ACC-FPX5610 Advanced Accounting, Budget Planning, and Control Partnership Accounting
Entering into a partnership offers various benefits and risks. By clearly defining each partner’s contributions, investments, and income, all parties can assess the fairness of the partnership agreement. Properly anticipating and defining various scenarios helps protect each partner against potential asset divisions and losses. In the absence of a formal partnership agreement, assets and profits would be divided equally.
Income Allocation Schedule
For a retail gourmet ice cream shop, Partner 1 will make an initial investment of $150,000 and work ten hours per week. Partner 2 will invest $50,000 and work forty hours per week. To allocate partnership income, the agreement uses a 10% interest allowance per year and salary allowances at $25.00 per hour, assuming total partnership income of $100,000.
Allocation of Partnership Net Income
| Partner 1 | Partner 2 | Total | |
|---|---|---|---|
| Net Income | $100,000 | ||
| Interest (10% beginning capital) | $15,000 | $5,000 | $20,000 |
| Net income after interest | $80,000 | ||
| Compensation Allowance | $250 * 52 = $13,000 | $1,000 * 52 = $52,000 | ($65,000) |
| Net Income remaining after interest and compensation | $15,000 | ||
| Remaining Income Distribution | $11,250 (75%) | $3,750 (25%) | $15,000 |
| Net income allocation totals | $39,250 | $60,750 |
Partnership Loss Allocation Schedule
According to Section 704, a partner can only use a loss allocated to them up to their “basis” in the partnership interest (Nitti, 2014). In the event of a loss, the allocation will follow the profit-sharing ratio. For example, if the retail gourmet ice cream shop incurs a $40,000 loss, the initial contributions are considered. Partner 1 contributed $150,000, while Partner 2 contributed $50,000.
| Partner 1 Contribution | $150,000 / $200,000 = 75% | | Partner 2 Contribution | $50,000 / $200,000 = 25% |
Costs are allocated according to the sales amount, with operating expenses deducted from gross profit. After adding interest and deducting salaries, if a loss remains, it is divided according to the income distribution ratio. In this case, if the net loss is $40,000, Partner 1 would absorb $30,000, and Partner 2 would take on $10,000 (Rogers, n.d.).
Selling a Business – Partnership Dissolution
Partnerships may dissolve for various reasons, such as a partner’s death or a mutual decision to part ways. For instance, if the ice cream shop’s assets amount to $900,000 after ten years, any profit or loss will be split equally.
Balance Sheet at Time of Sale
| Total Assets | $900,000 | Liabilities | $200,000 |
|---|---|---|---|
| Capital: Partner 1 | $400,000 | Capital: Partner 2 | $300,000 |
| Total Liabilities/Capital | $900,000 |
If the assets are sold for $1,200,000 and liabilities are settled for $200,000, $1,000,000 will be available for distribution among the partners.
Ice Cream Shop – Liquidation Schedule
| Cash (Assets) | Liabilities | Partner 1 Capital: 57% | Partner 2 Capital: 43% | |
|---|---|---|---|---|
| Beginning balances | $900,000.00 | $200,000.00 | $400,000.00 | $300,000.00 |
| Payment of Liabilities | $200,000.00 | -$200,000.00 | $0.00 | $0.00 |
| Potential Balances | $700,000.00 | $0.00 | $400,000.00 | $300,000.00 |
| Safe Balances | $700,000.00 | $0.00 | $400,000.00 | $300,000.00 |
SEC Reporting Requirements
Partnerships are not required to meet SEC segment reporting requirements. However, if a partnership converts to a corporation, it will need to adhere to these requirements. Financial statements can provide insights into the business’s activities in various economic environments. Quarterly financial statements do not need to be audited as annual reports do. The International Financial Reporting Standard (I