This document provides information about various types of current liabilities. It defines current liabilities as debts that are expected to be paid within one year or the normal operating cycle from existing current assets or through creating other current liabilities. Notes payable, accounts payable, accrued expenses like taxes and wages, sales taxes payable, and unearned revenues are provided as examples of current liabilities. The relationship between current liabilities and current assets is also discussed, noting that having more current liabilities could indicate an inability to meet obligations. Specific entries are given to record notes payable, interest payable, repayment of a note, sales taxes, and unearned revenues.

1. Accounting Principles 2a
Professor Jose Cintron, MBA
http://mba4help.com
http://www.linkedin.com/in/josecintron

2. www.mba4help.com
Plant assets
Plan Assets are resources that have three characteristics: Physical
substance, Used in the operations of a business, Not intended for sale to
customers. Also called property, plant, and equipment; plant and
equipment; and fixed assets. These assets are expected to provide
services to the company for a number of years

3. www.mba4help.com
Property plan and Equipment
The cost principle requires that companies record plant assets at cost.
The cost of factory machinery includes the purchase price, freight costs
paid by the purchaser, and installation costs. Once cost is established, the
company uses that amount as the basis of accounting for the plant asset
over its useful life.

4. www.mba4help.com
Land
Company acquires real estate at a cash cost of $100,000. The property
contains an old warehouse that is razed at a net cost of $6,000 ($7,500 in
costs less $1,500 proceeds from salvaged materials). Additional
expenditures are the attorney's fee, $1,000, and the real estate broker's
commission, $8,000. Cost of the land is $115,000, computed as follows

5. www.mba4help.com
Delivery truck
Assume that ABC purchases a delivery truck for $15,000 cash, plus sales
taxes of $900 and delivery costs of $500. The buyer also pays $200 for
painting and lettering, $600 for an annual insurance policy, and $80 for a
motor vehicle license. Explain how each of these costs would be
accounted for.

6. www.mba4help.com
Delivery Truck solution
The first four payments ($15,000, $900, $500, and $200) are
expenditures necessary to make the truck ready for its intended use.
Thus, the cost of the truck is $16,600. The payments for insurance and
the license are operating costs and therefore are expensed.

7. www.mba4help.com
Depreciation
Depreciation is the process of allocating to expense the cost
of a plant asset over its useful (service) life. Cost allocation
enables companies to properly match expenses with revenues.
It is important to understand that depreciation is a process of
cost allocation. It is not a process of asset valuation.

8. www.mba4help.com
Computing Depreciation
1. Cost. Recall that companies record plant assets at cost, in accordance
with the cost principle.
2. Useful life. Useful life is an estimate of the expected productive
life, also called service life, of the asset. Useful life may be expressed in
terms of time, units of activity or units of output.
3. Salvage value. Salvage value is an estimate of the asset's value at the
end of its useful life.

9. www.mba4help.com
Computing Depreciation

10. www.mba4help.com
Depreciation Methods
Depreciation is generally computed using one of the following methods:
1. Straight-line
2. Units-of-activity
3. Declining-balance

11. www.mba4help.com
Depreciation Methods
Once a company chooses a method, it should apply it consistently over
the useful life of the asset. Consistency enhances the comparability of
financial statements. Depreciation affects the balance sheet through
accumulated depreciation and the income statement through depreciation
expense.

12. www.mba4help.com
Straight-line method
Under the straight-line method, companies expense the same amount of
depreciation for each year of the asset's useful life. It is measured solely
by the passage of time.
Depreciable cost is the cost of the asset less its salvage value

13. www.mba4help.com
Straight-line method

14. www.mba4help.com
Units-of-Activity
Under the units-of-activity method, useful life is expressed in terms of
the total units of production or use expected from the asset, rather than as
a time period. The units-of-activity method is ideally suited to factory
machinery.

15. www.mba4help.com
Units-of-Activity

16. www.mba4help.com
Comparison of Methods

17. www.mba4help.com
Depreciation and Income Taxes
The Internal Revenue Service (IRS) allows corporate
taxpayers to deduct depreciation expense when they compute
taxable income. However, the IRS does not require the
taxpayer to use the same depreciation method on the tax return
that is used in preparing financial statements.
Taxpayers most likely use a special accelerated-depreciation
method called the Modified Accelerated Cost Recovery
System (MACRS)

18. www.mba4help.com
Individual work
Straight-Line Depreciation
On January 1, 2010, ABC Corp. purchased a new snow-grooming
machine for $50,000. The machine is estimated to have a 10-year life
with a $2,000 salvage value. What journal entry would ABC Corp. make
at December 31, 2010, if it uses the straight-line method of depreciation?

