{"id":809,"date":"2015-05-13T17:36:21","date_gmt":"2015-05-13T17:36:21","guid":{"rendered":"https:\/\/courses.candelalearning.com\/finacct2x10xmaster\/?post_type=chapter&p=809"},"modified":"2015-06-02T16:57:37","modified_gmt":"2015-06-02T16:57:37","slug":"journal-entries-for-partnerships","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-finaccounting\/chapter\/journal-entries-for-partnerships\/","title":{"raw":"Journal Entries for Partnerships","rendered":"Journal Entries for Partnerships"},"content":{"raw":"
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Investing in a partnership<\/h4>\r\n

Partners (or owners) can invest cash or other assets in their business.\u00a0 They can even transfer a note or mortgage to the business if one is associated with an asset the owner is giving the business.\u00a0 Assets contributed to the business are recorded at the fair market value.\u00a0 Anytime a partner invests in the business the partner receives capital or ownership in the partnership.\u00a0 You will have one capital account and one withdrawal (or drawing) account for each partner.<\/p>\r\n

To illustrate, Sam Sun and Ron Rain decided to form a partnership.\u00a0 Sam contributes $100,000 cash to the partnership.\u00a0 Ron is going to give $25,000 cash and an automobile\u00a0with a market value of\u00a0$30,000.\u00a0 Ron is also going to transfer the $20,000 note on the automobile to the business.\u00a0 The journal entries would be:<\/p>\r\n\r\n

\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Account<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
Cash<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 100,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 S. Sun, Capital<\/td>\r\n<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 100,000<\/td>\r\n<\/tr>\r\n
To record cash contribution by owner<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Cash<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 25,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Automobile<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 30,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 Note Payable<\/td>\r\n<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 20,000<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 R. Rain, Capital (25,000 + 30,000 - 20,000)<\/td>\r\n<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 35,000<\/td>\r\n<\/tr>\r\n
To record assets and note contributed by owner<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n

The entries could be separated as illustrated or it could be combined into one entry with a debit to cash for $125,000 ($100,000 from Sam and $25,000 from Ron) and the other debits and credits remaining as illustrated.\u00a0 Either way is acceptable.\u00a0 Since the note will be paid by the partnership, it is recorded as a liability for the partnership and reduces the capital balance of Ron Rain.<\/p>\r\n

Partners can take money out of the business whenever they want.\u00a0 Partners are typically not considered employees of the company and may not get paychecks.\u00a0 When the partners take money out of the business, it is recorded in the Withdrawals or Drawing account.\u00a0 Remember, this is a contra-equity account since the owners are reducing the value of their ownership by taking money out of the company.<\/p>\r\n

To illustrate, Sam Sun wants to go on a beach vacation and decides to take $8,000 out of the business.\u00a0 Ron Rain wants to go to Scotland and will take $15,000 out of the business.\u00a0 The journal entries would be:<\/p>\r\n\r\n

\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Account<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
S. Sun, Withdrawal<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 8,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 Cash<\/td>\r\n<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 8,000<\/td>\r\n<\/tr>\r\n
To record cash withdrawn by owner<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
R. Rain, Withdrawal<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 15,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
\u00a0 \u00a0 Cash<\/td>\r\n<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 15,000<\/td>\r\n<\/tr>\r\n
To record cash withdrawn by owner<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n

Just as in the previous example, the entries could also be combined into one entry with the credit to cash $23,000 ($8,000 from Sam + $15,000 from Ron) and the debits as listed above instead.<\/p>\r\n\r\n

Income Allocation<\/h4>\r\n

Once net income is calculated from the income statement (revenues - expenses), net income or loss is allocated or divided between the partners and closed to their individual capital accounts.\u00a0 The partners should agree upon an allocation method when they form the partnership.\u00a0 The partners can divide income or loss anyway they want but the 3 most common ways are:<\/p>\r\n\r\n

