Special features of company financial statements include:
Profit and loss account
The profit and loss account will be charged with directors’ remuneration and auditors’ remuneration. If the company has borrowings in the form of loan of debenture stock, the profit and loss account will be charged with interest. Company profits are assessable to corporation tax and the profit and loss account thus includes a charge of tax on profits. Finally, the profit and loss account will show appropriations of profit, for example, dividends paid and proposed.
Balance sheet
The balance sheet will include liabilities for tax and proposed dividends. If may also include long-term liabilities in the form of loan or debentures stock. Finally, the capital section of the balance sheet will include share capital reserves.
Company financial statements to be presented to shareholders are subject to detailed disclosure requirements. The illustration below shows the preparation of accounts in a form suitable for presentation internally.
Presidential realization and interim distributions
When assets are realized piecemeal, the partners may desire, as soon as all liabilities have been discharged, to withdraw immediately such as is available for decision between them rather than wait until all the assets have been sold. In such circumstances, subject to any contrary agreement between the partners, the interim payments to the partners should be of such amounts that even though the remaining assets prove to be worthless no partner will receive more than the amount to which he is ultimately found to be entitled after being debited with his proper share of the total loss sustained on realization of all assets. To enable this to be done the proceeds of realization of assets must first be applied in repaying to partners any sums necessary to reduce their capitals to amounts which will bear the same proportion to the total capital as those in which profits and losses are shared.
Amalgamation of firms
Where members of two or more partnerships decide to amalgamate, the transaction resolves itself into the dissolution of the existing partnerships and the formation of a new one. For the purposes of the amalgamation, it is probable that the goodwill and other assets of the original firms will be revalued, and the capitals of the respective partners adjusted by reference to the profit or loss arising on such revaluation, before arriving at the amount of capital introduced by each partner into the new firm. Where the capital of the new firm is a fixed amount, to be provided by the partners in specified proportions or sums, it may be necessary, after giving effect to the agreed revaluation of assets, for cash to be withdrawn or paid in by one or more of the partners in order to adjust the capitals to the agreed amounts.
Conversion of a Partnership into a Limited Company
Frequently a private business is converted into a limited company. The partners give up their partnership stakes in exchange for shares in the company. This conversion is usually seen as a necessary stage of development of the growth of the business. A larger stage may see the conversion of the private company into a public limited company.
Accounting entries
Such a transaction will necessitate the books of the firm being closed, and new books being opened for the company. The following will be the procedure for closing the firms’ books:
Open the realization account, and transfer to the debit thereof the book value of the assets taken over by the purchasing company, crediting the various asset accounts.
Transfer to the credit of the realization account the liabilities assumed by the company, debiting the respective liability accounts.
Debit the purchasing company’s account, and credit realization account with the agreed purchase price of the net assets taken over by the company. (The term net assets mean the assets less the liabilities).
The balance on the realization account, after debiting expenses, will represent the profit or loss on realization of the net assets, and will be transferred to the partners’ capital accounts in the proportions in which they share profits and losses.
Debit the accounts of the assets received as purchase consideration, and credit the purchasing company’s account.
Pay off any liabilities not taken over by the new company, crediting cash and debiting the liability accounts.
Distribute between t6he partners the shares, debentures and so on received from the company in the proportions agreed between them, debiting their capital accounts and crediting the accounts of the shares, debentures and so on.
Any balances remaining on capital accounts must now be cleared by the withdrawal or payment on of cash.
This is the situation where, on dissolution, a partner, capital account is in debt and he is unable to discharge his indebtedness.
Prior to the decision in Garner versus Murray it was generally supposed that any loss occasioned by one of the partners of a firm being unable to make good a debit balance on his account should be borne by the remaining partners in the proportions in which they shared profits and losses.
In this case, however, it was held that a deficiency of assets occasioned through the default of one of the partners must be distinguished from an ordinary trading loss, and should be regarded as a debt due to the remaining partners individually and not to the firm.
The decision of the case gave rise to considerable controversy. The circumstances were as follows: Garner, Murray and Wilkins were in partnership under a parole agreement by the terms of which capital was to be contributed by them in unequal shares, but profits and losses were to be divided equally. On the dissolution of the partnership, after payment of the creditors and of advances made by two of the partners, there was a deficiency of assets of 635 $, in addition to which Wilkins’ capital account was overdrawn by 263$, which he was unable to pay. There was thus a total deficiency of 898$, and the plaintiff claimed that this should be borne by the solvent partners, Garner and Murray, in their agreed profit and loss ration, via equally. Mr. Justice Joyce held, however, that each of the three partners was liable to make good his share of the 635$ deficiency of assets, after which the available assets should be applied in repaying to each partner what was due to him on account of capital. Since, however, one of the assets was the debt balance on Wilkins’ account, which was valueless, the remaining assets were to be applied in paying to Garner and Murray ratable what was due to them in respect of capital, with the result that Wilkins’ deficiency was borne by them in respect of capital, with the result that Wilkins’ deficiency was borne by them in proportion to their capitals.
Accounting for Closing Partnership Books on Dissolution
Apart from special circumstances, the following outline of the steps necessary to close the books of a partnership when the assets are sold en bloc, may be found useful:
Open a realization account, and debit there to the book value of the assets, crediting the various asset accounts. The realization account will also be debited with any expenses of realization, and cash credited.
Debit cash and credit realization account with the amount realized on the sale of assets.
Pay off the liabilities, crediting cash and debiting sundry creditors. Any discount allowed by creditors on discharging liabilities should be debited to the creditors’ accounts and credited to realization account.
The balance of the realization account will be the amount of the profit or loss on realization, which will be divided between the partners in the proportion in which they share profits and losses and transferred to their capital accounts.
Pay off partners’ advances as distinct from capital, first setting off any debit balance on the capital account of a partner against his loan account.
The balance on the cash book will now be exactly equal to the balances on the capital accounts, provided they are in credit; credit cash and debit the partners’ capital accounts with the amounts paid to them to close their accounts.
