Chapter (13)

Accounting
For
Partnership
Sheet (1)
Edited by: Dr/ Magdy Kamel
TeL: 01273949660

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Partnership defines as an association of two or more persons to carry on

as co-owners of a business for profit.

‫شركات االشخاص هى عباره عن اتحاد بين شخصين او اكتر كمالك متبادلين "متحدين" داخل العمل بغرض تحقيق الربح‬

a) Characteristics of partnership

(1) Association of Individuals ‫االرتباط بافراد‬

 Association of two or more individuals in a partnership

 Partnership is an accounting entity for financial reporting purposes.
(Thus, the personal assets, liabilities, and transactions of the partners are
excluded from the accounting records of the partnership)
‫الشركه هي كيان محاسبى بغرض اعداد تقارير ماليه‬
‫الممتلكات الشخصية للشركاء منعزله عن ممتلكات الشركة فى سجالتها المحاسبية‬

(2) Mutual Agency ‫الشركة هى كيان متبادل‬

 It means that each partner acts on behalf of the partnership when engaging
in partnership business.
 The act of any partner is binding on all other partners, even when partners
act beyond the scope of their authority, as long as the act appears to be
appropriate for the partnership.
‫كل شريك بيتصرف بالنيابة عن الشركة وذلك عن يكون القرار مناسب لعمل الشركة‬
‫تصرف اى شريك داخل الشركة بيلزم الشركاء االخرين حتى لو الشركاء خارج نظاق الشركه وذلك بشرط ان يكون‬
‫القرار مناسب لعمل الشركة‬

(3) Limited Life ‫عمر الشركة محدود‬

 Partnership doesn’t have unlimited life. It may be ended any time through the
acceptance of a new partner or the withdrawal of a partner.
‫دخول او خروج او موت احد الشركاء بينهى عمر الشركة ورقيا ويعاد تكوينها من اول وجديد على الورق فقط‬

(4) Unlimited Liability ‫التزمات غير محدوده‬

 A general partner a partnership has unlimited liability for all partnership debts
 It means that each partner is personally & individually liable for all
partnership liabilities regardless of that partner’s equity in the partnership
‫كل شريك ملزم بكل ديون الشركة بغض النظر عن الممتلكات الشخصية‬

(5) Co-ownership of property

 Partnership assets are owned jointly by the partners.

 If partnership is dissolved(terminated) , the assets don’t legally revert to the
original contributor.
‫اصول الشركة مملوكة جماعيا بين شركائها‬
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 ‫عند حل الشركة فان االصول ال تعود بشكل قانونى لمالكها االصلى‬
3) What are the principal advantages & disadvantages of partnership?

Advantages Disadvantages
1- Combining skills and resources of two or more 1-mutual agency
individuals. 2-limited life
2- Ease of formation. 3-unlimited liability
3- Freedom from governmental regulations. & Restrictions.
4- Ease of decision making.

Notes :
A primary advantage of the partnership form of entity is ease of formation
‫من مزايا الرئيسية لشراكات االشخاص انها سهلة التكوين‬

Basic Partnership Accounting

1- Forming a partnership:
 Each partner’s investment (cash, inventory, land, equipment) should be
recorded at the fair market value of the assets at the date of their transfer to the
partnership
 The values assigned must be agreed to by all the partners.

Example (1)
Alt and Blue combine their proprietorship to start a partnership
before forming partnership. They have the following assets & liabilities

Assets Book Value Fair Market Value

Alt Blue Alt Blue
Assets
Cash 9,000 8,000 9,000 8,000
Equipment 18,000 15,000 11,000 12,000
Acc-Depreciation- Equipment (2,000) (1,000) ----- -----
Accounts Receivable 6,000 4,000 6,000 4,000
Allowance For Doubtful Accounts (1,500) (1,000) (2,000) (1,000)
Total Assets 29,500 25,000 24,000 23,000
Total Liabilities
Accounts Payable (3,000) (2,000) (3,000) (2,000)
Notes Payable (1,000) ---- (1,000) ----

