from one partner to another may be recognized only when total capital of the firm is equal to its total contributed capital 2 types of withdrawal of a partner (seller) 1. purchase of interest by another partner or an outsider o personal transaction between buyer and seller o transfer of the sellers capital to the buyers capital 2. purchase of interest by the partnership o transaction between the partnership and buyer o decrease in partnership assets or increase in partnership liabilities Partnership dissolution with liquidation Liquidation the business operations are completely terminated or ended Causes:

1. 2. 3. 4.

the purpose for which the partnership was organized has been accomplished the term/period covered by the partnership contract has terminated the firm became bankrupts the partners mutually agree to close the business partnership assets are sold partnership creditors are paid remaining assets are distributed to the partners as a return of their investments the purpose of accounting during this period is to have an equitable distribution of partnership assets to creditors and partners

types: 1. lump-sum one time, big time after all the non-cash assets have been realized, the total amount of gain or loss on realization is known all liabilities have been made. Procedure: 1. finish accounting cycle update (adjust the books, determine net income and close to partners capital account, close all nominal accounts) sell non-cash assets order of priority: creditors partners loans capital when cash is not sufficient to creditors solvent general partners 2. installment more preferred cash is distributed to partners on a periodic basis more tedious

Introduction to corporation accounting

an artificial being entity principle created by operation of law having the right of succession and not easy to dissolve, virtually perpetual the power, attributes and properties expressly authorized by law or incident to its existence

Articles of incorporation - state the principal and secondary activities - must be filed first before we can claim its power, attributes and properties incident to its existence Characteristics 1. separate legal entity 2. created by operation of law 3. right of succession

4. powers, attributes, properties expressly authorized by law 5. ownership divided into shares shareholders 6. BOD (board of directors) selected people from the shareholders actively participates in the business highest policy making body. chairman can also be the president election of people who will manage the business

annual stakeholders meeting

advantages: right of succession obtain a stronger credit line bigger source of capital limited liability transferable shares dont need consent disadvantages: not easy to form limited liability more governmental requirements abuse of power increasing tax rate types: 1. 2. 3. 4. 5. 6. 7. 8. 9. public government service private private purpose / aim quasi public private corporation domestic organized under Philippine Laws foreign organized under the laws of other countries stock capital is divided into shares of stock and is profit-oriented non-stock no part of its income is distributed as dividends given by individuals open widely held by many investors closely held/family 50% or more of its stock is owned by 5 persons or less

organizing corporation 1. promotion pre-incorporation requirements a. at least 25% of the authorized share capital must be subscribed b. at least 25% of total subscription must be paid SEC: application form articles of incorporation treasures affidavit statement that attests that the promotion requirement have been compiled bank certificate

incorporation certificate of incorporation commencement start the business within 2 years organization costs costs incurred in connection with the formation of the corporation are recorded as expense by laws manual of administrative procedure

capital stock transaction 1. authorization record authorized shares 2. sale a stockholder buys stocks and pays immediately in full 3. subscription a subscriber enters into a contract to buy shares of stock 4. collection a subscriber pays his subscription 5. issuance of certificate it is issued to the subscriber when subscription is fully paid. Capital stock may be paid in the form of: a. cash b. property c. labor or services Capital stock may be issued: a. at par b. at a premium more than par value Rights of the corporation a. right o vote in stockholders meeting b. right to share in corporate profits (dividends) c. right to share in corporate assets upon liquidation d. pre-emptive right purchase additional stocks Delinquent subscriptions - subscriber fails to pay the balance of his subscription - defaulting subscriber not able to pay on due date - letters are sent to remind, calls, notices from lawyers o sale in public auction o file a case in court

if you dont pay

treasury shares - issued to the stockholders then reacquired by the corporation accounting methods of treasury shares 1. cost method prescribed under Philippine accounting standards 2. par value method

2 kinds of treasury shares 1. reacquisition by purchase 2. reacquisition by donation - retained earnings is the account which holds the accumulation of the net earnings of the corporation Dividends - dividends out of earnings: return on investments - the power to declare shall be paid out of unrestricted or free retained earnings - dividends shall be paid out of unrestricted or free retained earnings - not entitled to receive dividends: unissued shares, subscribed no par shares, treasury shares - it does not change the percentage interest of a stockholder in the business