Accounting For Partnership-“ Formation Of Partnership And Capital Account

September 6th, 2006 Comments off
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When a newly partnership is formed, a capital account is opened for individual partner. It’s usual for the amounts of the partners capital to be fixed by the partnership deed and the amount fixed throughout the partnership ( unless there is a call up for additional investment).

The contribution/ investment by the partners can be in various forms:

(1) Investment in the form of CASH

Accounting entries:

Debit: Cash $10,000

Credit: Capital of A $5,000

Credit: Capital of B $5,000

Here, equal amount of $5,000 CASH is injected into the partnership by Partner A & Partner B.

(2) Investment in the form of CASH & OTHER ASSETS

Besides (1) which is Cash contribution, other form of NON-CASH assets can be contributed by the partner(s).

When assets are injected into the partnership, the non-cash assets need to be fairly valued normally based on the current market value which is the value on the date of the asset is transferred to the partnership.

Of course, the valuation must be mutually agreed by the partners

Illustration:

There are two partners, Mr. A & Mr. BÂ Say both agree to contribute $100,000 each into the partnership.

Mr. A gave cash of $100,000 whilst

Mr. B gave cash of $10,000 and the balance a shop which is fairly valued at $90,000 which is also agreed by Mr. A.

Accounting Entries:

Debit: Cash $110,000

Debit: Fixed Asset-Building $90,000

Credit: Capital-Mr. A $100,000

Credit: Capital -Mr.B $100,000

Being record of initial capital contributed by Mr. A & Mr.B

(3) ASSETS AND LIABILITIES TAKEN OVER

As we studied in earlier article, due to combining of expertise or increasing the capital of the entity, two or more sole-proprietors may want to join together to form a partnership.

As such, besides bringing along the assets into the partnership, we also see liabilities of the sole proprietorship being taken over by the partnership.

Let assumes that the following two sole proprietor who has the following assets and liabilities wish to form a partnership.

Mr. A Mr. B

Cash 10,000 5,000

Accounts Receivable 20,000 10,000

Inventory 15,000 5,000

Motor Vehicle 10,000 20,000

Accounts Payable (20,000) (10,000)

Net Assets $35,000 $30,000

Accounting Entries:

Debit: Cash ($10,000+$5,000) $15,000

Debit: A/c Receivable($20,000+$10,000) $30,000

Debit: Inventory ($15,000+$5,000) $20,000

Debit: Motor Vehicle ($10,000+$20,000) $30,000

Credit: Accounts Payable($20,000+$10,000) $30,000

Credit:Capital-Mr.A $35,000

Credit:Capital-Mr.B $30,000

Being recording of capital contributed by the partners Mr. A & Mr. B.

[Note: instead of combining the above entries together,you can open up respective accounting entries for each partner to get the respective capital contribution].

ADDITIONAL Investment Or Capital Contribution

The above three methods reflects how the partnership is formed re: Cash, Cash & Non Cash Assets & Net Assets ( with liabilities assumed into the partnership).

Now, assuming after the formation of the partnership, the partners decide to put in more cash investment /contribution.

The accounting entries are simple:

Debit : Cash XX

Credit: Capital- Partner A X

Credit: Capital- Partner B X

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Financial Accounting

 
 

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