19. www.mba4help.com
Solution
The entry to record the first year's depreciation would be:
Dec. 31 Depreciation Expense 4,800
Accumulated Depreciation 4,800
(To record annual depreciation on snow-grooming machine)

20. www.mba4help.com
Plant Asset Disposals
Companies dispose of plant assets in three ways—retirement, sale, or
exchange—Whatever the method, at the time of disposal the company
must determine the book value of the plant asset. As noted earlier, book
value is the difference between the cost of a plant asset and the
accumulated depreciation to date.
1.Retirement
2.Sale
3.Exchange

21. www.mba4help.com
Retirement of Plant Assets
Retirement of plant assets, assume that Hobart Enterprises retires its
computer printers, which cost $32,000. The accumulated depreciation on
these printers is $32,000. The equipment, therefore, is fully depreciated
(zero book value). The entry to record this retirement is as follows.
Accumulated Depreciation—Printing Equipment 32,000
Printing Equipment 32,000
(To record retirement of fully depreciated equipment)

22. www.mba4help.com
Loss on disposal
If a company retires a plant asset before it is fully depreciated, and no
cash is received for scrap or salvage value, a loss on disposal occurs. For
example, assume that ABC co. discards delivery equipment that cost
$18,000 and has accumulated depreciation of $14,000. The entry is.
Accumulated DepreciationDelivery Equipment 14,000
Loss on Disposal 4,000
Delivery Equipment 18,000
(To record retirement of delivery equipment at a loss)

23. www.mba4help.com
Gain on Disposal
On July 1, 2010, ABC co. sells office furniture for $16,000 cash. The
office furniture originally cost $60,000. As of January 1, 2010, it had
accumulated depreciation of $41,000. Depreciation for the first six
months of 2010 is $8,000. ABC records depreciation expense and
updates accumulated depreciation to July 1 with the following.
July 1 Depreciation Expense 8,000
Accumulated Depreciation—Office Furniture 8,000
(To record depreciation expense for the first 6 months of 2010)

24. www.mba4help.com
Gain on Disposal
July 1 Cash 16,000
Accumulated Depreciation—Office Furniture 49,000
Office Furniture 60,000
Gain on Disposal 5,000
(To record sale of office furniture at a gain)

25. www.mba4help.com
Loss on Disposal
Assume that instead of selling the office furniture for $16,000, ABC sells
it for $9,000. In this case, ABC computes a loss of $2,000 as follows
July 1 Cash 9,000
Accumulated Depreciation—Office Furniture 49,000
Loss on Disposal 2,000
Office Furniture 60,000
(To record sale of office furniture at a loss)

26. www.mba4help.com
Individual work
Plant Asset Disposal
ABC Trucking has an old truck that cost $30,000, and it has accumulated
depreciation of $16,000 on this truck. ABC has decided to sell the truck.
(a) What entry would ABC Trucking make to record the sale of the
truck for $17,000 cash?
(b) What entry would ABC trucking make to record the sale of the truck
for $10,000 cash?

27. www.mba4help.com
Solution
(A)Cash (sale at gain) 17,000
Accumulated Depreciation—Truck 16,000
Truck 30,000
Gain on Disposal [$17,000 - ($30,000 - $16,000)] 3,000
(To record sale of truck at a gain)
(B)Cash (sale at loss) 10,000
Loss on Disposal [$10,000 - ($30,000 - $16,000)] 4,000
Accumulated Depreciation—Truck 16,000
Truck 30,000
(To record sale of truck at a loss)

28. www.mba4help.com
Intangible assets
Are rights, privileges, and competitive advantages that result from the
ownership of long-lived assets that do not possess physical substance.
1. Patents, copyrights, and trademarks.
2. Acquisition of another business, in which the purchase price includes
a payment for the company's favorable attributes (called goodwill).
3. Private monopolistic arrangements arising from contractual
agreements, such as franchises and leases.

