Partnerships, Liabilities, and Asset Depreciation: Key Concepts for Financial Accounting

Advantages of a partnership

Tax pass-through, shared skills/resources, easy to form

Disadvantages of a partnership

Mutual agency, unlimited liability, limited life

Mutual agency

Any partner can bind the partnership if action appears appropriate

Limited life (partnership)

Partnership dissolves when a partner enters or leaves

Unlimited liability

Partners are personally responsible for all partnership debts

Current liability

Debt paid within one year or operating cycle

Long-term liability

Debt paid beyond one year

Can a note be split into current/long-term portions?

Yes, current portion due within one year, remainder long-term

Contingent liability

Potential liability depending on a future event

When to record contingent liability

When probable AND reasonably estimable

Warranty expense recorded when?

Same period as the sale (Matching Principle)

Mandatory payroll deductions

FICA, federal income tax, state income tax

Voluntary payroll deductions

401(k), charity, health insurance

Employer payroll taxes

Employer FICA, FUTA, SUTA

Ordinary repairs

Revenue expenditure; maintain efficiency; expensed immediately

Additions and improvements

Capital expenditure; increase useful life/productivity; capitalize

Depreciation uses what three factors?

Cost, useful life, salvage value

Straight-line depreciation formula

(Cost - Salvage) ÷ Useful life

Double-declining balance formula

(1 ÷ useful life × 2) × Beginning book value

Revising depreciation estimate

Use new book value - salvage ÷ remaining life; applied prospectively

Gain or loss on disposal of asset

Compare proceeds to book value

Intangible assets

Nonphysical assets (patents, trademarks, goodwill)

Goodwill

Excess paid over fair market value of net assets when buying a business

Trademark

Word/phrase/symbol identifying a business

Amortization applies to

Limited-life intangible assets

Depletion applies to

Natural resources

Going concern assumption

Business will continue operating in foreseeable future

R&D costs

Expensed, not capitalized (GAAP)

Steps in partnership liquidation

Sell assets; allocate gain/loss; pay liabilities; distribute cash

Partnership net income allocation

Salary allowances, interest on capital, remaining income split by ratio

Partnership formation

Assets recorded at fair market value; credited to partner capital accounts

Closing entries for partnership

Close revenues, expenses, drawings to partners' capital

Current ratio formula

Current assets ÷ Current liabilities

Working capital formula

Current assets - Current liabilities

Asset turnover ratio

Net sales ÷ Average total assets

Depletion cost per unit formula

(Cost - Salvage) ÷ Total units

Depletion expense formula

Cost per unit × Units extracted

Notes payable—what to journalize?

Borrowing, interest expense, interest accrual

Accrued interest formula

Principal × Rate × Time