Accounting for Partnerships.ppt

Accounting for Partnerships Section 1: Forming a Partnership Drawing Accounts Any withdrawal by a partner, whether it is cash or some other asset, is a return of equity to that partner. The partner’s drawing account balance reduces that partner’s equity. Accounting for Partnerships Section 2: Allocating Income or Loss Partnership Financial Statements Income Statement Same as that for a sole proprietorship. One exception—on the bottom of the statement, the division of net income is shown between the partners. Balance Sheet Same as that for a sole proprietorship. One exception—there exists a separate capital account for each of the partners in Partner’s Equity section. Accounting for Partnerships Section 3: Partnership Changes Account for the investment of a new partner in an existing partnership. Sometimes a partnership agrees to pay each partner interest on their capital balances as a way to recognize their capital investments in the partnership. Partners may recognize their capital investments by allowing each partner a percentage of interest on their capital balance at the start of the period. Assume that Barret and Reed each have a 8 percent interest allowance. If the Barret and Reed partnership has a net loss during the period, the allocation would take place as follows: First any salary allowances are distributed, then any interest allowance is distributed and then finally the large debit balance in Income Summary is allocated to the partner’s capital account balances in the 60/40 ratio. In this situation, to close Income Summary the account would be credited and each of the partners’ capital accounts would be debited (reduced). Time to prepare the financial statements of the partnership. The Statement of Partner’s Equities contains the details of the partners’ capital accounts. For the most part, financial statements for a partnership are identical to those of a sole proprietorship with exception of the allocation of net income. The b