29. www.mba4help.com
Accounting for Intangible
Companies record intangible assets at cost. Intangibles are categorized as
having either a limited life or an indefinite life. If an intangible has a
limited life, the company allocates its cost over the asset's useful life
using a process similar to depreciation. The process of allocating the cost
of intangibles is referred to as amortization.

30. www.mba4help.com
Amortization
Amortization is to intangibles what depreciation is to plant assets and
depletion is to natural resources.
To record amortization of an intangible asset, a company increases
(debits) Amortization Expense, and decreases (credits) the specific
intangible asset.
Cost for an intangible asset includes only the purchase price.
Companies expense any costs incurred in
developing an intangible asset.

31. www.mba4help.com
Amortization
Intangible assets are typically amortized on a straight-line basis.
Companies amortize the cost of a patent over its 20-year life or its useful
life, whichever is shorter.
Assume that ABC purchases a patent at a cost of $60,000. If ABC
estimates the useful life of the patent to be eight years, the annual
amortization expense is $7,500 ($60,000 ÷ 8).
Dec. 31 Amortization Expense—Patent 7,500
Patent 7,500
(To record patent amortization)

32. www.mba4help.com
Patent
A patent is an exclusive right issued by the U.S. Patent Office that
enables the recipient to manufacture, sell, or otherwise control an
invention for a period of 20 years from the date of the grant. A patent is
nonrenewable. The initial cost of a patent is the cash or cash equivalent
price paid to acquire the patent.

33. www.mba4help.com
Copyritht
The federal government grants copyrights which give the owner the
exclusive right to reproduce and sell an artistic or published work.
Copyrights extend for the life of the creator plus 70 years.
The useful life of a copyright generally is significantly shorter than its
legal life. Therefore, copyrights usually are amortized over a relatively
short period of time.

34. www.mba4help.com
Trademark
A Trademark or trade name is a word, phrase, jingle, or symbol that
identifies a particular enterprise or product.
The creator or original user may obtain exclusive legal right to the
trademark or trade name by registering it with the U.S. Patent Office.
Such registration provides 20 years of protection. The registration may
be renewed indefinitely as long as the trademark or trade name is in use.

35. www.mba4help.com
Franchise
A franchise is a contractual arrangement between a franchisor and a
franchisee. The franchisor grants the franchisee the right to sell certain
products, provide specific services, or use certain trademarks or trade
names, usually within a designated geographical area.

36. www.mba4help.com
Franchise
When a company can identify costs with the purchase of a franchise or
license, it should recognize an intangible asset. Companies should
amortize the cost of a limited-life franchise (or license) over its useful
life. If the life is indefinite, the cost is not amortized. Annual payments
made under a franchise agreement are recorded as operating expenses.

37. www.mba4help.com
Goodwill
Usually, the largest intangible asset that appears on a company's balance
sheet is goodwill. Goodwill represents the value of all favorable
attributes that relate to a company. These include exceptional
management, desirable location, good customer relations, skilled
employees, high-quality products.

38. www.mba4help.com
Goodwill
Companies record goodwill only when an entire business is purchased.
In that case, goodwill is the excess of cost over the fair market value of
the net assets (assets less liabilities) acquired.
In recording the purchase of a business, the company debits (increases)
the net assets at their fair market values, credits (decreases) cash for the
purchase price, and debits goodwill for the difference.

39. www.mba4help.com
Individual work
Match the statement with the term most directly associated with it.
Copyright- Depletion- Intangible asset- Franchise- Depreciation-R/D-
Amortization- Plant assets- Trade mark- Patent

40. www.mba4help.com
Current Liability
is a debt with two key features: (1) The company reasonably expects to
pay the debt from existing current assets or through the creation of
other current liabilities. (2) The company will pay the debt within one
year or the operating cycle, whichever is longer.

41. www.mba4help.com
Current liabilities to
Current assets
Companies must carefully monitor the relationship of current liabilities
to current assets. This relationship is critical in evaluating a company's
short-term debt-paying ability.
A company that has more current liabilities than current assets may not
be able to meet its current obligations when they become due.

42. www.mba4help.com
Current Liabilities
Current liabilities include notes payable, accounts payable, and unearned
revenues. They also include accrued liabilities such as taxes, salaries and
wages, and interest payable.

