Chp 9- Partnerships- Formation and Operation

School: Howard University - Course: ACCT 330 - Subject: Accounting

Chp 9: Partnerships: Formation and Operation Partnerships - Advantages and Disadvantages One of the most common motives is the ease of formation. Only an oral agreement is necessary to create a legally binding partnership. oPartnership revenue and expense items must be assigned directly to the individual partners who pay the income taxes. Passing income balances through to partners in this manner avoids double taxation of the profits that are earned by a business and then distributed to its owners. oOperating losses can be used to reduce partners personal taxable income directly. oPartnership is an passive activity and passive losses thus serve only to offset passive losses. Disadvantages are the unlimited liability that each partner automatically incurs. Any partner can be liable for all debts of the business. Partnership Accounting - Capital Accounts The stockholders' equity accounts of a corporation do not correspond directly with the capital balances found in a partnership's financial records. The various equity accounts reported by an incorporated enterprise display a greater range of information. oTo provide adequate information and to meet legal requirements, corporate accounting must provide details about a variety of equity transactions and account balances. oIn contrast, partnerships provide only limited equity disclosures primarily in the form ofindividual capital accounts that are accumulated for every partner or every class of partners. These balances measure each partner's or group's interest in the bv of the net assets of the business.Thus, the equity section of a partnership balance sheet is composed solely of capital accounts that can be affected by many different events; contributions from partners as well as distributions to them, earnings, and any other equity transactions. Articles of Partnership This legal covenant which may be either oral or written, is often referred to as articles of partnership and forms the central governance for a partnership's operation. oThe financial arrangements spelled out in this contract establish guidelines for various capital transactions. Therefore, the articles of partnership, rather than either laws or official rules, provide much underlying basis for partnership accounting. oAlthough the articles of partnership may contain a number of provisions, and explicit understanding should always be reached in regard to the following: Name and address, business location, description of the nature of business, rights and responsibilities of partners, initial contribution made by each partner, withdrawal of assets, arbitration of partnership disputes, method of settling partner's share in business upon withdrawal, etc. Accounting for Capital Contributions

The initial transaction is the contribution the original partners make to begin the business. In the simplest situation, the partners invest only cash amounts.