Partnership Accounting
A partnership is defined as a contractual relationship between persons carrying on a business. These partners agree to combine some or all of their property, labor and skills. There are various kinds of partners like
1) Active partners – who generally take part in the day-to-day operations of the business. They contribute capital and are entitled to a share in the profits of the business.
2) Sleeping partners – they just contribute capital and do not take part in day-to-day operations. They are also entitled to a share in the business.
3) Nominal partners – these partners only allow the firm to use their name in the partnership deed and business. They may not contribute capital or share the profits.
Advantages:
1. It will lead to efficiency and strength because the capital, labor and skill of all the partners are pooled.
2. Easy to organize.
3. Do not have high tax rates as companies.
Disadvantages:
1. Limited life.
2. All the partners are personally liable for the debts and obligations of the firm.
3. One partner can take decision without consulting the other, and may create issues in day-to-day operations.
Partnership Accounting:
Accounting for a partnership is the same as a sole-proprietorship except for the number of partner’s equity accounts. Each partner will have a separate capital account for investments and share of profit/loss and a separate withdrawal account. All the net income (loss) is added to the capital account and withdrawals deducted to the capital account and closed to capital account at the end of the closing period.
Example: A, B and C decide to form a partnership and contribute capital of $10,000, $10,000 and $5,000 respectively. The journal entry for capital contribution would be:
Date Particulars Debit Credit
1-Jan-10 Cash a/c Dr $25,000
A, Capital a/c $10,000
B, Capital a/c $10,000
C, Capital a/c $5,000
Suppose, after a period, they earn an income of $5,000. If they had initially agreed a profit-sharing ratio of 2:2:1, the entry would be:
28-Feb-10 Income Summary a/c Dr $5,000
A, Capital a/c $2,000
B, Capital a/c $2,000
C, Capital a/c $1,000
Some of the topics covered under Partnership Accounting are:
1. Appropriation of Profit and Loss
2. Admission of a Partner
3. Retirement of a Partner
4. Death of a Partner
5. Change in the Profit-sharing ratio
6. Dissolution of the firm
7. Amalgamation of firms.
Of course, our scope of coverage is not limited to the above topics. You may contact www.theglobaltutors.com for any kind of query in partnership accounting.
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