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  1. Agreed upon percentages<\/strong>:\u00a0 Each partner receives a previously agreed upon percentage.\u00a0 For example, Sam Sun will get 60% and Ron Rain will get 40%.\u00a0 To allocate income, net income or loss is multiplied by the percent agreed upon.<\/li>\r\n\t
  2. Percentage of capital<\/strong>:\u00a0 Each partner receives a percentage of capital calculated as Partner Capital \/ Total capital for all partners.\u00a0\u00a0 Using Sam and Ron, Sam has capital of $100,000 and Ron has capital of $35,000 for a total partnership capital of $135,000 (100,000 + 35,000).\u00a0 Sam's percentage of capital would be 74% (100,000 \/ 135,000) and Ron's percentage would be 26% (35,000 \/ 135,000).\u00a0 To allocate income, the percent of capital is multiplied by the net income or loss for the period.<\/li>\r\n\t
  3. Salaries, Interest, Agreed upon percent<\/strong>:\u00a0 Since owners are not employees and typically do not get paychecks, they should still be compensated for work they do for the business.\u00a0 In this method, we start with net income and give salaries out to the partners, then we calculate an interest amount based on their investment in the business, and any remainder is allocated using set percentages.\u00a0 This is by far the most confusing so a video example would be helpful.<\/li>\r\n<\/ol>\r\nhttps:\/\/youtu.be\/wODP0UekxhM\r\n\r\n<\/div>\r\nNote:\u00a0 The video shows a sharing ratio of 3:1.\u00a0 To use this in calculations, you will add the numbers presented together (3 + 1 = 4) and divide each number of the sharing ratio by this total to get a percentage.\u00a0 The sharing ratio of 3:1 means 75% ( 3\/4) and 25% ( 1\/4).\r\n\r\nThe journal entries to close net income or loss and allocate to the partners \u00a0for each of the scenarios presented in the video would be (remember, revenues and expenses are closed into income summary first and then net income or loss is closed into the capital accounts)<\/em>:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Account<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
    Income Summary<\/td>\r\n\u00a0 70,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    \u00a0 \u00a0 Partner A, Capital<\/td>\r\n<\/td>\r\n\u00a0\u00a0\u00a0\u00a0 37,500<\/td>\r\n<\/tr>\r\n
    \u00a0 \u00a0 Partner B, Capital<\/td>\r\n<\/td>\r\n32,500<\/td>\r\n<\/tr>\r\n
    To record allocation of $70,000 net income to partners.<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    <\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    Income Summary<\/td>\r\n\u00a0 30,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    \u00a0 \u00a0 Partner A, Capital<\/td>\r\n<\/td>\r\n\u00a0 7,500<\/td>\r\n<\/tr>\r\n
    \u00a0 \u00a0 Partner B, Capital<\/td>\r\n<\/td>\r\n22,500<\/td>\r\n<\/tr>\r\n
    To record allocation of $30,000 net income to partners.<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    <\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    Partner A, Capital<\/td>\r\n\u00a0\u00a0\u00a0 \u00a022,500<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    \u00a0 \u00a0 Partner B, Capital<\/td>\r\n<\/td>\r\n12,500<\/td>\r\n<\/tr>\r\n
    \u00a0 \u00a0 Income Summary<\/td>\r\n<\/td>\r\n10,000<\/td>\r\n<\/tr>\r\n
    To record allocation of $10,000 net LOSS to partners.<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nIf the partners cannot or do not decide how income will be allocated, allocate it equally between the partners (for 4 partners divide net income by 4; for 3 partners divide net income by 3, etc.).\r\n

    Liquidation of a Partnership<\/h4>\r\nSometimes things do not go as well as planned in a business and it may be necessary to go out of business.\u00a0 When a partnership goes out of business, the following items must be completed:\r\n
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    • All closing entries should be completed including allocating any net income or loss to the partners.<\/li>\r\n\t
    • Any non-cash assets should be sold for cash and any gain or loss from the sale would be allocated to the partners.<\/li>\r\n\t
    • Any liabilities should be paid.<\/li>\r\n\t
    • Any remaining cash is allocated to the partners based on the capital balance in each partner's account (note:\u00a0 this is not an allocated figure but the actual\u00a0capital balance for each partner\u00a0after the other transactions).<\/li>\r\n<\/ul>\r\nHere is a good (but long) video demonstrating the liquidation process and the journal entries required.\r\n\r\nhttps:\/\/youtu.be\/rqFHf2uB6og\r\n\r\n<\/div>\r\n<\/div>\r\nhttp:\/\/www.openassessments.com\/assessments\/1206\r\n\r\n<\/div>\r\n<\/div>","rendered":"
      \n
      \n
      \n
      \n

      Investing in a partnership<\/h4>\n

      Partners (or owners) can invest cash or other assets in their business.\u00a0 They can even transfer a note or mortgage to the business if one is associated with an asset the owner is giving the business.\u00a0 Assets contributed to the business are recorded at the fair market value.\u00a0 Anytime a partner invests in the business the partner receives capital or ownership in the partnership.\u00a0 You will have one capital account and one withdrawal (or drawing) account for each partner.<\/p>\n

      To illustrate, Sam Sun and Ron Rain decided to form a partnership.\u00a0 Sam contributes $100,000 cash to the partnership.\u00a0 Ron is going to give $25,000 cash and an automobile\u00a0with a market value of\u00a0$30,000.\u00a0 Ron is also going to transfer the $20,000 note on the automobile to the business.\u00a0 The journal entries would be:<\/p>\n

