Learning Objectives LO 1 Journalize entries to record
Learning Objectives LO 1 Journalize entries to record investments by partners. LO 2 Journalize entries to record withdrawals by partners. © 2014 Cengage Learning. All Rights Reserved.
Lesson 23 -1 Partnerships LO 1 ● A business in which two or more persons combine their assets and skills is called a partnership. ● Each member of a partnership is called a partner. © 2014 Cengage Learning. All Rights Reserved. SLIDE 2
Lesson 23 -1 Comparison of Forms of Ownership Form Advantages LO 1 Disadvantages Sole 1. Ease of formation Proprietorship 2. Retention of all profits 3. Total control 4. Simple tax structure 1. Unlimited liability 2. Less capital available 3. Limited vision and skills 4. Terminates with life of owner Partnership 1. Ease of formation 2. More capital available 3. Share work; each partner can operate in their area of expertise 4. Simple tax structure 1. Unlimited liability 2. Liable for partner’s actions 3. Must share profits 4. Hard to dissolve 5. Terminates with life of one partner Corporation 1. Limited liability 2. Ease of transfer of ownership 3. Unlimited life of the organization; does not terminate with death of investor 1. Harder/more expensive to form 2. Less control 3. Double taxation 4. More government regulations © 2014 Cengage Learning. All Rights Reserved. SLIDE 3
Lesson 23 -1 Partnership Agreements LO 1 ● A written agreement setting forth the conditions under which a partnership is to operate is called a partnership agreement. ● Legally, a partnership agreement may be either written or oral. ● However, a written agreement may limit misunderstandings in the future; therefore, a partnership agreement should be in writing. © 2014 Cengage Learning. All Rights Reserved. SLIDE 4
Lesson 23 -1 Written Partnership Agreements LO 1 ● Name of the business and the partners ● Investments of each partner ● Duties and responsibilities of each partner ● How profits and losses are to be divided ● What happens if a partner dies ● How the partnership is to be dissolved ● Duration of the agreement © 2014 Cengage Learning. All Rights Reserved. SLIDE 5
Lesson 23 -1 Initial Investments by Owners Cash 20, 000. 00 January 1. Received cash from partner, Sarah Hatcher, as an initial investment, $20, 000. Receipt No. 1. LO 1 Sarah Hatcher, Capital 20, 000. 00 Credit capital account for total investment by owner 1 1 Debit Cash for amount of cash invested by owner 1 2 © 2014 Cengage Learning. All Rights Reserved. SLIDE 6
Lesson 23 -1 Initial Investments by Owners January 1. Received cash, $17, 000. 00, and office equipment valued at $3, 000. 00, from partner, Parker O’Reilly, as an initial investment. Receipt No. 2. Office Equipment 3, 000. 00 LO 1 Cash 17, 000. 00 Parker O’Reilly, Capital 20, 000. 00 Debit Office Equipment for value of asset invested by owner 2 3 Credit capital account for 4 total investment by owner 2 Debit Cash for amount of cash invested by owner 2 © 2014 Cengage Learning. All Rights Reserved. 5 SLIDE 7
Lesson 23 -1 Withdrawal of Cash by Partner January 15. Parker O’Reilly, partner, withdrew cash for personal use, $750. 00. Check No. 12. Parker O’Reilly, Drawing 750. 00 LO 2 Cash 750. 00 Debit Parker O’Reilly, Drawing 1 Credit Cash 2 © 2014 Cengage Learning. All Rights Reserved. SLIDE 8
Lesson 23 -1 Withdrawal of Supplies by Partner January 15. Sarah Hatcher, partner, withdrew supplies for personal use, $450. 00. Memorandum No. 1. Sarah Hatcher, Drawing 450. 00 LO 2 Supplies 450. 00 1 Debit Sarah Hatcher, Drawing 2 Credit Supplies © 2014 Cengage Learning. All Rights Reserved. SLIDE 9
Lesson 23 -1 Audit Your Understanding 1. List at least three items that should be included in a partnership agreement. ANSWER A partnership agreement should include: • Name of the business and the partners • Investments of each partner • Duties and responsibilities of each partner • How profits and losses are to be divided • What happens if a partner dies • How the partnership is to be dissolved • Duration of the agreement © 2014 Cengage Learning. All Rights Reserved. SLIDE 10
Lesson 23 -1 Audit Your Understanding 2. Which accounts are debited and credited when a partner withdraws merchandise from the partnership? ANSWER The partner’s drawing account increases by a debit; Purchases decreases by a credit. © 2014 Cengage Learning. All Rights Reserved. SLIDE 11
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