Methods Used To Account For Partnership Formation

2021-05-19 12:50:52
7 pages
1832 words
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A partnership is an entity formed when two or more persons (partners) come together to establish an entity for profit making purposes. The transactions in a partnership entail the investment of a partner, the sharing of the profit or losses incurred by the company among the partners, the withdrawal of a partner from the business and the partnership liquidation. There are several methods for accounting for the transactions in a partnership and these three are; exact, bonus and goodwill methods. Profits and losses are shared basing on the terms and conditions sated in the agreement deed.

Business partnerships are divided into; General partnerships, limited partnerships and limited liability partnerships. In general partnership, the partners share their rights and responsibilities equally when it comes to the running of the company. All the debts or the obligations are the responsibilities of each and every partner collectively. Profits are also shared equally. The advantage of general partnership is that the partners enjoy tax advantages as the profits are charged individually. In limited partnerships, just as the name suggests, personal liability is limited according to the respective capital input of each partner. However, even in Limited Partnerships, one individual is usually a general partner. He or she is under full liability though he has overall control and makes major decisions. In Limited Liability Partnerships, some partners are granted liability protection. Losses are not shared equally among all the partners. Just as in general partnerships, the partners enjoy tax advantages.

Admitting a new partner

It is important to note that upon the admission of a new partner, the contributions that he or she makes are recorded using the current market value, and however, the original book value is what will be used in the calculation of tax purposes. Calculations are made in order to enable the new partner invest amounts that are similar to the layout of the capital balance. The main purpose of this is to eradicate the call for the recording of goodwill/bonus. There are two ways of doing this; the investment of the new partner is set at a value thats equivalent to the percentage of the overall business, this being multiplied with the overall capital of the business. The overall capital is calculated by adding the new partners investment capital to the previous capital. As such, the new partners investment is determined by the following formula:

NPI = % A * [PC + NPI]

A situation can occur when the new partner provides assets whose value is greater than the percentage calculated by the aforementioned formula. When this happens, the following steps can be taken: The difference is recorded through the bonus method. As such, the partner is bestowed either a set capital balance or a percentage of the overalls capital. A variation or imbalance caused by the contribution is recorded to the capital accounts of the original partners (this is in accordance to the earlier methods of profit and loss allocation)

The difference can similarly be registered through the goodwill technique. In this method, the new partner is given a capital balance, which is similar to the contribution. The new partner will calculate the implicit value of the company through the use of the payment. Consequently, to acquire the above valuation, the investment is divided through the obtained percentage value.

Goodwill is calculated by subtracting the implied value from the total capital (old capital + the new partners investment capital) and this is noted down with a counterbalancing entry recorded on the capital accounts (this is in accordance to the earlier methods of profit and loss allocation)

Revenue and Expenses calculation (End of Year)

At the end of the year, the company could either have made losses or profits and these are recorded on the capital accounts of the partners. The value allocated to either of the partner follows the agreement agreed upon during the formation of the partnership. If no agreement had been made, then the sharing is on an equal basis. If the agreement made only stipulates on profit sharing and does not mention sharing of losses, then the split is even. All agreements are strictly adhered to and these can entail elements such as allowances of salary, levels of interests and ratio values.

Liquidation of the Partnership

When a company becomes insolvent and cannot pay its obligations when they are due, then its operations are most likely to be halted, all the assets will be sold and the cash shared between the lenders and the companys shareholders and this is in accordance to the degree of their claims.

When it comes to noncash assets, whatever are incurred, either profits or losses are bestowed on the partners depending on the standard and conventional method of loss and profit apportionment. Any remaining cash is divided between the partners in accordance to the closing balances available in the capital accounts. However, if cash is available to pay all the obligations then this is used prior to the selling of the noncash assets. In the evaluation of allocation, then utmost losses are inferred upon the noncash assets that have remained. In a situation where a partners capital balance is negative, then the value is to be distributed among the other partners in their percentages or ratio of relative profit and loss.

Dissolution of Partnerships

Dissolution refers to the closing down or termination of an official body. Therefore, Partnership dissolution means the disbanding of the partnership. There are several ways through which dissolution can take place. First is by agreement, where the partners reach to a mutual agreement to dissolve the company, it could also be in conformity with the conditions of the partnership deed. Secondly, it can be through notice, this is when the partnership was at will. In such a situation, a partner can decide to pull out and this dissolves the partnership. Thirdly, it can be through expiration, after the time limit or span or term in which the partners had agreed reaches to an end, and then dissolution takes place. Fourth, death of a partner or bankruptcy on both or one of the partners necessitates dissolution. A partnership could also be dissolved by law, a court, on finding valid reasons and ground to terminate a partnership, may do so.