43. www.mba4help.com
Notes payable
are often used instead of accounts payable because they give the lender
formal proof of the obligation in case legal remedies are needed to
collect the debt. Notes payable usually require the borrower to pay
interest. Companies frequently issue them to meet short-term financing
needs.

44. www.mba4help.com
Notes Payable
ABC signs a $100,000, 12%, four-month note. With an interest-bearing
promissory note, the amount of assets received upon issuance of the note
generally equals the note's face value. ABC. therefore will receive
$100,000 cash and will make the following journal entry.
Mar. 1 Cash 100,000
Notes Payable 100,000
(To record issuance of 12%, 4-month note to First National Bank)

45. www.mba4help.com
Record interest Payable
ABC makes an adjusting entry as follows:
June 30 Interest Expense 4,000
Interest Payable 4,000
(To accrue interest for 4 months on First National Bank
note)

46. www.mba4help.com
Repayment for the note
At maturity (July 1, 2010), ABC inc. must pay the face value of the note
($100,000) plus $4,000 interest ($100,000 × 12% × 4/12). It records
payment of the note and accrued interest as shown below.
July 1 Notes Payable 100,000
Interest Payable 4,000
Cash 104,000
(To record payment of First National Bank interest-bearing note and
accrued interest at maturity)

47. www.mba4help.com
Sales Taxes Payable
Under most state sales tax laws, the selling company must ring up
separately on the cash register the amount of the sale and the amount of
the sales tax collected.
Mar. 25 Cash 10,600
Sales 10,000
Sales Taxes Payable 600
(To record daily sales and sales taxes)

48. www.mba4help.com
Unearned Revenues
1. When a company receives the advance payment, it debits Cash, and
credits a current liability account identifying the source .
2. When the company earns the revenue, it debits the Unearned
Revenue account, and credits an earned revenue account.
Sells10,000 season football tickets at $50 each for its five-game home
Aug. 6 Cash 500,000
Unearned Football Ticket Revenue 500,000
(To record sale of 10,000 season tickets)

49. www.mba4help.com
Record Revenue
As the school completes each of the five home games, it earns one-
fifth of the revenue. The following entry records the revenue
earned.
Sept. 7 Unearned Football Ticket Revenue 100,000
Football Ticket Revenue 100,000
(To record football ticket revenue earned)

50. www.mba4help.com
Unearned Revenues

51. www.mba4help.com
Analysis- Liquidity
Use of current and noncurrent classifications makes it possible to analyze
a company's liquidity. Liquidity refers to the ability to pay maturing
obligations and meet unexpected needs for cash.
The excess of current assets over current liabilities is working capital

52. www.mba4help.com
Analysis- Liquidity

53. www.mba4help.com
Current Ratio
The excess of current assets over current liabilities is working capital
The current ratio permits us to compare the liquidity of different-sized
companies and of a single company at different times.

54. www.mba4help.com
Payroll
Payroll and related fringe benefits often make up a large percentage of
current liabilities. Employee compensation is often the most significant
expense that a company incurs. For example, Costco recently reported
total employees of 103,000 and labor and fringe benefits costs which
approximated 70% of the company's total cost of operations.

55. www.mba4help.com
Salaries and wages
The term “payroll” pertains to both salaries and wages.
Managerial, administrative, and sales personnel are generally paid
salaries. Salaries are often expressed in terms of a specified amount per
month or per year rather than an hourly rate. Store clerks, factory
employees, and manual laborers are normally paid wages. Wages are
based on a rate per hour.

56. www.mba4help.com
Professionals Fees
The term “payroll” does not apply to payments made for services of
professionals such as certified public accountants, attorneys, and
architects. Such professionals are independent contractors rather than
salaried employees. Payments to them are called fees.

57. www.mba4help.com
Gross earnings
Gross earnings is the total compensation earned by an employee. It
consists of wages or salaries, plus any bonuses and commissions.
Jose, an employee of ABC, worked 44 hours for the weekly pay period
ending January 14. His regular wage is $12 per hour. For any hours in
excess of 40, the company pays at one-and-a-half times.

58. www.mba4help.com
Payroll deductions
As anyone who has received a paycheck knows, gross earnings are
usually very different from the amount actually received. The difference
is due to payroll deductions.