Capital, Dec 31 25,500 23,000 20,000 21,000

Required

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a) Prepare separate journal entries to record the transfer of each
Proprietorship’s Assets & liabilities to the partnership
Solution

Alt
Jan.1 Cash 9,000
Equipment 11,000
Accounts Receivable 6,000
Allowance For Doubtful Accounts 2,000
Accounts Payable 3,000
Notes Payable 1,000
Alt, Capital 20,000

Blue
Jan.1 Cash 8,000
Equipment 12,000
Accounts Receivable 4,000
Allowance For Doubtful Accounts 1,000
Accounts Payable 2,000
Blue, Capital 21,000

Example (2) lecture

Alt has the following account balances as of december 31, 20X0
Dr. Cr.
Cash 3,000
Inventory 7,000
Equipment 20,000
Accumulated Depreciation – Equipment 5,000
Liabilities 10,000
Alt, Capital 15,000

 Alt & Blue agree to form a partnership,

 Alt's business is audited, and its net assets are appraised
 The audit and appraisal disclose that $1,000 of liabilities has not been recorded
 Inventory has a market value of 9,000, & the equipment has a fair market value
of 19,000
 Blue will contributes $10,000 for a one third capital interest.

Required
Prepare the journal entry to record the transfer of each proprietorship’s assets &
liabilities to the partnership.

Solution
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 Journal entry
Alt
Cash 3,000
Inventory 9,000
Equipment 19,000
Liabilities (10,000 + 1,000) 11,000
Alt, Capital 20,000

Blue
Cash 10,000
Blue, Capital 10,000

Question (3) exam (2006)

Ken Law and Jim Renn operate separate auto repair shops. On January 1, 2005,
they decide to combine their separate businesses which were operated as
proprietorships to form L & R auto repair, a partnership information from their
separate balance sheets is presented below:

Law auto repair Renn auto repair

Cash 8,000 12,000
Accounts receivable 9,000 6,000
Allowance for doubtful accounts 1,000 500
Accounts payable 5,000 6,000
Notes payable ---- 3,000
Salaries payable 1,000 500
Equipment 12,000 24,000
Accumulated depreciation equipment 2,000 4,000

It is agreed that the expected realizable value of law’s accounts receivable is 7,000 &
the value of Renn’s receivables is 5,000. The fair market value of law’s equipment is
15,000 and Renn’s equipment is 20,000. It is further agreed that the new partnership
will assume all liabilities of the proprietorships with the exception of the notes payable
on renn’s balance sheet which he will pay himself.

Required
Prepare the journal entries necessary to record the formation of the partnership.
Solution

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Journal entries Ken Law
Jan, 1 Cash 8,000
Accounts receivable 9,000
Equipment 15,000
Allowance for doubtful accounts 2,000
Accounts payable 5,000
Salaries payable 1,000
Ken law , capital 24,000

Jim Renn
Jan, 1 Cash 12,000
Accounts receivable 6,000
Equipment 20,000
Allowance for doubtful accounts 1,000
Accounts payable 6,000
Salaries payable 500
Jim renn , capital 30,500

example (4) Exam (2018)

K. Decker, S. Rosen, and E. Toso are forming a partnership. Decker is transferring
$50,000 of personal cash to the partnership. Rosen owns land worth $15,000 and a
small building worth $80,000, which she transfers to the partnership. Toso transfers
to the partnership cash of $9,000, accounts receivable of $32,000 and equipment
worth $39,000. The partnership expects to collect $29,000 of the accounts
receivable.

Instructions
(a) Prepare the journal entries to record each of the partners’ investments.
(b) What amount would be reported as total owners’ equity immediately after the
investments?
Solution
(a)
Cash 50,000
Decker, Capital 50,000

Land 15,000
Building 80,000
Rosen, Capital 95,000

Cash 9,000
Accounts Receivable 32,000

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 Equipment 39,000
Allowance for Doubtful Accounts 3,000
Hughes, Capital 77,000
(b) Decker, Capital $50,000
Rosen, Capital + $95,000
Toso, Capital + $77,000
total owners’ equity $222,000

Example (5)
Dick Acer and George Dooley decide to form a partnership. Acer invests $25,000
cash and accounts receivable of $30,000 less allowance for doubtful accounts of
$2,000. Dooley contributes $20,000 cash and equipment having a $6,000 book
value.It is agreed that the allowance account should be $3,000 and the fair market
value of the equipment is $10,000.

