Chapter 11: Partnership Formation

What is a partnership?

A partnership is a business formed by two or more individuals who act as co-owners and agree to share profits.

What does “unincorporated association” mean in a partnership?

It means the partnership is not a corporation, but it still operates as a separate legal entity.

What does “limited life” mean in a partnership?

A partnership can end due to events like:

1. Withdrawal of a partner
2. Death
3. Agreement expiration

What is “unlimited liability”?

Partners may be personally liable for debts if partnership assets are not enough.

What is a general partnership?

A partnership where all partners have unlimited liability.

What is a limited partnership?

A partnership with:

1. At least one general partner (unlimited liability)
2. Other limited partners (limited liability)

What are the 4 major partnership accounting stages?

1. Formation
2. Operations
3. Dissolution
4. Liquidation

When does a partnership legally exist?

When the agreement is made, even if oral.

How are partner contributions initially measured?

At fair value.

What is fair value? (partnership)

The price that would be received to sell an asset or paid to transfer a liability.

How is cash contribution measured?

At face amount.

How is inventory contribution measured?

At lower of cost or net realizable value (NRV).

What is net realizable value (NRV)?

Selling price minus cost to complete and sell.

How is a partner’s capital account determined at formation?

Fair value of assets contributed minus liabilities assumed.

What increases a partner’s capital account?

1. Investment
2. Additional contributions
3. Share in profit

What decreases a partner’s capital account?

1. Losses
2. Withdrawals
3. Drawings

What is a drawings account?

A temporary account for withdrawals during the period.

What is the normal balance of drawings account?

Debit balance.

What is “receivable from partner”?

A loan given by the partnership to a partner.

What is “payable to partner”?

A loan taken by the partnership from a partner.

What happens when a liability is assumed by the partnership?

It reduces the partner’s capital contribution.

What is the “bonus method”?

A method where a partner receives more or less capital than their contribution, adjusted from other partners.

What happens to total partnership capital under bonus method?

It remains equal to total fair value of contributions.

Where does the bonus come from?

From other partners’ capital accounts.

What is cash settlement between partners?

Partners personally adjust contributions outside partnership books.

What is additional investment adjustment?

A partner adds or withdraws cash to match agreed capital ratio.

What is the total equity of a partnership?

The sum of all partners’ capital balances.