59. www.mba4help.com
FICA
FICA Taxes. In 1937 Congress enacted the Federal Insurance
Contribution Act (FICA). FICA taxes are designed to provide workers
with supplemental retirement, employment disability, and medical
benefits. The benefits are financed by a tax levied on employees'
earnings.

60. www.mba4help.com
When FICA taxes
When FICA taxes were first imposed 1937, the rate was 1% on the first
$3,000 of gross earnings, or a maximum of $30 per year. The rate and
base have changed dramatically since that time!
In 2008, the rate was 7.65% (6.2% Social Security plus 1.45% Medicare)
on the first $102,000 of gross earnings for each employee.

61. www.mba4help.com
Income Taxes
Under the U.S. pay-as-you-go system of federal income taxes, employers
are required to withhold income taxes from employees each pay period.
Three variables determine the amount to be withheld: (1) the employee's
gross earnings; (2) the number of allowances claimed by the employee;
and (3) the length of the pay period.

62. www.mba4help.com
Other Deductions
Other Deductions. Employees may voluntarily authorize withholdings
for charitable, retirement, and other purposes. All voluntary deductions
from gross earnings should be authorized in writing by the employee.

63. www.mba4help.com
Net pay
ABC determines net pay by subtracting payroll deductions from gross
earnings. Illustration shows the computation of Jose's net pay for the pay
period.

64. www.mba4help.com
Freedom Day
In 2008, Americans worked 74 days to afford their federal taxes and 39
more days to afford state and local taxes.
It takes 113 (74 + 39) days to pay your taxes. Thus, April 23 is Tax
Freedom Day. For the past 26 years Tax Freedom Day has occurred in
April, except for the year 2000 when it occurred in May.

65. www.mba4help.com
Employee Earning Records
To comply with state and federal laws, an employer must keep a
cumulative record of each employee's gross earnings, deductions, and net
pay.

66. www.mba4help.com
Payroll register
Payroll register. This record accumulates the gross
earnings, deductions, and net pay by employee for each pay period

67. www.mba4help.com
Recognizing Payroll
Expenses and Liabilities
From the payroll register in ABC co. makes a journal entry to record the
payroll. For the week ending January 14 the entry is:
Jan. 14 Office Salaries Expense 5,200.00
Wages Expense 12,010.00
FICA Taxes Payable 1,376.80
Federal Income Taxes Payable 3,490.00
State Income Taxes Payable 344.20
United Way Payable 421.50
Union Dues Payable 115.00
Salaries and Wages Payable 11,462.50
(To record payroll for the week ending January 14)

68. www.mba4help.com
Recording Payment
of the Payroll
Each paycheck is usually accompanied by a detachable statement of
earnings document

69. www.mba4help.com
Payment of the payroll
Following payment of the payroll, the company enters the check
numbers in the payroll register. ABC co. records payment of the payroll.
Jan. 14 Salaries and Wages Payable 11,462.50
Cash 11,462.50
(To record payment of payroll)

70. www.mba4help.com
Group work
In January, gross earnings in Ramirez Company were $20,000. All
earnings are subject to 8% FICA taxes. Federal income tax withheld was
$4,500, and state income tax withheld was $500. (a) Calculate net pay
for January, and (b) record the payroll.
Record gross earnings as Salaries and Wages Expense, record payroll
deduction as liabilities, and record net pay as Salaries and Wages payable

71. www.mba4help.com
Solutions
Net pay: $20,000 - (8% × $20,000) - $4500 - $500 = $13,400
Salaries and Wages Expense 20,000
FICA Taxes Payable 1,600
Federal Income Taxes Payable 4,500
State Income Taxes Payable 500
Salaries and Wages Payable 13,400
(To record payroll)

72. www.mba4help.com
Employer Payroll Taxes
Payroll tax expense for businesses results from three taxes that
governmental agencies levy on employers. These taxes are: (1) FICA, (2)
federal unemployment tax, and (3) state unemployment tax. These taxes
plus such items as paid vacations and pensions are collectively referred
to as fringe benefits.

73. www.mba4help.com
FICA Taxes
Each employee must pay FICA taxes. In addition, employers must match
each employee's FICA contribution. The matching contribution results in
payroll tax expense to the employer. The employer's tax is subject to the
same rate and maximum earnings as the employee's.