Instructions
Prepare the necessary journal entry to record the formation of the partnership.
Solution

Cash ($25,000 + $20,000) 45,000

Accounts Receivable 30,000
Equipment 10,000
Allowance for Doubtful Accounts 3,000
Acer, Capital 52,000
Dooley, Capital ($20,000 + $10,000) 30,000

some question exams ‫بعض مسائل االمتحانات‬

For each of the following statements, circle the (T) or (F) to indicate whether the
statement is true or false

T 1) the act of any partner is binding on all other partners to be appropriate for the
partnership.
F 2) A partnership is an association of no more than two persons to carry on as co-
owners of a business for profit
F 3) A partner in partnership does not participate in management of the partnership
F 4) Each partner’s investment in a partnership should be recorded at book value
T 5) upon formation of a partnership, Each partner’s initial investment of assets
should be recorded at their appraised values
F 5) A partnership is not an accounting entity for financial reporting purposes.
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T 6) the personal assets, liabilities, and personal transactions of partners are
excluded from the accounting records of the partnership
F 7) In a partnership, mutual agency means each partner acts on his own behalf
when engaging in a partnership business
T 8) In a partnership, every partners has full authority to negotiate contract that are
binding on the business
F 9) If a partner’s investment in a partnership consists of accounts receivable of
25,000 and an allowance for doubtful accounts of 7,000, it would not be
appropriate for the partnership to record the allowance for doubtful accounts
F 10) L. Stone invests the following assets in a new partnership: 17,000 in cash ,
and equipment that cost 30,000 but has a book value 32,000 and fair market
value of 20,000. L. Stone, Capital will be credit for 39,000
T 11) Once assets have been invested in the partnership, they are owned jointly by
all partners
T 12) If a partner's investment in a partnership consists of equipment that has
Accumulated depreciation of $8,000, it would not be appropriate for the
partnership to record the accumulated depreciation
F 13) A major advantage of the partnership form of organization is that the partners
have unlimited liability
T 14) Partnership creditors may have a claim on the personal assets of any of the
partners if the partnership assets are not sufficient to settle claims.
F 15) The partnership agreement between partners must be in writing.
T 16) If a partner invests noncash assets in a partnership, they should be recorded
by the partnership at their fair market value.
F 17) Two proprietorships cannot combine and form a partnership.
F 18) a partner is a partnership is liable for partnership liabilities only to the extent
of that partner’s capital equity.
T 19) no partner can enter into a contract on behalf of a partnership without a
majority vote of all of the partners

1. A partnership
a. has only one owner.
b. pays taxes on partnership income.
c. must file an information tax return.
d. is not an accounting entity for financial reporting purposes.

2. A general partner in a partnership

a. has unlimited liability for all partnership debts.
b. is always the general manager of the firm.

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 c. is the partner who lacks a specialization.
d. is liable for partnership liabilities only to the extent of that partner's capital
equity

3. Which one of the following would not be considered a disadvantage of the

partnership form of organization?
a. Limited life
b. Unlimited liability
c. Mutual agency
d. Ease of formation

4. The partnership form of business is

a. restricted to law and medical practices.
b. restricted to firms having fewer than 10 partners.
c. not restricted to any particular type of business.
d. most often used in relatively large companies.

5. Which of the following is not a principal characteristic of the partnership

form of business organization?
a. Mutual agency
b. Association of individuals
c. Limited liability
d. Limited life

6. Which of the following statements is true regarding the form of a legally

binding partnership contract?
a. The partnership contract must be in writing.
b. The partnership contract may be based on a handshake.
c. The partnership contract may be implied.
d. The partnership contract cannot be oral.

