Partnership

is an association of two or more persons to carry on as co-owners of a business for profit.

Characteistics of a partnership:

• easily formed (verbal or written)
• Association of individuals: it is a legal entity, each individual owner is taxed (not the partnership itself), can own property and can be sued.
• Mutual Agency:each partner acts on behalf of the business.
• Limited Life: partnership may be ended "voluntarily" at any time.
• Unlimited Liability: all partners are personally and individually liable for all partnership liabilites.
• Co-ownership of Property: all partners own business assets and net income and loss.

Adavantages:

Simple and inexpensive to create and operate.

Disadvantages: Owners (partners) personally liable for business debts.

Advantages and disadvantages of LP

Adavantages:

Limited partners have limited liability for business debts as long as they DON'T participate in management. GP's can raise cash w/out involving outside investors in management of business.

Disadvantages: GP's are personally liable for business debts, more x-pensive to create, suitable mainly for companies that invest in real estate.

Advantages:

Mostly of interest in old-line professions ie law, accounting, medicine. Owners aren't liable for malpractice of others.

Disadvantages:

Unlike a LLC, owners remain personally liable for many types of obligatins owed to business creditors, lenders, and landlords.

Advantages:

Owners have limited personal liability for business debts even if they participate in management

Disadvantages:

More expensive to create than Regular Partnership

Parrtnership Agreement

"What it should entail"

1.Names and capital contributions of partners.

2.Rights and duties

3.Basis for sharing net income or loss.

4.Provisions of withdrawals of assets.

5.Procedures for submitting disputes to arbitration

6.Procedures for the w/drawal or addition of a partner

7.Rights & duties of surviving partners in the event of a partner's death.

Example of recording initial asset investment.

Investment of A. Rolfe

Cash                                     8,000

Office Equipment                    4,000        

     A. Rofle, capital                              12,000

(to record investment of Rolfe)

1. Debit each revenue account for its balance, and credit Income Summary for total revenues.

2. Debit Inc. Sum. for total expenses, and credit each expense account for its balance.

3. Debit Inc. Sum. for its balance, and credit each partner's capital account for his or her share of net income. Or, credit Inc. Sum., and debit each partner's capital account for his or her share of net loss.

4. Debit each partner's capital account for the balance in each partner's drawing account, and credit each partner's drawing account for the same amount.

Dividing Net Income and Loss:

Ex. of closing entries.

Assume that AB Company has net income of 32K for 2010. The partners, L. Arbor and D. Barnett, share net income and loss equally. Drawings from the year were Arbor 8K and Barnett 6K.

Income Summary                        32,000

     Arbor Capt (32,000 x 50%)                       16,000

     Barnett Capt (32,000 x 50%)                     16,000

(transfer net income to partners accounts)

Arbor Capt                                   8,000

Barnett Capt                                6,000

     Arbor Drawing                                           8,000

     Barnett Drawing                                         6,000

(close drawing accounts to capital accounts)

 Inc. Ratios

1. expressed as a proportion (6:4), a % (70% & 30%), or a fraction (2/3 and 1/3).
2. ratio based either on capt. balances at the begining of the year or on aver. capt. balances during the year.
3. Salaries to partners and the remainder on a fixed ratio.
4. Interest on partners' capital balances & the remainder on fixed.
5. Salaries to partners, interest on partners' capital, and remainder on a fixed.

Kingslee Comp.

Inc. Statement

Sales 200K

Net Inc. 22K

Division of net Inc.

                                                  King             Lee            Total

Salary allowance                           8,400           6,000         14,400

Interest allowance on partners' capt

King (28K x 10%)                          2,800 

Lee (24K x10%)                                               2,400

 Total int. allow.                                                               5,200

Total salaries & int.                        11,200          8,400        19,400

Remaining Inc. 2,400

(22K-19.6K)

King (2,400 x 50%)                         1,200

Lee (2,400 x 50%)                                             1,200

 Total remainder                                                               2,400

Total division of net income             12,400           9,600       22,000

Inc. Summary               22,000

     King, Capt                               12,400

     Lee, Capt                                 9,600

(to close net income to partners' capt.)

Partners' Capt Statement

Liquidation of a Partnership

Completing the accounting cycle for liquidation.

