The partnership is easier to create and control when compared to a corporation. There are several influential reasons for entering a partnership agreement. The research focuses on learning the nuances of partnership accounting. One nuance is the admission of a new partner. The research focuses on the partnership members as mutual agents of one another. The research centers on the partners’ investment of their industry money, and resources to increase the partnership revenues. The partnership may agree on the terms of the partnership contract. The research focuses on the withdrawal of one or more partners from the partnership. Partnership accounting includes research on the admission of a new partner as well as the withdrawal of a new partner. The partnership organization includes different business transactions.
Nuances of Partnership Accounting
Reasons for forming a partnership
Partnership can be described as contract that binds two or more persons to contribute industry, property, or cash in a common fund with the main purpose of distributing the profits generated from the partnership’s business among themselves. Bob Tricker (154) theorized there are many reasons for forming a partnership. First, forming a partnership is less expensive to organise when compared forming a corporation. The partnership can be formed with a minimum of two persons. On the other hand, the Corporation cannot be established with only two persons forming the corporation. Second, the unlimited liability of the partners will encourage the creditors and suppliers to engage in credit transactions with the partnership. Third, the partnership of two or more persons increases the number of persons supervising, managing, controlling, planning, and marketing the partnership affairs. In a sole proprietorship, only one owner manages the affairs of the company. Another reason for forming a partnership is to profitably generate partnership gains and infused different skills into the accomplishment of the partnership goals and objectives. In a partnership, the partners contribute their personal touches to the accomplishment of the partnerships’ aim of distributing the profits (Samuelson 262).
Characteristics of the Partnership
There are several characteristics of a partnership. First, the assets invested in the partnership become the assets of the partnership. The partnership agreement is characterized by the presence of a distinct artificial being that is separate from the individual human partners. Second, the business partnership is exempt from paying the income taxes. Instead, the partners will have to include their share of the partnership’s distributed profits in their individual income tax returns. Third, the partnership has a limited life. The death of one partner in a partnership automatically precipitates to the dissolution of the partnership. The admission of a new partner in a present partnership automatically dissolves the partnership. If one partner dies during the existence of the partnership, the partnership is automatically dissolved. The partnership has a legal being. As such, the partnership can sue and be sued. The partnership can acquire assets as its own. In the same manner the partnership can acquire loans and other debt instruments to aid in the partnership’s mission and vision of generating partnership revenues and profits (Kirk 262).
There are four other reasons for joining a partnership. First, the one person wants to contribute money to the partnership. Another partner can contribute one’s industry or prowess into the partnership. Another partner can contribute an amount equal to ten percent of the total partnership capital. A third partner can contribute an amount worth 50 percent of the total agreed capital. A fourth partner can agree to contribute an amount equal to 85 percent of the total capital. One of the partners can manage the entire partnership. Another partner prefers to be a silent partner. Another partner may act as the liquidating partner during the installment phase of the bankruptcy partnership’s liquidation or closing down process (Beams 599).
Another person wants to contribute property to the partnership business. Third, the partnership members can to contribute furniture to the partnership business. A fourth reason for joining the partnership is to partake in the spoils or profits of the partnership business. The partners may be personally liable for the liabilities and debts of the partnership in excess of the amount invested. In case the partnership assets are not enough to pay the creditors during bankruptcy, the some of the partners are required to contribute additional personal assets to pay for the remaining debts of the partnership (Beams 599).
The partnership may agree on the terms of the partnership. The partnership agreement may include the functions of each partner in the organization. The terms of the partnership agreement may include the method of distributing the partnership’s profits. The partnership agreement includes the method of allocating the partnership’s losses (Reddy 175). The partnership agreement may designate the official positions or ranks of the partnership’s line and staff positions.
For example, the partnership may agree to divide the profits equally. It is also possible that the profits will be divided according to some arbitrary ratio such as offering salaries to the partnership manager, the partnership finance director, and other partners. The partnership may also include the method of hiring new workers. The partnership agreement may also state the required conditions of the partnership in terms of accepting or rejecting a new partnership applicant. The partnership agreement may designate the liability of the general partner in the partnership. In addition, the partnership agreement may indicate the terms of allocating bonus to the old or new partners (Reddy 175).
Further, the partnership agreement may also include the routine acts needed to ensure goodwill allocation is fair to all partners concerned. The partnership agreement may also include the terms on how to pay the partnership’s outstanding and maturing loans and other partnership liabilities. The partnership agreement may include the guidelines on how to distribute the asset balances during the installment method bankruptcy liquidation of the company’s remaining assets during the partnership’s installment liquidation activities. The partnership agreement may also include the functions, responsibilities, goals, and objectives of each partner in the partnership (Reddy 175).
