Updated: Jul 2, 2022
Suppose you choose to start your business as a sole proprietorship.
In that case, it is possible that, as the business expands, you will need to bring on more individuals, either to gain access to additional sources of funding or to provide a different experience.
The formation of a partnership is one approach that can be taken to meet these requirements.
A partnership is formed when two or more persons carry on a business for profit as co-owners.
Partnership Formation Accounting
When the partnership is founded initially, financial resources are contributed to it by each of the members.
The capital can be brought in either in the form of currency or in some other form completely, such as equipment, machinery, buildings, or accounts receivable.
If the capital is contributed in a form other than cash, it is always contributed to the partnership at the equivalent amount of its fair value.
For example, the formation of a partnership between two people, who will be referred to here as partner Chin and partner Tan.
Under these circumstances, a typical entry in the books of the partnership may look something like this:
Introduction of Cash into a Partnership
Partner Chin contributes RM10,000 in the form of cash. The following entry would be entered in the bookkeeping journal with double entries:
Introduction of a Fixed Assets in a Partnership
A piece of equipment with an estimated worth of RM20,000 is brought by Partner Tan. (non-cash assets are always accounted for at fair market value when introduced to the partnership).
The following entries are to be posted in the double-entry bookkeeping journal:
Introduction of Accounts Receivable into a Partnership
Additionally, Partner Chin contributes a total of RM12,000 in accounts receivable, of which the partnership anticipates that it will be able to recover RM10,000.
In this scenario, the gross value of the accounts receivable needs to be recorded (to reflect the total amount receivable from the customers), and the reduction to fair value is accounted for by changing the value on the allowance for doubtful debts account.
Ultimately, the reduction to fair value is reflected in the account balance.
The following are the entries that were made into the partnership's books:
After all of these accounting entries for the formation of the partnership, the balance sheet of the partnership would look like this at the end of the process:
The capital injected by each partner in this partnership is RM20,000, resulting in a 1:1 capital injection ratio.