7. Which of the following statements about a partnership is correct?

a. The personal assets of a partner are included in the partnership accounting
records.
b. A partnership is not required to file an information tax return.
c. Each partner's share of income is taxable to the partnership.
d. A partnership represents an accounting entity for financial reporting
purposes.

8. In a partnership, mutual agency means

a. each partner acts on his own behalf when engaging in partnership business.
b. the act of any partner is binding on all other partners, only if partners act
within their cope of authority.
c. an act by a partner is judged as binding on other partners depending on
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 whether the act appears to be appropriate for the partnership.
d. that partners must pay taxes on a mutual or combined basis

9. Which of the following statements about partnerships is incorrect?

a. Partnership assets are co-owned by partners.
b. If a partnership is terminated, the assets do not legally revert to the original
contributor.
c. If the partnership agreement does not specify the manner in which net
income is to be shared, it is distributed according to capital contributions.
d. Each partner has a claim on assets equal to the balance in the partner's
capital account.

10. Which of the following is not an advantage of the partnership form of

business?
a. Mutual agency
b. Ease of formation
c. Ease of decision making
d. Freedom from governmental regulations and restrictions

11. Norton invests personally owned equipment, which originally cost $110,000
and has accumulated depreciation of $30,000 in the Norton and Kennett
partnership. Both partners agree that the fair market value of the equipment
was $60,000. The entry made by the partnership to record Norton's investment
should be
a. Equipment ...................................................... 110,000
Accumulated Depreciation—Equipment 30,000
Norton, Capital...................................... 80,000

b. Equipment ..................................................... 80,000

Norton, Capital..................................... 80,000

c. Equipment ..................................................... 60,000

Loss on Purchase of Equipment ................... 20,000
Accumulated Depreciation—Equipment 30,000
Norton, Capital...................................... 110,000
d. Equipment ...................................................... 60,000
Norton, Capital...................................... 60,000

12. Partner B is investing in a partnership with Partner A. B contributes as part

of his initial investment, Accounts Receivable of $20,000; an Allowance for
Doubtful Accounts of $3,000; and $2,000 cash. The entry that the partnership
makes to record B's initial contribution includes a

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a. credit to B, Capital for $22,000.
b. debit to Accounts Receivable for $17,000.
c. credit to B, Capital for $19,000.
d. debit to Allowance for Doubtful Accounts for $3,000.

Test yourself

1) C. J . Ford is in business and on 31 December 2004 his assets and liabilities were :

Dr. Cr.
Cash 5,000
Inventory 15,000
Equipment 30,000
Accumulated Debreciation – Equipment 7,000
Liabilities 13,000
C . J . Ford – Capital 30,000

 On January 1 , 2005. morris joined him as a partner on the following terms :

 The audit and appraisal disclose that 2000 of liabilities has not recorded
 Inventory has a market value of 20,000, & equipment has a fair market value of
20,000
 Morris will contributes 10,000 for a one fourth capital interest
The partnership is to acquire all of ford’s business and assume its debits.

Required
Prepare the journal entry to record the transfer of each proprietorship’s assets &
liabilities to the partnership.

2) Ken Lott and Jim Stine operate separate auto repair shops. On January 1, 2017, they
decide to combine their separate businesses which were operated as proprietorships to
form L & S Auto Repair, a partnership. Information from their separate balance sheets is
presented below:

Lott auto repair Stine auto repair

Cash 13,000 12,000
Accounts receivable 9,000 10,000
Allowance for doubtful accounts 1,000 500
Accounts payable 5,000 6,000
Notes payable ---- 3,000
Salaries payable 1,000 1,500
Equipment 12,000 24,000
Accumulated depreciation equipment 2,000 4,000

It is agreed that the expected realizable value of Lott's accounts receivable is $8,000 and
Stine's receivables is $7,000. The fair market value of Lott's equipment is $13,000 and
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the value of Stine's equipment is $20,000. It is further agreed that the new partnership
will assume all liabilities of the proprietorships with the exception of the notes payable on
Stine's balance sheet which he will pay himself.
Instructions
Prepare the journal entries necessary to record the formation of the partnership

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