Partnership - DOC

							Partnership

According to the Uniform Partnership Act, a partnership is defined
as an association of two or more individuals who carry on as co-
owners a business for profit. In general, accounting for a partnership
follows the same rules as for a sole proprietorship with the exception
that there are separate drawing and capital accounts for each partner.
Partnerships are quite often formed in order to bring together
different skills or talents, and to bring together necessary capital in
order to operate an enterprise. The major characteristics of the
partnership form of business are summarized below.

Limited life. A partnership, unlike a corporation, does not have an
unlimited life. A partnership may come to an end by the withdrawal
or death of any member of the business, mutual agreement between
the partners, completion of the goal for which partnership was
formed, bankruptcy, or court order.

Ease of formation. Unlike a corporation, a partnership can be formed
without any formal proceedings. Although not necessary, a formal
partnership agreement spelling out the rights and responsibilities of
all the partners is recommended. In cases where the written
agreement is silent, the Uniform Partnership Act governs. As a
minimum, the partnership agreement should cover the initial capital
contributions by each member, withdrawal of funds, distributional
percentages of profits and losses, admission of new partners,
withdrawal of partners, and the accounting for the eventual
dissolution of the business.

Ownership of property. The property contributed to the partnership
by a given partner and property purchased by the partnership
become jointly owned by the partners. No partner owns any
particular piece of partnership property. Each partnerُ s interest in
partnership property is based on his or her proportionate capital
balance.

Unlimited liability. Unlike the corporate form of business, in a
partnership each individual member is held personally liable for all
the debts of the firm. Partnership obligations can be satisfied not
only with partnership assets but also with the personal holdings of
each partner. However, a newly admitted partner may or may not
elect to assume the debts of the partnership existing prior to his or
her admission. When a partner withdraws from the firm he or she
should give sufficient notice to the public. If the person does not, he
or she may be held liable for all partnership liabilities incurred after
withdrawal. Those partners who retire or withdraw continue to
remain liable for partnership obligations existing at the time of
withdrawal unless a novation exists. A novation is a creditorُ s
consent to release a given partnerُ s liability for partnership debt.
Allocation of net income or net loss . Profits and losses are divided
among the partners in conformity with the terms of the partnership
agreement. If nothing is expressly stated, profits and losses are
distributed equally.

Mutual agency . Each partner acts as an agent for any partner as long
as those acts relate to normal partnership activity. However, the
partnership is not bound by acts committed beyond the scope of
partnership business.

Initial Partnership Investments

When an investment is made by a partner the journal entry is

                                Asset

                                            Capital

When a noncash asset is invested it should be recorded at its fair
market value at the date of transfer to the partnership.

An obligation by the partnership is credited to the specific liability
account involved.

Partner Drawing Accounts

The partnerُ s drawing account is treated the same way as the
drawing account of the owner in the single proprietorship. A
personal withdrawal by a partner represents a disinvestment in the
business and requires the following journal entry:
                        Mr. / Ms. X, Drawing

                                 Cash

If an asset other than cash is withdrawn (e.g., furniture), that specific
asset is credited.

Allocating Net Income or Loss to Partners

Partnership net income or loss is divided in the manner specified in
the partnership agreement. Usually, the division is based upon the
proportionate capital interest of each partner.

Admitting a New Partner

Under the Uniform Partnership Act a partner has the option to sell
all or part of his or her interest in the partnership without the consent
of the others. The individual who acquires the selling partnerُ s
interest obtains the right to share in profits. However, unless
admitted to firm, the individual does not have the right to vote or
participate in partnership affairs.

Admission by Acquiring an Interest

A new partner who buys an interest from an old partner pays the
purchase price directly to the old partner. An entry is made on the
partnership books to transfer only the capital from the old partner to
the new one. All other accounts are left intact.
Asset Revaluation

Prior to admitting a new partner, certain assets of the partnership
have to be adjusted from book value to fair market value. The net
effect this revaluation is allocated to the existing partners based on
the profit-sharing ratio.

When many assets require revaluation, a temporary account called
Asset Revaluation be established to reflect the adjustments. The
account would then be closed to the partnersُ capital accounts.

Recording Goodwill

When a partnership earns excess earnings over other similar firms it
has goodwill associated with it. Goodwill may arise because of a
number of factors, such as the business talents of the partners, better
goods or services provided and an established 'name.' When a new
partner is admitted, he or she may have to pay for the goodwill of
partnership. In such a case, the goodwill account is debited and the
capital accounts of the old partners are credited based on the profit-
and-loss ratio.

Liquidating a Partnership

To discontinue a partnership, the following steps are required: (1)
the accounts are adjusted and closed; (2) assets are sold; (3)
liabilities are paid; and (4) the remaining cash is distributed to the
partners based on their remaining capital balances.
Corporations

The corporation is an artificial being created by law with an
indefinite. It is owned by stockholders who hold shares in it. The
advantages of incorporating are: (1) in the event the corporation
fails, stockholders are only accountable for the amount they have
invested; (2) ownership may easily be transferred by selling the
shares held; (3) the corporation continues to exist even with the
death of a stockholder; (4) contracts can be entered into in the
corporate name; and (5) significant funds can be raised through the
sale of stock to the public. The disadvantages of the corporate form
are: (1) high taxes; (2) annual fees paid to the state in which the
company operates; (3) double taxation in that the source of
dividends, corporate income, is subject to corporate income taxes
and the dividends by stockholders are themselves subject to personal
income taxes; (4) the cost of printing stock certificates; (5)
governmental regulation over corporate affairs; and (6) the filing of
financial reports, as required by the Securities and Exchange
Commission, that may disclose vital information to creditors.

