Today we discuss Partnership Accounting due to important sector in
Accounting. First upon we find why partnership accounting arise already had
Sole property Business.
Partnership arises due to enhance his business by person
individually he can’t invest more his business and also manage that so seek
some partners and adjoin starting his business with comment business agreement
that is called Partnership.
Definition
A partnership has been defined as “The relation who subsists
between persons carrying on a business with a common view of profit.
Partnership Act of 1890 (U.K)
The partnership business of Sri lanka are governed by this act in
all respects.
Starting Partnership
Because ownership rights in a partnership are divided among two or
more partners, separate capital and drawing accounts
are maintained for each partner.
Ø Investment of cash
If a partner invested cash in a partnership,
Cash account of the partnership Dr
Partner's capital account Cr.
Capital account
Capital account of each partner represents his equity in the partnership.
Capital account of a partner is increased in the following
situations:
§ The owner made additional investments during the
year.
§ The owner received guaranteed payments from the
partnership.
§ Partnership earned profits, and a share of
profits was allocated to the partner.
§ The increase in the capital will record in
credit side of the capital account.
Salary and interest allowances are guaranteed payments, discussed
later.
Capital account of a partner is decreased when the owner makes
withdrawals of cash or property
Guaranteed Payments
Guaranteed payments are those made by a partnership to a partner
that are determined without regard to the partnership's income. Compensation
for services and capital are guaranteed payments.
A partnership treats guaranteed payments for services, or for the
use of capital, as if they were made to a person who is not a partner. This
treatment is for purposes of determining gross income and deductible business
expenses only.
For other tax purposes, guaranteed payments are treated as a
partner's distributive share of ordinary income. Guaranteed payments are not
subject to income tax withholding.
Closing Process
Closing process at the end of the accounting period includes
closing of all temporary accounts by making the following entries.
§ Close all revenues accounts to Income Summary.
§ Close all expenses accounts to Income Summary.
§ Close Income Summary by allocating each
partner's share of net income or loss to the individual capital account.
§ Close each partner's drawing account to the
individual capital accounts.
Admitting a new partner
A new partner may be admitted by agreement among the existing
partners. When this happens, the old partnership is dissolved and a new
partnership is created, with a new partnership agreement.
A new partner may buy into the business in three ways:
§ by purchasing an interest directly from existing
partners
§ by making an investment in the business, or
§ by contributing assets from an existing
business.
Death of a Partner
The death of a partner dissolves the partnership. On the date of
death, the accounts are closed and the net income for the year to date is
allocated to the partners' capital accounts. Most agreements call for an audit
and revaluation of the assets at this time. The balance of the deceased
partner's capital account is then transferred to a liability account with the
deceased's estate.
The surviving partners may continue the business or liquidate. If
the business continues, the procedures for settling with the estate are the
same as those described earlier for the withdrawal of a partner.
Liquidation of a Partnership
Liquidation of a partnership generally means that the assets are
sold, liabilities are paid, and the remaining cash or other assets are
distributed to the partners.
When normal operations are discontinued, adjusting and closing
entries are made. Thus, only the assets, liabilities and partners' equity
accounts remain open.
If noncash assets are sold for more than their book value, a gain
on the sale is recognized. The gain is allocated to the partners' capital
accounts according to the partnership agreement.
If noncash assets are sold for less than their book value, a loss
on the sale is recognized. The loss is allocated to the partners' capital
accounts according to the partnership agreement.
As the assets are sold, the cash is applied first to the claims of
creditors. Once all liabilities are paid, the remaining cash and other assets
are distributed to the partners according to their ownership interests as
indicated by their capital accounts.