74. www.mba4help.com
The Federal Unemployment Tax Act (FUTA) is another feature of the
federal Social Security program. Federal unemployment taxes provide
benefits for a limited period of time to employees who lose their jobs
through no fault of their own. The FUTA tax rate is 6.2% of taxable
wages. The taxable wage base is the first $7,000 of wages paid to each
employee in a calendar year.
Federal Unemployment
Tax Act (FUTA)

75. www.mba4help.com
State unemployment(suta)
All states have unemployment compensation programs under state
unemployment tax acts (SUTA). Like federal unemployment taxes, state
unemployment taxes provide benefits to employees who lose their jobs.
These taxes are levied on employers.

76. www.mba4help.com
Employer Payroll Taxes

77. www.mba4help.com
Employer payroll taxes
Companies usually record employer payroll taxes at the same time they
record the payroll.
Jan. 14 Payroll Tax Expense 2,443.82
FICA Taxes Payable 1,376.80
Federal Unemployment Taxes Payable 137.68
State Unemployment Taxes Payable 929.34
(To record employer's payroll taxes on January 14 payroll)

78. www.mba4help.com
Filing and Remitting
Payroll Taxes
For purposes of reporting and remitting to the IRS, the company
combines the FICA taxes and federal income taxes that it withheld.
Companies must report the taxes quarterly, no later than one month
following the close of each quarter. The remitting requirements depend
on the amount of taxes withheld and the length of the pay period.
Companies generally file and remit federal unemployment taxes annually
on or before January 31 of the subsequent year.

79. www.mba4help.com
(Form W-2)
Employers also must provide each employee with a Wage and Tax
Statement (Form W-2) by January 31

80. www.mba4help.com
Partnership form of
organization
A partnership is an association of two or more persons to carry on as co-
owners of a business for profit.
Partnerships are fairly easy to form. People form partnerships simply by
a verbal agreement (less than a year), or by written agreement.
A partnership is a legal entity. A partnership can own property
(land, buildings, equipment), and can sue or be sued. A partnership also
is an accounting entity.

81. www.mba4help.com
Partnership and taxes
The net income of a partnership is not taxed as a separate entity. But, a
partnership must file an information tax return showing partnership net
income and each partner's share of that net income. Each partner's share
is taxable at personal tax rates, regardless of the amount of net income
each withdraws from the business during the year.

82. www.mba4help.com
Mutual Agency
Mutual agency means that each partner acts on behalf of the partnership
when engaging in partnership business. The act of any partner is binding
on all other partners. This is true even when partners act beyond the
scope of their authority, so long as the act appears to be appropriate for
the partnership.

83. www.mba4help.com
Limited Life
A partnership may be ended voluntarily at any time through the
acceptance of a new partner or the withdrawal of a partner. Partnership
dissolution occurs whenever a partner withdraws or a new partner is
admitted. Dissolution does not necessarily mean that the business ends.
If the continuing partners agree, operations can continue without
interruption by forming a new partnership.

84. www.mba4help.com
Unlimited Liability
Each partner is personally and individually liable for all partnership
liabilities. Creditors' claims attach first to partnership assets. If these are
insufficient, the claims then attach to the personal resources of any
partner, irrespective of that partner's equity in the partnership. Because
each partner is responsible for all the debts of the partnership, each
partner is said to have unlimited liability

85. www.mba4help.com
Co-Ownership of Property
Partners jointly own partnership assets. If the partnership is
dissolved, each partner has a claim on total assets equal to the balance in
his or her respective capital account. This claim does not attach to
specific assets that an individual partner contributed to the firm.

86. www.mba4help.com
Share Income or loss
Partnership net income (or net loss) is also co-owned. If the partnership
contract does not specify to the contrary, all net income or net loss is
shared equally by the partners. As you will see later, though, partners
may agree to unequal sharing of net income or net loss.

87. www.mba4help.com
Limited partnership
“Ltd.,” or “LP”
In a limited partnership, one or more partners have unlimited liability and
one or more partners have limited liability for the debts of the firm.
Those with unlimited liability are general partners. Those with limited
liability are limited partners.
Limited partners does not get involved in management.

88. www.mba4help.com
Limited Liability Partnership
In an LLP, all partners have limited liability. No general partners.
The LLP is designed to protect innocent partners from malpractice or
negligence claims resulting from the acts of another partner.
These professional partnerships vary in size from a medical/Lawyer
partnership of three to five doctors, up to couple hundred partners.