Only balance sheet accounts should be open during the begining of liquidation. Sell of noncash assets for cash assets is called realization. Any difference b/t book value & cash is the gain or loss. To liquidate a partnership, you must:

1. Sell noncash assets for cash & recognize loss or gain.
2. Allocate gain/loss on realization to the partners based on their income ratio.
3. Pay partnership liabilities in cash.
4. Distribute remaining cash to partners on the basis of their capt balances

Schedule of Cash Payments

Two most common Corps are by purpose and ownership, and they are?

Profit and not-for-profit.

The classification by ownership distinguishes b/t publicly held and privately held corps.

Publicly: may have thousands of stockholders and usually is traded on the national securities exchange.

Privately: has only a few stockholders and doesn't offer to sell its stock to the general public.

Seperate Legal Existence

as an entity seperate and distinct from its owners, the corp. acts under its own name rather than in the name of the stockholders.

Limited Liability of Stockholders

Creditors have recourse only to corperate assets to satisfy their claims and have no legal claim on the personal assets of the owners unless fraud has occurred.

Transferable Ownership Rights

Stockholders may dispose of part or all of their interest by selling their stock and at the discretion of them only. It doesn't require approval. The transfer of the ownership rights is a transaction b/t individual owners.

Ability to Aquire Capt

Easy to aquire capt. through the issuance of stock. Investors buy stock to make money as price share grows, and bc the stockholder has limited liability and shares of stock are readily transferable. In sum, abillity of a sucessful corp. to obtain capt. is virtually unlimited.

Continuous Life

Life of a corp. is stated in its charter, life may be perpetual, or it may be limited. If its limited it can be extended thru the renewal of the charter. As a result, a sucessful enterprise can have a continuous/perpetual life.

Corporation Management

Stockholders legally own it, but manage the corp. indirectly thru a board of directors. Board selects officers, ie president & 1 or more vice presidents, to execute policy and perform daily management.

• Chief Executive Officer (CEO): overall responsibility of managing. CEO delegates responsibility to other officers.
• Chief Accounting Officer: AKA controller. Maintains accounting records, adequate system of internal controls, and prepairing financial statements, tax returns and internal reports.
• Treasurer: custody of corp's funds & respon. for maintaining cash position.

Government Regulations

corp's subject to numerous state and federal regs. State laws usually prescribe the requirements for issuing stock, dist. of earnings, and effects of retiring stock. Federal securities laws govern the sale of capital stock to the general public. Most publicly held corps are required to have full disclosure of financial affairs to the SEC.

Additional Taxes

Corp's unlike proprietorships and partnerships must pay federal and state income taxes as a seperate and legal entity. These taxes are substantial. In addition, stockholders must pay taxes on cash dividends. Thus, many argue that govn't taxes corp income twice. (double taxation).

Advantages:

Seperate legal existence, Limited liability of stockholders, Transferable ownership rights, Ability to aquire capital, Continuous Life, Corp. Management-prefessional managers.

Disadvantages:

Corp. management-seperation of ownership and management, Govn't Regulations, Additional taxes.

Charter

• Ownership rights are sold thru stock.
• When a corp. has only one class of stock, it's called "common stock."

1. Vote at board of director annual meetings and actions that require SH approval.
2. Share the corporate earnings thru receipt of dividends.
3. Keep the same % of ownership when new shrs. of stock are issued.
4. Share in assets upon liquidation in proportion to their holdings. This is called a risidual claim: owners are paid in assets that remain after all creditors' claims have been made.

• How many shrs. should it authorize for sale?
• How should it issue them?
• At what price should it issue stock?
• What value should the corp. assign the stock?

• Charter indicates the amount of stock that a corp. can issue.
• Total amount issued at the time of incorp. normally anticipates both initial & capital needs. As a result, the number authorized generally exceeds the number initially sold.
• If a corp. sells all of its autho. stock, a corp. must obtain conscent to amend its charter before it can issue more.
• Authorization of capt. stock doesn't result in a formal accounting entry. And, has no effect on either corp. assets or SH's equity. But, the # of autho. shrs. are often reported in SH's equity section.

1. Company's anticipated future earnings.
2. Its expected dividend rate per share.
3. Current financial position.
4. Current state of the economy.
5. Current state of the securities market.

Owners' equity is identified by various names: stockholders' equity, shareholders' equity, or corporate capt. The SH's equity section of a corp's balance sheet consists of two parts:

1. Paid-in (contributed) capital
2. Retained earnings (earned capital)

Legally corp's can make dividends out of retained earnings in all states, but they cannot issue dividends out of paid-in capt. Management, SH's, and others often look to REs for continued existence and growth of the corp.