It is imperative to consider several factors in the dissolution process, these are; liability for the companys obligations, apportionment of the companys assets among the partners, final compilation of the partnership account, storage of the companys records in accordance to the requirements as per the law and professional code of ethics and whether there will be need for indemnity insurance.

In dissolution, all the creditors are paid and the remaining assets distributed.




June 30, 2014 Partners capital and loans Profit and loss ratio Ability to absorb losses Rank Order

Chaplin 20,800 5 41600 1

New Partner 24,050 2 120,250 2


Individual Equity Balances

Total Equity Chaplin (C) New Partner (N)

Balance before liquidation 71,500 20,800 24,050

Loss to eliminate C 41600 20,800 8,320

Balance 29,900 0 15,730

New Ratio 4

Loss to eliminate N 21,450 8,580

Balance 8,450 7,150

New Ratio 2

Balance 8,450 7,150


Despite the balance sheet's strength, most organizations have had to put into place restructuring techniques and processes and implement them. Those that are very aggressive and ambitious started through the launching of an accelerated restructuring plan whose primary focus was on improving cash flows from business operations. Because of the diminishing availability of traditional financing in the capital markets, the need for restructuring is more important now than ever. A comprehensive approach should have a detailed assessment of market position - evaluating the product portfolio, regional markets, market segments and customer base. Financial restructuring involves the collateralizing of assets, refinancing credit, securing exit financing, resolving pre-petition debt at deep discount and establishing debt for equity ways. Operational restructuring entails the refocusing of product portfolio, focusing on capital expenditures, re-sourcing materials, streamlining distribution, focusing on capital expenditures, assessing manufacturing footprint and asset utilization and the restructuring of long term contracts on labor and long term leases. Short term cash improvements involve the disposition of executor contracts, rationalizing headcount, and managing risks with troubled suppliers, reducing external expenditure, liquidation of assets, adjusting wages, benefits and overhead costs, reducing inventory and re evaluating capital plan.

Bankruptcy is when an organization is declared in law unable to pay its outstanding debts. The company is deemed insolvent. Organizations perceive that bankruptcy eradicates all debts, however, this is not entirely the case. There are various forms of bankruptcy and they include: Chapter 7 Bankruptcy, Chapter 13 Bankruptcy, Chapter 11 Bankruptcy, Chapter 9 Bankruptcy, Chapter 12 Bankruptcy and Chapter 15 Bankruptcy.

Chapter 11 Bankruptcy is used by many organizations in a bid to rationalize and restructure its finances. Companies have to stop or end their activities entirely if they want to apply Chapter 7 Bankruptcy for the purposes of liquidation; therefore, this makes Chapter 11 Bankruptcy more desirable as it allows for the continuance of all activities even in a state of bankruptcy. It also provides for the rescripting and redrafting of the consensus regarding collective bargaining together with the reorganization of pensions. In this form of bankruptcy, the trustee can decide to mange the business. Another advantage is that legal indictment or lawsuit only takes place after everything is settled. A repayment plan can be drafted but the creditors can either consent to it or not. The plan may take years until the entire loan is repaid.

Chapter 7 Bankruptcy is recognized for its liquidation. This is popular with individuals even though companies can also use. This type of bankruptcy is simple, easy, uncomplicated and swift. An individual or organization gives all his non-exempt property to a person or a member of a board who has been given control powers of administration of property in trust with a legal obligation to administer it solely for the purposes specified. Indemnities are different as per a nations policies, these may be trade tools, social security payments etc. The non-exempt property is sold to pay off debt and to pay all the money owed to creditors. If the value of the property does not fully repay the debt, the person may be fully absolved from the remainder. This does not happen always and other debts cannot be expelled, these include; child support, student loans and spousal support among others.

Chapter 13 Bankruptcy entails forming a plan, which will steer payment of loans owed to creditors, either part of the loan or all of it. The individual or company makes a plan founded on the amount he or she can get, sets out a time limit of repaying the loan and makes payments to a person or organization given responsibility to manage money through a trust, these then expend the payments. This plan is presented to a plan and he can either consent to it or refuse, but the creditors have no say in it. Those with low incomes make payments for a period of three years while those with higher incomes do so in five years.

Chapter 9 Bankruptcy enables cities reorganize its finances minus increasing taxes imposed on the citizens. Chapter 12 Bankruptcy is for low-income earners. Chapter 15 Bankruptcy is more concerned about o...

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