The topic that I will discuss is about PARTNERSHIP ACCOUNTING. This subject in the course of ACCOUNTANCY seems one of most difficult subject. Allow me to impart to you to the best of my knowledge the things about PARTNERSHIP ACCOUNTING.
DETERMINATION OF CAPITAL.
Let me talk directly to the formation of the partnership at its initial stage. The basic thing in the capital structure of a partnership is that whatever amount of capital is brought in the partnership is their capital investment to be credited to their account.
EXAMPLE OF BASIC CAPITAL INVESTMENT.
1. IF PURE CASH IS INVESTED then whatever amount of CASH IS INVESTED is their capital
2. if the partners will contribute CASH , ASSETS, , the assets shall be revalued to its realizable value then the total REVALUED ASSETS including cash shall be their capital.
3. if the would partners has their own individual business , then all assets shall be revalued at realizable value, and the LIABILITIES shall likewise be revalued at thier true, accurate amount, the ASSETS, LESS LIABILITIES SHALL BE THEIR CAPITAL The adjusted balance sheet of such businesses shall be recorded in the partnership books by way of journal entry..
THERE ARE OTHER METHOD OF RECOGNIZING ADDITIONAL CAPITAL outside of the basic capital.
1. THRU BONUS. there is a situation where a partner will allow his capital investment to be reduced and transferred or given to the other partner, in which case the capital of the partner receiving the amount will increase and the other will decrease. that means the other partner shared part of his capital to be credited to the other partner. That amount given is called BONUS to the receiving partner of course the entry is :
debit account of the giving partner...............
credit account of the receiving partner.........................
EXAMPLE:
pete capital tony capital
initial capital 20,000 25% 60,000 80,000
bonus given 5,000 ( 5,000)
adjusted capital 25,000 31.25% 55,000 80,000
there are times that though the bonus is not explicitly agreed, but they agreed that after a bonus is given , their capital must be equal or the same or 50% , 50%. EXAMPLE o
INITIAL AFTER BONUS
pete 20,000 40,000 50% 20,000
tony 60,000 40,000 50% (20,000)
total 80,000 80,000 100%
Since in the case of BONUS the initial capital and the final capital will be the same, 50% OF 80,000 is 40,000 which will be the capital of pete and since his original capital is only 20,000, he will have a bonus of 20,000 to make his capital 40,000, this 20,000 bonus is deducted to the capital of TONY
2. THRU GOODWILL there is a situation that because a certain partner has develop some sort of goodwill in his person or business, that value of the goodwill will be added to his capital and such goodwill shall be recorded as an asset of the partnership, therefore the capital of the other partner will remain the same.. THIS IS CALLED GOODWILL.
Sometimes , the amount of goodwill is not outrightly given but is only determined after they have agreed on the final capital ratio. The difference between the initial capital against the agreed final capital is considered the GOODWILL.
EXAMPLE:
They have agreed that pete will received a GOODWILL though the amount is not given. but they have agreed that PETE capital should be 40% . Since the capital of TONY will not change because he is the NOT the one to receive the goodwill, therefore his capital will still be 60,000, so since his capital is 60,000 and this is 60% share ( pete having 40%), 60,000 divide 60% equals 100,000 which is the final total capital of the partnership. To get the final capital of pete, 100,000 less 60,000 of tony equals 40,000 for pete , but since his original capital is 20,000 , therefore his goodwill is 20,000.
initial final amount of goodwil
pete 20,000 40,000 20,000
tony 60,000 60,000 60%
total 80,000 100,000 100% 20,000
Sometimes, a partner will received a goodwill and at the same time invest additional cash or assets on the condition that his capital ratio will be different.
example:
Pete will received goodwill 20,000 and to invest additional cash but to have a 50% capital ratio. on the example below, tonys capital will remained the same since he is not the one to receive the goodwill, so dividing his capital of 60,000 by 50% as his capital ratio, would equal to a 120,000 total capital of partnership , therefore the final capital of pete is 60,000, ( 100,000 LESS 60,000 OF tony ) but since he is given a 20,000 goodwill , to make his capital to be 60,000 he should invest additional 20,000 cash to obtained a total of 60,000 capital that would represent a 50% share.
initial cap final goodwill cash
PETE 20,000 60,000 20,000 20,000
tony 60,000 60,000 50%
total 120,000 100%
DISTRIBUTION OF PROFITS
The methods or the basis of distributing partnership profit.
1. ARBITRARY RATIO. Say it may be EQUALLY or 50%, 50%, or any ratio agreed upon or UNEQUAL RATIO
2. RATIO OF CAPITAL based on the outcome of the following/
a. capital ratio at the beginning of the partnership.
b. capital ratio at the beginning of the current period
c. capital ration at the end of the current period.
d. average capital during the period.
3. INTEREST ON BASED ON CAPITAL BALANCES, AND THE REMAINDER ARBITRARY.
a. interest on capital balance beginning of the current period, any remainder arbitrary
b. interest on capital balance end of the current period, remainder, arbitrary
c. interest on average capital balances , remainder arbitrary.
4. SALARY TO THE PARTNERS AND REMAINDER ARBITRARY
5. COMBINATION OF 3 AND 4.
to be continued
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