UNIT 1: MODULE 2<br />Objective 8, 9<br />PREPARATION OF FINANCIAL STATEMENTS:  CHANGES IN OWNERSHIP STRUCTURES<br />
The Partnership Agreement<br />To avoid complications in the future, partners in a business venture should make a formal a...
Capital contribution<br />Partners agree on the (total amount of) capital needed to operate the business effectively.<br /...
Opportunity costs<br />Partners should agree on <br />Interest rate (if any) to be given on capital invested before the pr...
Remunerations<br />Partners should agree on <br />Which partner(s) should be paid a salary  [it is usually the general par...
Profit/loss sharing<br />Partners should agree on how they will share the profits or losses of the business.<br />This mig...
Admission of a new partner<br />
By private interest acquisition<br />Where a direct payment is made to an individual partner<br />It is not recorded on th...
by purchasing interest in the business<br />When an interest stake involves the acquisition /introduction of assets  in th...
Reflecting the investment by the bonus method<br />Record the investment made by the new partner in the journal<br />Calcu...
Reflecting the investment by the goodwill method<br />Record the investment made by the new partner in the journal<br />Ca...
Where goodwill is not recorded<br />Sometimes a business [normal practice] may decide to write down acquired goodwill for ...
Sharing the profits after the change<br />When the change in the partnership share ratio occurs during its common financia...
Dissolution of a partnership<br />Partnerships can be dissolved or liquidated for several reasons, ranging from<br />Bankr...
The dissolution (liquidation)<br />LIQUIDATION<br />IMMEDIATELY<br />PIECEMEAL<br />ASSETS SOLD AT A GAIN OR LOSS<br />INS...
Using the realisation account<br />
record entry of new partner’s capital<br />goodwill distributed in capital accounts<br />share revaluation in capital acco...
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lesson 2 partnership

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lesson 2 partnership

  1. 1. UNIT 1: MODULE 2<br />Objective 8, 9<br />PREPARATION OF FINANCIAL STATEMENTS: CHANGES IN OWNERSHIP STRUCTURES<br />
  2. 2. The Partnership Agreement<br />To avoid complications in the future, partners in a business venture should make a formal agreement on certain issues, such as:<br />The rational for formation<br />Capital contributions<br />Opportunity cost (interests or penalties)<br />Profit & loss sharing ratios<br />Admission of new partners (goodwill or bonus)<br />Exit of old partners (retirement)<br />Dissolution of the partnership<br />Interest on a partner’s loan to the firm<br />
  3. 3. Capital contribution<br />Partners agree on the (total amount of) capital needed to operate the business effectively.<br />The capital is essentially a pooling of the assets and liabilities of the individual partners.<br />The assets and liabilities are generally recorded at their fair values (what they are valued at if sold on the current market)<br />The capital is recorded as a simple journal entry in the (new) business.<br />
  4. 4. Opportunity costs<br />Partners should agree on <br />Interest rate (if any) to be given on capital invested before the profits are shared.<br />They should state whether it is the opening, closing or average capital<br />This represents the opportunity benefit for not investing the capital in another project.<br />Interest rate (if any) to be charged on drawings on the capital base before the profits are shared.<br />This represents the opportunity penalty for reducing the capital due to personal reasons.<br />
  5. 5. Remunerations<br />Partners should agree on <br />Which partner(s) should be paid a salary [it is usually the general partner(s)]<br />Which partner(s), if any, would receive a bonus<br />Whether on income before the allocations<br />OR on the income after the allocations<br />
  6. 6. Profit/loss sharing<br />Partners should agree on how they will share the profits or losses of the business.<br />This might be by fixed ratio<br />OR by the ratio of their capital balances<br />
  7. 7.
  8. 8. Admission of a new partner<br />
  9. 9. By private interest acquisition<br />Where a direct payment is made to an individual partner<br />It is not recorded on the books<br /> calculate the interest acquired from the partner(s)<br />Account for the acquisition by adjusting the capital accounts of the partners [debit OLD partners; credit NEW partner]<br />Adjust the Balance Sheet to reflect the redistribution of the capitals<br />[note] the amount paid does not appear on the books<br />
  10. 10. by purchasing interest in the business<br />When an interest stake involves the acquisition /introduction of assets in the business itself one of two methods are used to reflect the change<br /> bonus method<br /> goodwill method<br />
  11. 11. Reflecting the investment by the bonus method<br />Record the investment made by the new partner in the journal<br />Calculate the book value of the business after the investment was made [OLD + NEW capital]<br />Calculate the amount of capital the new partner has actually acquired [new book value * % interest bought]<br />Calculate the bonus resulting from the activity<br />[investment - acquisition]<br />Distribute the bonus to the OLD partners<br />if the bonus is positive credit OLD debit NEW<br />if the bonus is negative debit OLD credit NEW<br />
  12. 12. Reflecting the investment by the goodwill method<br />Record the investment made by the new partner in the journal<br />Calculate the implied value of the business base on the investment was made [investment/% interset]<br />Calculate the book value of the business after the investment was made [OLD + investment]<br />Calculate the goodwill resulting from the activity<br />[implied value - book value]<br />Distribute the goodwill to the OLD partners<br />if the bonus is positive credit OLD debit goodwill<br />if the bonus is negative debit OLD <br />Any revaluation in the assets must be shared by OLD<br />
  13. 13. Where goodwill is not recorded<br />Sometimes a business [normal practice] may decide to write down acquired goodwill for various reasons.<br />Allocate the goodwill to the OLD partners<br />Write down the goodwill in the new profit sharing ratio<br />Credit the goodwill a/c to write off from books<br />
  14. 14. Sharing the profits after the change<br />When the change in the partnership share ratio occurs during its common financial year – the distribution of profits must be time apportioned.<br />Some of the expenses incurred may also be subject to this adjustment [such must be specified under exam rules and conditions]<br />It is useful to use the columns of the profit & loss account to allocate the time-periods; and the profit appropriation.<br />
  15. 15. Dissolution of a partnership<br />Partnerships can be dissolved or liquidated for several reasons, ranging from<br />Bankruptcy of a partner<br />Partner misconduct or serious disagreement<br />Death or retirement of a partner<br />Operation has become illegal<br />Operating at a continuous loss <br />
  16. 16. The dissolution (liquidation)<br />LIQUIDATION<br />IMMEDIATELY<br />PIECEMEAL<br />ASSETS SOLD AT A GAIN OR LOSS<br />INSOLVENT PARTNERS<br />PARTNERS’ DEBIT BALANCES<br />
  17. 17. Using the realisation account<br />
  18. 18. record entry of new partner’s capital<br />goodwill distributed in capital accounts<br />share revaluation in capital accounts (OLD only)<br />Prepare the T, P& L on time apportioned basis<br />Appropriate the profits on time basis<br />Present partners’ current account (note interest on loan is credited here)<br />

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