Question

i want to know the methodology of the partnership firm project

Answer 1

A partnership consists of an entity created by two or more individuals, called partners, who conduct a business for profit. Partnership transactions consist of a partner’s investment, the division of the partnership’s profit and losses, a partner’s withdrawal from the business and the liquidation of the partnership. Some partner-related transactions are accounted for using the exact, bonus or goodwill method. Division of profits and losses are usually based on the terms disclosed in a partnership agreement. method, any difference between the partner’s investment and the book value of the interest is distributed as a “bonus” to the old partners or new partner. If the investment amount is larger than the book value of the interest, the bonus is allocated to the old partners; if the investment amount is less than book value, the bonus is allocated to the new partner. Under the goodwill method, any difference between the partner’s investment and book value of the capital interest purchased is recorded as goodwill, an intangible asset. Partnership Liquidation

When a partnership is liquidated, all liabilities must be paid off and losses must be accounted for before any remaining capital is distributed to the partners. If one of the partners has a capital deficiency, the negative balance can be offset against the partner’s loan account, if one is available. A negative capital balance can also be absorbed by the remaining partners, according to their profit and loss ratios.



Distribution of Profits and Losses

A partnership’s profits and losses can be split equally among all partners or according to a partnership agreement. For example, partners X , Y and Z have a partnership agreement that states profits and losses are shared 70:20:10. In the absence of an agreement, it is assumed that division of profits and losses are equal among all partners. Any guaranteed payments, such as salaries, are deducted before any profit or loss amounts are allocated to each partner. Unless the agreement states otherwise, these payments must be paid and may increase a partnership loss.

market value. The difference between the re-valued assets and the withdrawing partner’s capital balance is allocated to the remaining partners based on their profit and loss ratios. Under the goodwill method, the assets are also revalued and “goodwill” is allocated to all partners according to their profit and loss ratios. The withdrawing partner’s adjusted capital balance is the pay off amount.