Terminology

A stockholder is an owner of the company and as such is entitled to
vote, share in earnings through the receipt of dividends, share in the
disposition of assets after creditors if the company becomes
bankrupt, sell his or her ownership interest, and invest in additional
shares on a proportionate basis if the company increases the amount
of shares outstanding (preemptive right). Stockholders elect a board
of directors who make corporate policy decisions and appoint
corporate officers.

Shares of stock are issued as evidence of ownership in the company.
The stock certificate typically has a par value printed on it. This
represents an arbitrary amount assigned to it as per the corporationُ s
charter. The market price of the stock is what the stock is currently
selling for on the stock exchange.

Authorized shares are the maximum amount that can be issued
according to the articles of incorporation. However, the company
may apply at a later date to state for permission to increase the
number of authorized shares. Issued shares are the amount of
authorized shares that have been sold to the public. The difference
between the authorized shares and the issued shares represents the
unissued shares. Treasury stock represents the issued shares that
have been reacquired by the company. Outstanding shares are those
shares being held by stockholders. Outstanding shares less treasury
stock. Dividends are based on outstanding shares. Subscribed shares
are those shares under contract at a specified price for which a down
payment has been given. The shares will not be issued until full
payment is received from the subscriber.
Types of Stock

The two types of stock are common and preferred. If a company
only has one class of stock, it is known as common stock. An owner
of common stock has voting rights. Preferred stock does not have
voting rights but does have preference over common stock in the
event of liquidation and in the distribution of dividends. However ,
the amount of dividends paid to preferred stockholders is typically
limited to a given percentage of par value. Most preferred stock is
cumulative, which means that if no dividends are paid in a given
year those dividends accumulate (dividends in arrears). The
preferred stockholders must receive the dividends in arrears before
common stockholders can receive any dividends. Noncumulative
preferred stock means that omitted dividends are lost. Preferred
stock is typically nonparticipating.

Which means is does not receive dividends in excess of the fixed
percentage rate. Participating preferred stock, which is rarely issued,
means that in addition to the regular specified dividend it will
participate with common stock in any additional dividend paid.

Stockholders’ Equity

The stockholders’ equity section of the balance sheet consists of
capital stock, paid-in capital, retained earnings, and total
stockholders’ equity.
Capital stock. This section shows the par value of the stock issued.
Preferred stock is listed before common stock because of its
preference in liquidation.

Paid-in capital. This section shows the amount received over the par
value of the stock issued.

Retained earnings. This represents the accumulated earnings of the
company since inception less the dividends declared.

Total stockholders equity. This is the sum of the above.

Issuance of Stock

An entry is made when shares are issued by the company to
stockholders. However, when one stockholder sells his or her shares
to another stockholder, no entry is made on the company’s books
since the entity is not involved in the transaction. All that will
happen as far as the company is concerned is the mailing of the
dividend check to the new shareholder.

When stock is issued at par value, can is debited and the particular
security (common stock or preferred stock) is credited.

The market price of a company’s stock will inevitably be different
from its par value. Possible reasons include inflation, financial
strength of the entity, business conditions, and the trend in
dividends.
When stock is sold at an issuance price that is different that par
value, cash is debited for the amount received and the particular
security (common stock or preferred stock) is credited at par value.
The difference will either represent a premium or a discount.

When stock is sold above par value, the excess is called a premium.
The premium account is shown under the paid-in capital section of
stockholders’ equity because it relates to the issuance of the
company’s stock. It is not an income statement account since the
company earns profits by selling goods and services to outsiders, not
by issuing shares of stock.

In the case where the issuance price is less than par value, a discount
account ensues. This is shown under paid-in capital as a reduction.
The issuance of stock at a discount is very rare. In many states, it is
prohibited.

Subscribed Stock

Stock may be acquired under an installment plan. The journal entry
for the down payment is

Cash (down payment)

Subscriptions Receivable (balance due)

Common Stock Subscribed (par value)

Premium on Common Stock (subscription price over par value)
Subscriptions receivable is a current asset. Common stock
subscribed is shown under capital stock in the stockholders’ equity
section.

The journal entry for each payment made by the subscriber is

                                  Cash

                                     Subscriptions Receivable

When full payment has been received, the subscribed stock will be
issued. The journal entries are

                                  Cash

                                     Subscriptions Receivable



                                  Common Stock Subscribed

                                     Common Stock

If a subscriber defaults on his or her subscription, the company must
account for it in accordance with the lows of the state of its
incorporation. Some states require the subscriber to forfeit the
amount he or she has paid. Other states require that shares be issued
based upon a percentage of the amount paid by the subscriber.
Treasury Stock

Treasury Stock represents issued stock that has been reacquired by
the company. The reasons for the reacquisition include having shares
available for a stock option plan or for the acquisition of another
company, and attempting to support the market price of stock.
Shares of stock held in the treasury are not entitled to dividends or
voting rights. Treasury stock is shown in the balance sheet as a
reduction to stockholders’ equity since in essence the company is
returning capital to stockholders.

The most common method of accounting for treasury stock is to
record it at cost. The par value and the market price at which the
stock was originally sold is not considered. The journal entry is

                                     Treasury Stock

                                         Cash