Paid-in Capital

Net income that a corp. retains for future use. Net income is recorded in RE by a closing entry that debits Income Summary & credits REs.

I.e. assuming Delta Robotics net income for its first year is $130,000, closing entry is:

Income Summary            130,000

     Retained Earnings(RE)                  130,000

(to close Inc. Sum. and transfer net inc. to RE)

Delta Robotics

Balance Sheet

Assuming Delta has $800K in Com. Stock at year end, the SH's equity section would be as follows:

Stockholders' equity

    Paid-in Capital (PIC)

      Common Stock              $800,000

    Retained Earnings              130,000

       Total SH's equity                         $930,000

Proprietorship                Corporation

Able, Capt.-Credit        Common Stock-Credit

                                Retained Earnings-Credit

Partnership

Able Capt.-Credit

Baker, Capt.-Credit

Objective in accounting for issuance of CS are:

1. Identify the specific sources of paid-in capt.
2. Maintain the distinction bt paid-in capt. & retained earnings.

Issuance of CS only affects paid-in capt. accounts.

Example: Hydro-Slide company Issuance at par

Cash                                        1,000

     Common Stock                                      1,000

(record issuance of 1,000 shrs. of $1 par common stock @ par)

Issuance above par

Cash                                        5,000

     Common Stock                                       1,000

     Paid-in capt. in excess of par                    4,000

(issuance of 1K shrs. of $1 par common stock)

SH's equity

    PIC

      Common Stock                      $2000

      PICEP                                    4000

         Total PIC                            6000

    Retained Earn.                         27000

         Total SH's equity                 33000

Issuing No-Par Common Stock for Cash

Ie: assume that instead of $1 par value stock, Hydro-Slide has $5 stated value no-par stock & the company issues 5,000 shrs. at $8 per share for cash. Entry is:

Cash                          40,000

     Com. Stock                              25,000

     PICESV                                     15,000 

(issue of 5K shrs. of $5 stated val. no-par stock)

Issuing no-par stock w/out stated value

Cash                           40,000

     Com. Stock                               40,000

(issue of 5K shrs. of no-par stock) 

Example: Company issues 4000 shrs. of $1 par value CS in payment for services rendered by attorneys helping them get incorped. Time of the exchange no FMV was est. for the stock. So, it's considered the FMV consideration received is $5000. Entry is:

Organization expense                                 5000

     Com. Stock                                                                      4000

     PICEP                                                                                 1000

(issuance of 4000 shrs. of $1 par value stock to attorn's)

Company issues 10,000 shrs. of $5 par value stock to a seller to buy some land that the seller advertised for $90,000. The value that is clear in this noncash trans. is the market price for the consideration given, $80,000. Entry is:

Land                                                            80,000

     Com. Stock                                                                    50,000

     PICEP                                                                               30,000

(issuance of 10,000 shrs. of $5 par value stock for land)

Par value of stock is never a factor in determining the cost of the assets received

• To reissue the shrs. to officers & employees under bonus and stock compensation plans.
• Signal that management thinks the stock is underpriced, hoping to enhance market value.
• Have additional shrs. available to aquire.
• Reduce outstanding shrs. to increase earnings per share.
• Rid company of bad investors

Company acquires 4000 shrs. of its stock at $8 per. Entry is:

Treasury Stock                        32000

     Cash                                              32000

(purchase of 4K shrs. TS at $8 per)

Is com. stock affected. No, bc the number of issued shrs. doesn't change. In the SH's equity sect. of the bal. sheet, the comp. deducts TS from total PIC and RE. Treas. Stock is a contra SH's equity account. Thus, the aquisition of TS reduces SH's equity.

When the selling price of TS equals their cost, the comp. records the sale by a debit to Cash and a credit to TS. When selling price is greater than their cost, the comp. credits the diff. to Paid-in Capt. from Treas. Stock.

Assume the comp. sells for $10 per the 1000 shrs. of its TS, previously acwuired for $8 per. Entry is:

Cash                                                  10,000

      Treas. Stock                                                          8,000

      PICTS                                                                      2,000

(sale of 1k shrs. of TS above cost)

When you sell it below cost, they usually debit Paid-in Capt. from TS the excess of cost over selling price.