Accounting for partnership
Accounting for partnership entails the use of standard journal entries. The standard journal entries are done to ensure uniformity or consistency in the recording of the partnership’s business transactions from the creation of the business until the closing of the partnership business. Accounting for partnership includes dividing the profits in accordance with the partnership’s contract terms. Likewise, the distribution of the partnership’s net income should not sway from the partnership’s agreed terms. In addition, the partnership accounting process should include the proper distribution of partnership profits in accordance to the partners’ capital contribution. This may occur if there is no formal agreement among the partners in terms of the division of profit distribution (Warren 537).
In addition, the accounting for partnerships includes the process of profit distribution. The profit distribution includes dividing the profits equally. The distribution of the partnership profits based on arbitrary ratios is another method of profit distribution. Partnership accounting also includes prioritising the giving of interest payments to the managing partner or any partner in the partnership. The partnership agreement includes the unique provisions of dividing the partnership losses. The losses may be distributed on equal basis or arbitrary basis. The partnership accounting also includes the payment of bonuses to either the old partners or the new partners with the remainder of the net profits being distributed among all the partners in accordance with the partnership contract terms. The accounting for partnership business also entails the payment of salaries to the managing partner or any other partner offering as payment of sharing one’s expertise to run the partnership business profitably. The recording of partnership business transactions includes the recording of assets at their fair market values at the time of the contribution of the assets to the business organization (Warren 537).
Changes in the ownership of the partnership
The partnership lays down the criteria for recording a change in the partnership agreement. For example, the partnership may debit the capital amount of the departing partners from the current partnership. In addition, the partnership accountant may record a credit to the capital account to formally welcome the entry of a new partner to the new partnership. The change in partnership structure may include the release of the departing member’s capital investment. The entry of a new partner creates a new change in the partnership composition. The current partnership agreement is automatically cancelled and replaced by a new partnership agreement upon the entry or exit of one partner (Kirk 293).
Admission of New Partner
The admission of a new partner dissolves the current partnership. The new partner is debited an amount corresponding to the fair market value of the assets invested in the partnership. In addition, the new partner is credited with a capital account to represent the new partner’s share in the total partnership capital. The assets of the new partner must be received and recorded at the fair market value at the time of the new partner’s investment. During the admission of the new partner, bonus or goodwill may crop up. The possibilities include the granting of goodwill to the old or new partners. Likewise, the admission of a new partner may generate bonus. The bonus may be given to the old partners or new partners (Beams 611).
Further, there is a big advantage in admitting a new partner. First, the new partner may contribute one’s industry to the partnership. The partner’s industry may include one’s expertise in marketing the company’s products and services. The expertise may also include one’s knowledge in creating new products that will outsell the competitors’ rival products and services. The partnership may admit a new partner that has lots of cash and other assets. The new asset investments will help in the purchase of high value factory equipment. The new equipment can increase the current generation of higher quantity products and services. The new equipment will help generate more quality products. The higher quality products will increase the company’s revenues. Consequently, the increase in partnership revenues will increase the partnership’s profits. The increase in profits will also increase each partner’s partnership profit share (Beams 611).
Withdrawal of a Partner
The partnership agreement may include the intricate journal entry steps during the withdrawal of one or more partners from the current partnership. When a partner withdraws, the partnership is automatically dissolved. The remaining partners are now forced to search for new partners to help the remaining partners increase revenues and profits entering the partnership’s market segment. The leaving partner is an amount equal to his or her partnership capital balance. In addition, the old partners are encouraged to search for other individuals to replace the withdrawing partner.
There are some reasons for withdrawing from a partnership. One reason is the cropping up of conflicts between two or more partners or among all the partners. One partner may feel being alienated on some partnership projects. Another partner may feel bored with the entire partnership policies and benchmarks. Another partner may feel unfairly treated during some partnership transactions that include distribution of partnership profit theorized (Beams 611).
In a Nutshell, The partnership organization includes different business transactions. There many reasons for forming a partnership. One of the valid the reasons include generating a share of the partnership profits. There are many characteristics of a partnership. For example, the partnership investor wants to receive one’s share in the partnership profits. Second, the partnership members are mutual agents of one another. Third, the partners share their industry to increase the partnership revenues. The partnership may agree on the terms of the partnership contract. The partnership agreement includes the responsibilities and functions of each partnership member. Accounting for partnership includes complying with the standard journal entries approved by recognised accounting standards organisations. In addition, the accounting for partnerships incorporates the process of profit distribution. The distribution of profits may crop up on diverse terms like equally, or arbitrarily. The admission of a new partner replaces the current partnership with a new partnership name. In addition, the new partner is credited with the fair market value of one’s asset investment. The partnership agreement incorporates the standard journal entry steps done during the withdrawal of one or more of the partners. Indeed, the partnership is easier than a corporation to form and control.
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Reddy, James. Advanced Accounting . London: APH Press, 2004. Print
Samuelson, Kirk. UK Accounting Standards. London: Elsevier Press, 2005. Print
Ticker, Bob. Essentials for Board Directors. London: Bloomberg Press, 2009. Print
Warren, Charles. Accounting. London: Cengage Press, 2008. Print