Financial Accounting - Assessment Item 2 — Written Component

Assessment item 2

Written component

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Step 1: Session Preparation(5 marks) No Word Limit

1. Partnership: Chapter 15 of your set textbook, Accounting 9e

Ch 15 formation, operation and reporting

15. 1 Partnership Defined

When I first started studying Accounting (I am studying to be an Industrial Technology and Design teacher – I know it seems weird but as a second area I think this is the most practical), it struck me that anyone who goes into business must be a special blend of crazy and brave. But now looking at a partnership, I realise that there is a new level of crazy and brave if you are willing to go into business with unlimited personal liability for loss with another human being! A partnership is therefore the bringing together of two or more individuals for the purpose of conducting a business. A financial marriage for those willing to blend their assets and skills and accept the outcome be it a profit or a loss. While there will be a separate account that details each individual’s partner’s investment and therefore share of the business, the liability is still squarely on the shoulders of the owners divided up as they decide. Just scary. In Australia, it is even possible to have a partnership without a written agreement. Nuts. While, it is possible to construct a limited liability partnership, this text focuses on the first type. Not something I want to do but like a house fire, something I am strangely drawn to.

15.2 Advantages and characteristics of a partnership

But I am getting too negative. I need to try to see the advantages to this legally binding business structure. Ok – partners get to pool their assets and skills giving them the greater possibility of success. Yes, partnerships are less costly and regulated than businesses to establish that there is flexibility within the way the partners may operate. Right.

Characteristics of a Partnership

• Mutual Agency

This characteristic is that under the terms of the Partnership Act, one partner may act on behalf of all partners. This includes binding the partnership to a contract without explicit agreement of all partners. A plus for expedient action and a minus for considered and agreed action. How on earth do multiple individuals all agree to be bound by the actions of each and every one of them?

• Unlimited Liability

This is where each partner is responsible for the financial and legal obligations of the partnership. Oh boy. Really? So this means if I tie myself to a well-intentioned idiot, I could be forced in bankruptcy because of that. Ain’t nobody got time for that. Do people really trust each other enough to do this?

• Limited life

Partnerships have a limited life span and are tied to the existence of the partners. If one partner dies, then the partnership goes belly up too. Such a fragile business structure. People die all the time and this would again mean a devastation for the surviving partners.

• Transfer of partnership interest

As a partner, you are only entitled to the share of the assets and profits agreed to. This does not mean an automatic assignment of a management role. This could be a good thing if the one partner does not have the expertise but rather the assets needed to run the business but again could be a source of conflict in an already rocky state of existence.

15.3 Partnership Agreement

So this partnership agreement which can be written or verbal is basically the contract between the partners which sets out the big important pieces of the partnership like ownership share and the distribution of the losses or profits as well as the management duties assigned to each partner as well as the nature of the business. How anything is important could be verbal is beyond me. I don’t like jumping out of perfectly good aeroplanes either but skydiving seems as popular as going into business with someone.

15.4 Accounting for a partnership

As per a Sole Trader, the activities of the partnership are separated from the partner’s personal finances though in the eyes of the Australian Taxation Office, due to the unlimited liability, they are the same entity. This means that there is logically two methods of accounting available;

• The use of capital accounts for the recording of each partner’s current status within the partnership

• The use of drawings and retained earnings to account for