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Accounting for Partnerships

Partnership

A partnership is one of the three general legal forms of business, the other two being the sole proprietorship and the corporation. Partnerships are made up of two or more owners who carry on business together for the purpose of making a profitPartnerships are unincorporated and are not separate legal entities as their owners. They are formed by agreement. 

Partnership Agreement

A written or oral agreement should identify who the partners of the business are, what each party will be responsible for in the business, how income will be shared, how decisions will be made if more investment is needed or a partner wishes to withdraw capital, what happens when one partner wishes to leave and what happens when the partnership is liquidated. 

Taxes

Partnerships are not separate legal entity and, as a result, do not pay taxes. Each partner's share of the partnerships net income is taxed as that partner's personal income. 

Liability

Partnerships are not separate legal entities. As a result, if the partnership is sued or goes bankrupt, plaintiffs and creditors can come after the partners' personal assets. This is unlike a corporation, who's shareholders can not lose more than their initial investment. The exception is the limited liability partnership. In some cases one partner may be allowed limited liability. This is typically allowed when one partner is a "silent partner" or a partner who contributes capital but does not take part in or advise on the operations of the business.  

Agency

Any partner can enter into contracts on behalf of the partnership. As a result, all partners can be legally bound be the actions of one partner. For example, one partner can contract to provide services for a client, order supplies or borrow money for the partnership. When this happens, all of the partner's assets may be used to settle a creditors claim.


The exception is that, by agreement, one partner may be limited in his or her ability to enter into contracts . However, if a client, supplier or creditor contracts with that partner and does not know that the partner has limited agency, the other partners will be bound by the contract. This helps to protect creditors who may lend money to a partner believing that the assets of the partnership will be available to settle the debt.  

Categories within Accounting for Partnerships

Partners’ Equity

Postings: 2

The partners' equity section of the balance sheet shows the value of the partners' investment in the business. Mathematically it is equal to the assets minus the liabilities of the business. Each partner will have their own capital account which measures their share of the equity of the partnership.

Changes in Partners

Postings: 1

This section shows the journal entries required when the partners of a partnership change. There are two ways for a new partner to be added to a partnership. The first way is when a new partner buys out the interest of another partner who leaves the partnership. The second way is when a new partner contributes new capital, increasing the number of partners in the partnership.

Partnership Problem (Taxation)

a) Darryl, Darrell, and David form a 1/3d-1/3d-1/3d partnership. Darryl contributes land worth $100,000 with a basis of $100,000. Darrell contributes supplies worth $100,000 with a basis $90,000. David receives his 1/3d interest for his services in putting the deal together and for the future services. Thus if the partnership we

Limited Partnership Losses

The problem to be solved: ***Becky, a single taxpayer, acquired a rental house in 2000. The rental house, which Becky actively manages, generated a $15,000 loss in 2012. In addition, Becky owns a limited partnership interest which she acquired in 2005. Her share of the partnership loss for 2012 is $10,000. Becky has modified