Week 7:Partnerships, Corporations & Other Organisations

ProprietorshipsLO 1A proprietorship is a company owned by a single individual.Simple to formNo limitation on legal liabilityNot taxableLimited lifeLimited ability to raise capital (funds)

PartnershipsA partnership is an association of 2 or more persons who own and manage a business for profit. No limitation on legal liabilityNot taxableLimited lifeLimited ability to raise capital (funds)LO 1

Partnership Agreement/DeedA partnership agreement includesLength of existence of partnership Nature of businessduties & responsibilities of the partners to each other & to others outside the firm amount of capital contributed by each partnerProfit/loss sharing arrangementPartners salariesInterest paid on partners capital & advancesInterest charged on drawingsWhat happens when a partner dies, retires, leaves or becomes bankrupt, or when a new partner is admittedLO 1

PartnershipsA limited partnership is a unique legal form that provides partners who are not involved in the operations of the partnership with limited liability.There must be at least one general partner who operates the partnership.The remaining partners are considered limited partners.LO 1

Advantages of PartnershipsEasier & less expensive to form (v. corporations)Less formal & more flexible (v. corporations)Utilises talents/skills of more than 1 person (v. proprietorship)Can obtain more capital (v. proprietorship)Less risk faced (v. proprietorship)LO 1

Disadvantages of PartnershipsEach partner liable for debts of partnership (not limited liability)Any contract made by a partner is binding on all other partnersToo many cooks spoil the brothPartnership has to be reformed whenever a new partner joins, or when an old partner withdraws/retires/dies.LO 1

LO 5Statement of Partnership EquityThe changes in the partners capital accounts for a period of time are reported in a statement of partnership equity.There is a capital account for each partner.Starts with capital balances at the beginning of the accounting periodReflects additional investments, made by the partners during the yearAlso reflects net income for the period, and withdrawals.

LO 5Statement of Partnership EquityAdditional investments and allocated net income increase capital accounts of the partners. All kind of allowances, like salary allowances and capital allowances, are treated as withdrawals.Withdrawals reduce capital accounts. The end result is capital balances of the partners at the end of the accounting period.

LO 5Statement of Partnership Equity

Partner APartner BTotalCapital, Jan. 1, 20X840,00030,00070,000Additional investments10,00020,00030,000Capital plus investments50,00050,000100,000Net income for the year60,00040,000100,000Balance110,00090,000200,000Withdrawals30,00020,00050,000Capital, Dec 31, 20X880,00070,000150,000

Corporations/CompaniesA corporation is a legal entity, distinct and separate from the individuals who create and operate it. As a legal entity, a corporation may acquire, own, and dispose of property in its own name.A corporation sells shares of ownership, called shares or stock.The shareholders who own the shares own the corporation. can buy and sell shares without affecting the corporations operations or continued existence.

LO 1

Corporations whose shares are traded in public markets are called public corporations/public companies/public limited companies (plcs).Corporations whose shares are not traded publicly are usually owned by a small group of investors and are called private corporations. The shareholders of all corporations have limited liability.

LO 1Corporations/Companies

The shareholders control a corporation by electing a board of directors. This board meets periodically to establish corporate policy. It also selects the chief executive officer (CEO) and other major officers.

LO 1Corporations/Companies

Corporations/CompaniesA corporation has limited shareholders liability.A corporation is subject to taxes. Thus, the corporate form has the disadvantage of double taxation.

LO 1

Non-profit organisationsentities that receive significant amounts of revenue from providers who do not receive equivalent amounts of services operate for purposes other than providing goods or services at a profit do not possess ownership interests like those of business entitiesE.g. hospitals/clinics, universities/colleges, clubs/societies, charities

LO 1

Accounting for non-profit organisationsThe day-to-day accounting consists of maintaining:Cash book for recording receipts and paymentsLedger for classification of transactions under proper headings.LO 1

Accounting for non-profit organisationsReceipts & payments book:does not show expenses and incomes on accrual basis (but is done on cash basis)does not show whether the club or society is able to meet its day-to-day expenses out of its incomes.does not show expenses on account of depreciation of assets.does not explain the details about many expenses and incomes. In order to explain such questions, treasurer of the club prepares 'Income and expenditure account' and balance sheet.LO 1

Accounting for non-profit organisationsIncome and expenditure accountdiscloses whether the organisation has earned or lost.prepared on "accrual basis" (not on receipt basis)all incomes & expenses are included (whether actually received/paid or not). LO 1

Accounting for non-profit organisationsSpecial accounting itemsLegacy: amount received via the 'will' of a donor. Annual members subscriptionsLife membership fees: lump sumEntrance feesHonorarium: for lecturesDonations: for a specific purpose & generalEndowment fund: donation of a source of permanent income. LO 1

Accounting for non-profit organisationsSpecial accounting itemsProceeds of concerts, lectures and dramas or cultural showsGovt. grantsLO 1

Accounting for PartnershipsCapital accountsCapital contributed by partners assets, or cashCapital accounts will be credited by the value of the assets/cash contributedE.g. W & L are partnersW contributes RM50,000 cashL contributes equipment valued at RM30,000Accounting entries are:Dr CashRM50,000Cr Capital, WRM50,000

Dr Equipment RM30,000Cr Capital, LRM30,000

Accounting for PartnershipsFixed & Current Capital accountsFixed capital accounts original amounts contributed are unchangedCurrent capital accounts will recordSharing of profits/lossesInterest on partners advances & capitalInterest on drawingsPartners salaries

Accounting for PartnershipsSharing of profits & lossesCan be shared on any agreed basisUsually based on fixed capital contributionsThe Profit & Loss Appropriation AccountAn extension of the income statementShows how the net profit/loss is shared by partnersExample to come later.