Thus, if the comp. sells an additional 800 shrs. of TS at $7 per it makes the entry:

Cash                                               5,600

PICTS                                                 800

     Treas. Stock                                                 6,400

(sale of 800 shrs. of TS below cost)

The sale of TS increases both total assets and total SH's equity.

When a comp. fully depletes the credit bal. in PICTS, it debits to RE any additional excess cost over selling price. Assume the company sells the remaining 2,200 shrs. at $7 per. The excess of cost over selling price is $2,200 [2,200 x ($8 - $7)]. In this case the comp. debits $1,200 of the excess to PICTS. Then debits the remainder to RE. Entry is:

Cash                                            15,400

PICTS                                             1,200

RE                                                    1,000

     Treas. Stock                                                  17,600

pro rata dist. of cash to stockholders. For a comp. to pay a cash divid., it must have.

1. Retained earnings. cash payments from RE is legal in all states, but payments made from only com. stock (legal capt.) is illegal. Divid. declared out of PIC is a liquidating dividend.
2. Adequate cash. You can't pay out more cash than you have.
3. Declaration of dividends. Comps. don't pay dividends unless its BOD decides to.

Three dates are important for dividends: declaration date, record date, & payment date. On declaration date BOD formally declares the cash divid. & announces it to SHs. Declaration of cash divids. commits the corp. to a legal obligation. It's Binding! Comp. makes entry to decrease RE and increase the liabilty Dividends Payable.

Assume a comp. declares a cash divid. for 50c per on 100,000 shrs. of $10 par value com. The divid. is $50,000 (100,000 x 50c) Entry is:

Retained Earnings                                50,000

     Dividends Payable                                               50,000

(record declaration of cash divid.)

Entries for Cash Divids.

Record Date

Entries for Cash Divids.

Payment Date

Comp. issues the cash for the dividends and records the payment. Entry is:

Dividends Payable               50,000

    Cash                                           50,000

(record payment of cash divid.)

Payment reduces both current assets and liabilities. The cumulative effect of declaration/payment of cash divids. is to decrease both SH's equity and total assets.

Preferred has preference over com. stock and must be paid any unpaid prior-year divids. & its current year's divid. before com. stockholders recieve divids.

Assuming that a cash divid. is issued that is less than what you owe preferred. It all goes to preferred.

Retained Earning              6,000

     Dividends Payable                      6,000

(record $6 per share cash dividend to preferred SHs.)

Pro rata dist. to stockholders of the corp's own stock. Stock divids. result in a decrease in RE & an increase in PIC. Unlike a cash divid. a stock divid. doesn't dcrease total SH's equity or total assets. Assume you have 2% ownership in a comp. you own 20 of its 1000 shrs. of CS. If that comp. declares a 10% stock divid. it would issue 100 shrs. of stock. You would receive two shrs. Would your ownership interest change? No, it would remain 2% (22 x 1100). You own more stock but your ownership hasn't changed.

Small (less than 20-25%)

Large (greater than 20-25%)

Retained earnings              75,000

    Com. Stock Divids Dist.                   50,000

    PICEP                                            25,000

(declaration of 10% stock divid.)

Comp. debits RE at FMV of stock issued ($15 x 5,000). It credits Com. Stock Divids. Dist. for the par value of the divids. shares ($10 x 5,000), and credits PICEP for the excess over par. Com. Stock Divids. Dist. is a SH's equity account. Its not a liability bc assets won't be used to pay the divid.

When the comp. issues the dividend shares, it debits com. stock divids. dist. and credits com. stock.

Com. stock divids. dist.          50,000

     Com. Stock                                   50,000

(issuance of 5,000 shrs. in stock divid.)

Item                      Stock split       Stock divid.

Total paid-in capt.     No change      Increase

Total RE                   No change       Decrease

Total par value          No change      Increase

Par value per share    Decrease         No change

1. Legal Restrictions. many states restrict RE for the cost of Treas. Stock, when they sell the restrict. is lifted.
2. Contractual restricts. long-term debt may restrict
3. Voluntary restricts.

Comps. generally disclose restrictions of RE in notes of financial statements

RE

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1. Net loss                               1. Net Income

2. prior period adjustments        2. Prior period

for overstatement of net inc.       adjusts. for

3. Cash divids. and stock divids.  understate. of

4. Some disposals of TS              net inc.