 Hello and welcome to the session. This is Professor Farhad and the session would look at entries to form a partnership. This topic is covered financial accounting as well as advanced accounting and advanced accounting. Obviously, I do have the topic covered in a much advanced level. This topic is also covered on the CPA exam, the far section. If you haven't connected with me on LinkedIn, please do so. YouTube is where you would need to subscribe. I have 1,700 plus accounting, auditing, finance and tax lectures. If you like my recording, please like them, share them, subscribe to the channel. If they help you, it means they might help other people, share the wealth, connect with me on Instagram. On my website, farhadlectures.com, you will find additional resources to supplement your accounting education and your CPA exam, CMA exam, enrolled agent exam or any other course you might be taking. So let's start by looking at the partners. When the partners invest in a business, they can invest both assets. Notice they can invest both assets and liabilities. What does that mean? It means you might contribute a piece of equipment, but you might have a loan against that piece of equipment. So when you contribute the piece of equipment, the loan comes with it. So that's why you might contribute both assets and liabilities. Asset and liabilities are recorded and agreed upon normally the fair market value. How do you determine how much you contributed? Usually it's the fair market value. And every time a partner contribute asset, every time the partner gives asset, so you have a partner here and they give asset to the company. Well, their capital account goes up. And obviously every time, without even saying this, the partnership gives asset back, usually cash to the partner, their capital, not their capital, you're going to say their withdrawal account goes up. Because when you withdraw money from the company, your capital account simply decreases. So withdrawals from the partnership decrease the capital's account. So your withdrawals goes up. It means your capital goes down. So every time you contribute asset, your capital account goes up. Every time you take money away or assets away, your capital goes down. So let's take a look at an example at the initial, initial contribution. On January 11th, Zane and Hector Perez, so we have Zane and Perez organize a partnership called Boards. Zane's initial investment is $7,000 cash, $33,000 in boarding facilities and an old payable comes with the boarding facilities they have alone against those. Perez only contributed $10,000 cash. So simply put, Zane contributed cash of $7,000 equipment of, or you know, I'm going to call it equipment. You can call it equipment, boarding facilities, whatever. Then with this equipment comes in notes payable of $10,000. So this is what they contributed. They contributed cash, equipment and notes. Now what is their capital account? How much did their capital account went up by? Well, they contributed in total $40,000 of assets minus $10,000 in liabilities. Because if they get out of the liability it means it's as if the company gave them back the money. Because when you transfer a liability it's as someone gave you the money to that liability. So they contributed $30,000 in their capital. Therefore Zane capital account increased by $30,000. Let's take a look at the journal entry and this is what it looks like. Cash goes up, boarding facilities or equipment goes up, the note goes up. So notice this is $40,000 minus $10,000. So their capital goes up by $30,000. Now for Perez it's pretty straightforward. They contributed only $10,000 in cash. Well debit cash, credit capital of $10,000. Let's look at organizing a partnership. In accounting for partnership what's going to happen is the partners withdrawals are debited to their own separate account. So when the owner takes money out the account is debited to their own personal account. So basically what's going to happen, I'll tell you this is like a funny story not a funny story but something from the real world. When I was in practice we had a pizzeria and had like maybe 10 different locations in an area called the Lehigh Valley. And there were Italians and a lot of names Tony. Tony first name and the same obviously I cannot tell you the last name but the same last name. So Tony last name, Tony last name but they had like second, third, fourth, so on and so forth. So when we were doing their financial statements or when we were doing actually especially their tax return we wanted to make sure which Tony took the money out because each Tony had their own separate withdrawal account just like each Tony will have their own capital account. So that's very important. So partners capital are credited or debited to their shares of net income or net loss when closing the accounts. So when we we're going to see this in the next session when we allocate net income so basically once the partnership generate net income that net income is allocated to the various partners. Well when that income is allocated it's also allocated to each partner's capital account separately. And obviously if we have a net loss it reduces our loss account. Also each partner's withdrawal account is close to that partner's capital account. So Tony first withdrawals is close to Tony first capital. So it's each individual they have their own personal capital account and personal withdrawal account. For example they just say if I am a sole proprietorship which is I am right now I'm operating a sole proprietorship and my company have an account called Farhat Capital and I also have an account called Farhat Withdrawals. So when I contribute money or when I have net income my capital goes up when I take money out my withdrawal account goes up as a result my capital goes down. So I have two separate account one for capital and one for withdrawals. Let's take a look at an example to see how this all fits together Libran and Durant organize a partnership on January 1st Libran initial investment was 1,500 consisting 350 in cash and 1,500 in equipment with the notes payable on that equipment for 500 so simply put 350 in cash now for the equipment you would say great they gave the partnership 1,500 worth of equipment but remember this equipment had a loan the loan would reduce your would reduce it by 500 dollars so basically the net is 1,150 for the equipment. Now what is the net amount? Well if you contributed 1,150 plus 350 that's equal to 1,500 which is the cash is the total contribution so simply put cash 350 equipment 1650 the note would reduce the contribution of this to 1,150 so this is the net equipment then Libran in total contributed 1,500 Durant initial investment is cash 800 pretty straightforward debit cash credit the capital for Durant so notice we have two separate capital account for each partner now each partner will have their own withdrawal account we'll see that later on once we allocate income and start to take money out of the business in the next session we would look at allocating income among partners or losses please if you like this recording like it share it subscribe visit my website for additional resources if you're looking to invest a little bit more in your education especially pass your CPA exam good luck study hard especially during those coronavirus days thank you