15.6: Summary

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15.1 Describe the Advantages and Disadvantages of Organizing as a Partnership

There are many advantages and disadvantages of partnership as a form of business entity and they should be carefully considered.
The most significant advantage of partnerships is the exemption from tax at the business level. Partners are taxed on their share of the profit or loss at their individual tax rates.
Mutual agency and unlimited liability should be weighed against the tax benefits of partnership.
There are other entity forms that have many of the characteristics of standard partnerships. These other entity forms often share the legal liability protection of corporations, and the tax and personal benefits of a partnership.

15.2 Describe How a Partnership Is Created, Including the Associated Journal Entries

Partners must consider several factors when developing their partnership agreement, such as the contributions and authority of each partner and a means to resolve disputes.
Non-cash assets such as equipment and prepaid expenses should be recorded at current market values.
Partners are sometimes given an ownership interest based on their expertise or experience instead of any contributed assets.
Liabilities assumed by the partnership should be recorded at their current value.

15.3 Compute and Allocate Partners’ Share of Income and Loss

There are several different approaches to sharing the income or loss of a partnership, including fixed ratios, capital account balances, and combinations of the two.

15.4 Prepare Journal Entries to Record the Admission and Withdrawal of a Partner

There are two different methods for admitting a new partner to a partnership—direct investment to the partnership (affects partnership assets) and transaction among partners (does not affect partnership assets).
There are two different methods for a partner to withdraw from a partnership—direct payment from the partnership and direct payment from the partners.

15.5 Discuss and Record Entries for the Dissolution of a Partnership

There are times, such as following bankruptcy, death, or retirement, when a partnership ceases operation.
The following four accounting steps must be taken, in order, to dissolve a partnership: sell noncash assets; allocate any gain or loss on the sale based on the income-sharing ratio in the partnership agreement; pay off liabilities; distribute any remaining cash to partners based on their capital account balances.

Key Terms

bonus: difference between the value of a partner’s capital account and the cash payment made at the time of that partner’s or another partner’s withdrawal

capital account: equity account for each partner that tracks all activities such as profit sharing, reductions due to distributions, and contributions by partners to partnership

dissolution: closing down of a partnership for economic, personal, or other reasons that may be unique to the particular partnership

general partnership: partnership in which each partner is personally liable to the partnership’s creditors if the partnership has insufficient assets to pay its creditors

limited liability: form of legal liability in which a partner’s obligation to creditors is limited to his or her capital contributions to the firm

limited liability partnership (LLP): partnership that provides all partners with limited personal liability against all other partners’ obligations

limited partnership (LP): partnership in which at least one partner is a general partner but the remaining partners can be limited partners, which means they are liable only for their own investment in the firm if the partnership cannot pay its creditors; thus, their personal assets are not at risk

liquidation: (also, dissolution) process of selling off non-cash assets

mutual agency: ability of each partner to act as an agent of the partnership in dealing with persons outside the partnership

partner: individuals, corporations, and even other partnerships participating in a partnership entity

partnership: legal business structure consisting of an association of two or more people who contribute money, property, or services to operate as co-owners of a business

partnership agreement: document that details the partners’ role, the way profits and loss are shared, and the contributions each partner makes to the partnership

realization: the sale of noncash assets for cash

unlimited liability: form of legal liability in which general partners are liable for all business debts if the business cannot meet its liabilities.