Advanced Accounting

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AdvancedAccounting

• Professor William F. OBrien, MBA, CPA

Fall 2007
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Session 2--Partnerships

• Advanced Accounting
• Partnerships

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Partnership

• Association of 2 or more entities, who
• Contribute resources
• Operate as co-owners
• Share profits and losses
• Joint ventures are partnerships

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Partnership Types

• General no risk limits
• Limited limits on risk

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Partnership Features

• Ease of formation
• Potential for non-continuity of ownership
• Disposal difficulty
• Unlimited liability potential
• Mutual agency binding and openness
• P L sharing
• Form 1065 non-taxable status
• Psychological needs
• Often stepping stone to incorporation

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CPA Role in Partnerships

• Explanation of key accounting concepts (ie. cash
  versus accrual)
• Advice regarding alternative sharing methods
• Tax ramifications versus other operating forms

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Partnership Accounting Considerations

• GAAP not required
• Cash basis is OK
• Prior period adjustments are common
• Current value accounting more prevalent
• Goodwill can exist without a business combination
• Partner accounts
• Capital contributions and withdrawls
• Drawing contra capital temporary account
• Loans

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Contributions
Tax accounting is not our focus.

• At current value for book purposes
• At adjusted basis for tax

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Sharing Methods
Basic accounting Income Summary Account
XXX Capital-Partner A
XXX Capital-Partner B XXX

• Ratios
• Salary 1st then ratios
• Imputed interest, salaries, then ratios
• Order of priority subject to profit
• Other approaches
• Capital balances
• Assigned billings and expense sharing
• Performance methods

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Changes to Sharing Method

• Revalue to current value
• Prospectively apply new method

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Key Point

• The language in the partnership agreement must be
  specific and thorough
• Legal review is recommended