89. www.mba4help.com
Limited Liability Companies
A hybrid form of business organization with certain features like a
corporation and others like a limited partnership is the limited liability
company, or “LLC.” An LLC usually has a limited life. The
owners, called members, have limited liability like owners of a
corporation. the members of a limited liability company (LLC) can
assume an active management role.
Income tax purposes, the IRS usually classifies an LLC as a partnership.

90. www.mba4help.com

91. www.mba4help.com
One major advantage of a partnership is to combine the skills and
resources of two or more individuals.
Partnerships are easily formed and are relatively free from government
regulations and restrictions.
Partners generally can make decisions quickly on substantive business
matters without having to consult a board of directors.
Advantages & Disadvantages

92. www.mba4help.com
The Partnership Agreement
The partnership agreement contains such basic information as the name
and principal location of the firm, the purpose of the business.
1. Names and capital contributions of partners.
2. Rights and duties of partners.
3. Basis for sharing net income or net loss.
4. Provision for withdrawals of assets.
5. Procedures for submitting disputes to arbitration.
6. Procedures for the withdrawal or addition of a partner.
7. Rights and duties of surviving partners in the event of a partner's
death.

93. www.mba4help.com
Partner's initial investment
Each partner's initial investment in a partnership is entered in the
partnership records. The partnership should record these investments at
the fair market value of the assets at the date of their transfer to the
partnership. All partners must agree to the values assigned.

94. www.mba4help.com
The partnership records
the investments
Investment of A. Rolfe
Cash 8,000
Office Equipment 4,000
A. Rolfe, Capital 12,000
(To record investment of Rolfe)
Investment of T. Shea
Cash 9,000
Accounts Receivable 4,000
Allowance for Doubtful Accounts 1,000
T. Shea, Capital 12,000
(To record investment of Shea)

95. www.mba4help.com
Dividing Net Income
or Net Loss
Partners equally share partnership net income or net loss unless the
partnership contract indicates otherwise. The same basis of division
usually applies to both net income and net loss.

96. www.mba4help.com
Closing Entries
As in the case of a proprietorship, a partnership must make four entries
in preparing closing entries. The entries are:
1. Debit each revenue account for its balance, and credit Income
Summary for total revenues.
2. Debit Income Summary for total expenses, and credit each expense
account for its balance.
3. Debit Income Summary for its balance, and credit each partner's
capital account for his or her share of net income. Or, credit Income
Summary, and debit each partner's capital account for his or her share of
net loss.
4. Debit each partner's capital account for the balance in that partner's
drawing account, and credit each partner's drawing account for the same
amount.

97. www.mba4help.com
First two entries
The first two entries are the same as in a proprietorship. The last two
entries are different because (1) there are two or more owners' capital
and drawing accounts, and (2) it is necessary to divide net income (or net
loss) among the partners.

98. www.mba4help.com
The last two closing
entries are:
AB Company has net income of $32,000 for 2010. The partners, L.
Arbor and D. Barnett, share net income and net loss equally. Drawings
for the year were Arbor $8,000 and Barnett $6,000.
Dec. 31 Income Summary 32,000
L. Arbor, Capital ($32,000 × 50%) 16,000
D. Barnett, Capital ($32,000 × 50%) 16,000
Dec. 31 L. Arbor, Capital 8,000
D. Barnett, Capital 6,000
L. Arbor, Drawing 8,000
D. Barnett, Drawing 6,000
(To close drawing accounts to capital accounts)

99. www.mba4help.com
Capital and drawing Acct.
Assume that the beginning capital balance is $47,000 for Arbor and
$36,000 for Barnett. After posting the closing entries, the capital and
drawing accounts will appear as shown

100. www.mba4help.com
Salaries to partners and
interest on partners
Salaries to partners and interest on partners'' capital are not expenses of
the partnership. Therefore, these items do not enter into the matching of
expenses with revenues and the determination of net income or net loss.
For a partnership, as for other entities, salaries expense pertains to the
cost of services performed by employees.
When the partnership agreement permits the partners to make monthly
withdrawals of cash based on their “salary,” the partnership debits these
withdrawals to the partner's drawing account
End part 1