Accounting for PartnershipsDrawingsWithdrawals by partners from the business.Interest on drawings may be charged by the partnership, on the partners making the withdrawals.Interest on capitalPayment to the partners on their capital contributionThe partner who contributes more capital will get a larger interest.

Accounting for PartnershipsPartners salariesUsually paid to partners who contribute time in the management of the partnershipSleeping partners are those who do not actively manage the partnership

Accounting for PartnershipsWorking Example 1:Amos, Benny & Claus are partners, sharing profits & losses in the following proportions: 3:2:1.By the partnership agreement, partners are to be credited with interest on capital & charged with interest on drawings.Net profit for the year is RM168,000.Partners salaries are as follows:Amos RM48,000Benny RM50,000Claus RM45,000

Accounting for PartnershipsWorking Example 1:Interest on capital is as follows:Amos RM6,000Benny RM4,000Claus RM2,000Interest on drawings is as follows:Amos RM380Benny RM420Claus RM270Capital accounts of the partners as at 31.12.2010 are as follows:Amos RM200,000Benny RM150,000Claus RM100,000

Accounting for PartnershipsWorking Example 1:Partners drawings are as follows:Amos RM10,000Benny RM20,000Claus RM30,000

Accounting for Partnerships

Profit and loss appropriation accountRMNet profit168,000Add: interest on drawings1,070Less: Partners salaries(143,000)Less: Interest on capital(12,000)14,070Share of partnership:Amos (3/6 x 14,070)7,035Benny (2/6 x 14,070)4,690Claus (1/6 x 14,070)2,345

Accounting for Partnerships

Partners capital accountDrawings10,00020,00030,000Bal b/f200,000150,000100,000Interest on drawings380420270Interest on capital6,0004,0002,000Bal c/f202,655138,27074,075Share of profits7,0354,6902,345213,035158,690104,345213,035158,690104,345

Accounting for PartnershipsWorking Example 2:Xandria, Yasmin & Zaitun had the following trial balance extracted from the books of their partnership on 31.1.2011. The balances are stated BEFORE considering interest on capital and interest on drawings.X, Y & Z share profits & losses in the ratio 2:2:1 respectively.

Accounting for Partnerships

X, Y & Z: Trial balance as at 31.1.2011RMRMCapital accounts:X200,000Y200,000Z130,000Current accounts:X65,000Y52,000Z38,000Salaries:X72,000Y65,000Z54,000

Accounting for Partnerships

X, Y & Z: Trial balance as at 31.1.2011RMRMProperty430,000Equipment160,000Motor vehicles110,000Inventory as at 31.1.201126,000Loan120,000Accounts receivable15,000Accounts payable23,000Net profit for the year124,000Cash at bank20,000952,000952,000

Accounting for PartnershipsWorking Example 2:No entries were made in the books of the partnership for the following matters:Interest on capital will be equal to 5% of the balances in the capital accounts.Interest on drawings were determined as RM1,200 for Xandria, RM1,200 for Yasmin and RM800 for Zaitun.

Accounting for Partnerships

Profit and loss appropriation accountRMNet profit124,000Add: interest on drawings (1,200 + 1,200 + 800)3,000Less: Partners salaries(72,000 + 65,000 + 54,000)(191,000)Less: Interest on capital(10,000 + 10,000 + 6,500)(26,500)Loss(90,500)Share of loss of partnership:Xandria (2/5 x -90,500)(36,200)Yasmin (2/5 x -90,500)(36,200)Zaitun (1/5 x -90,500)(18,100)

Accounting for Partnerships

Partners current accountsInterest on drawings1,2001,200800Bal b/f65,00052,00038,000Bal c/f37,60024,60025,600Interest on capital10,00010,0006,500Share of losses(36,200)(36,200)(18,100)38,80025,80026,40038,80025,80026,400

Accounting for non-profit organisationsThe receipts and payments book of the ABC Sports Club as at 31 December 2010 showed the following:Members subscriptions - 5,110Sales of annual dinner tickets 2,500Annual dinner expenses 1,749Electricity and water expenses - 1,250Donations to charities - 3,000

Accounting for non-profit organisationsThe following balances as at 31 December are also relevant:Prepare an Income and Expenditure Account for the ABC Sports Club for the year ended 31 December 2010.

As at 2009As at 2010RMRMPrepaid subscriptions310410Subscriptions in arrears2440Rent unpaid200

Accounting for non-profit organisations

SubscriptionsArrears b/f (Debtors)24Prepaid b/f(Creditors)310Prepaid c/f410Received in 20105,110Income & Expenditure A/c5,026Arrears c/f405,4605,460

Accounting for non-profit organisations

ABC Sports Club Income and Expenditure Account for the year ended 31.12.2010IncomeRMNet members subscriptions5,026Sales of concert tickets2,500Total income7,526

Expenditure Concert expenses1,749Electricity & water expenses1,250Rent 200Donations to charities3,000Total expenditure6,199Net surplus (if negative, called deficit)1,327

No limitation on legal liabilityEach partner is fully liable for the debts of the partnership.Partnership not considered a separate entity from the partnersIn other words, if claims are made against the partnership and the partnership assets are not enough to meet these claims, the partners themselves will be personally responsible out of their personal assets.

Note: Bal b/f has already taken into account partners salaries & drawings.