      \n\n\n\n\n\n\n\n\n\n\n\n\n
      Account<\/strong><\/td>\nDebit<\/strong><\/td>\nCredit<\/strong><\/td>\n<\/tr>\n
      Cash<\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 100,000<\/td>\n<\/td>\n<\/tr>\n
      \u00a0 \u00a0 S. Sun, Capital<\/td>\n<\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 100,000<\/td>\n<\/tr>\n
      To record cash contribution by owner<\/td>\n<\/tr>\n
      <\/td>\n<\/td>\n<\/td>\n<\/tr>\n
      Cash<\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 25,000<\/td>\n<\/td>\n<\/tr>\n
      Automobile<\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 30,000<\/td>\n<\/td>\n<\/tr>\n
      \u00a0 \u00a0 Note Payable<\/td>\n<\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 20,000<\/td>\n<\/tr>\n
      \u00a0 \u00a0 R. Rain, Capital (25,000 + 30,000 – 20,000)<\/td>\n<\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 35,000<\/td>\n<\/tr>\n
      To record assets and note contributed by owner<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n

      The entries could be separated as illustrated or it could be combined into one entry with a debit to cash for $125,000 ($100,000 from Sam and $25,000 from Ron) and the other debits and credits remaining as illustrated.\u00a0 Either way is acceptable.\u00a0 Since the note will be paid by the partnership, it is recorded as a liability for the partnership and reduces the capital balance of Ron Rain.<\/p>\n

      Partners can take money out of the business whenever they want.\u00a0 Partners are typically not considered employees of the company and may not get paychecks.\u00a0 When the partners take money out of the business, it is recorded in the Withdrawals or Drawing account.\u00a0 Remember, this is a contra-equity account since the owners are reducing the value of their ownership by taking money out of the company.<\/p>\n

      To illustrate, Sam Sun wants to go on a beach vacation and decides to take $8,000 out of the business.\u00a0 Ron Rain wants to go to Scotland and will take $15,000 out of the business.\u00a0 The journal entries would be:<\/p>\n

      \n\n\n\n\n\n\n\n\n\n\n
      Account<\/strong><\/td>\nDebit<\/strong><\/td>\nCredit<\/strong><\/td>\n<\/tr>\n
      S. Sun, Withdrawal<\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 8,000<\/td>\n<\/td>\n<\/tr>\n
      \u00a0 \u00a0 Cash<\/td>\n<\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 8,000<\/td>\n<\/tr>\n
      To record cash withdrawn by owner<\/td>\n<\/tr>\n
      <\/td>\n<\/td>\n<\/td>\n<\/tr>\n
      R. Rain, Withdrawal<\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 15,000<\/td>\n<\/td>\n<\/tr>\n
      \u00a0 \u00a0 Cash<\/td>\n<\/td>\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 15,000<\/td>\n<\/tr>\n
      To record cash withdrawn by owner<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n

      Just as in the previous example, the entries could also be combined into one entry with the credit to cash $23,000 ($8,000 from Sam + $15,000 from Ron) and the debits as listed above instead.<\/p>\n

      Income Allocation<\/h4>\n

      Once net income is calculated from the income statement (revenues – expenses), net income or loss is allocated or divided between the partners and closed to their individual capital accounts.\u00a0 The partners should agree upon an allocation method when they form the partnership.\u00a0 The partners can divide income or loss anyway they want but the 3 most common ways are:<\/p>\n

      \n
        \n
      1. Agreed upon percentages<\/strong>:\u00a0 Each partner receives a previously agreed upon percentage.\u00a0 For example, Sam Sun will get 60% and Ron Rain will get 40%.\u00a0 To allocate income, net income or loss is multiplied by the percent agreed upon.<\/li>\n
      2. Percentage of capital<\/strong>:\u00a0 Each partner receives a percentage of capital calculated as Partner Capital \/ Total capital for all partners.\u00a0\u00a0 Using Sam and Ron, Sam has capital of $100,000 and Ron has capital of $35,000 for a total partnership capital of $135,000 (100,000 + 35,000).\u00a0 Sam’s percentage of capital would be 74% (100,000 \/ 135,000) and Ron’s percentage would be 26% (35,000 \/ 135,000).\u00a0 To allocate income, the percent of capital is multiplied by the net income or loss for the period.<\/li>\n
      3. Salaries, Interest, Agreed upon percent<\/strong>:\u00a0 Since owners are not employees and typically do not get paychecks, they should still be compensated for work they do for the business.\u00a0 In this method, we start with net income and give salaries out to the partners, then we calculate an interest amount based on their investment in the business, and any remainder is allocated using set percentages.\u00a0 This is by far the most confusing so a video example would be helpful.<\/li>\n<\/ol>\n