INTRODUCTION TO FINANCIAL ACCOUNTING

BHRM 1144

SAITO UNIVERSITY
COLLEGE
INTRODUCTION TO
FINANCIAL ACCOUNTING
BHRM 1144
INDIVIDUAL
ASSIGNMENT

NAME UNISHWARY SANDRAN

ID.NO 20191234-01-12116
COHORT BHRM B5
LECTURER MR. P. MANIAM
NAME
 TOPICS PAGE
NUMBER
PARTNERSHIP 3-5

DISSOLUTION OF PARTNERSHIP 6

CAUSES OF PARTNERSHIP 7-8

REALIZATION ACCOUNT 9-10

BANK ACCOUNT AND CAPITAL ACCOUNT 11-12

GARNER VERSUS MURRAY CONCEPT 13-15

TABLE CONTENT

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 1. PARTNERSHIP

A simple definition for partnership is a formal arrangement by two or more parties to

manage and operate a business and share its profits. A partnership is an arrangement between
two or more people to oversee business operations and share its profits and liabilities. In a
general partnership company, all members share both profits and liabilities. Professionals like
doctors and lawyers often form a limited partnership. There may be tax benefits to a
partnership compared to a corporation.

In particular, in a partnership business, all partners share liabilities and profits equally,
while in others, partners have limited liability. There also is the so it’s called silent partner in
which one party is not involved in the day-to-day operations of the business. In a broad sense,
a partnership can be any endeavour undertaken jointly by multiple parties. The parties may be
governments, non-profits enterprises, businesses, or private individuals. The goals of a
partnership also vary widely.

There also have many different ways, that how they using the partnership. Within the
narrow sense of a for-profit venture undertaken by more than two individuals, there are three
main categories of partnership. First is general partnership, limited partnership and limited
liability limited partnership.

In a general partnership, all parties share legal and financial liability equally. The
individuals are personally responsible for the debts the partnership takes on. Profits also they
can have an equal share. The specifics of profit sharing will almost certainly be laid out in
writing in a partnership agreement. A general partner is a member or partner in a general or
limited partnership with unlimited personal liability for the debts of the business. A general
partner actively manages and exercises control over the company.

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 The advantages of general partnership are a general partnership is easy to establish. It’s
creating a general partnership is simpler, cheaper and requires less paperwork than forming a
corporation. The next advantage are faces simplified taxes. The general partnership faces
simplified taxes because general partnerships do not pay income tax. All the profits and
losses are passed through to the individual partners. The last advantages are easy to dissolve.
The partnership in general, easily can be dissolved at any time.

The disadvantages of general partnership are the partners in face potential unlimited
liability. Due to the lack of corporate structure, a general partnership does not establish itself
as a business entity separate from the partners. Partners are unprotected from any lawsuits
against the business and their personal assets can be seized to cover debt obligations of the
business. Next, partner is liable for each other’s actions. Each partner is liable for the actions
of the others. If one partner executes an agreement without the knowledge of the other
partners, the other partners are still obligated to honour the terms of that agreement.

Second is, limited partnership. Limited partnership is a form of partnership similar to a

general partnership except that while a general partnership must have at least two general
partners, a limited partnership must have at least one limited partner. Business structure that
combines features of a limited company with that of a partnership for use as a tax shelter, but
does not create a legal entity separate and distinct from its owners.

It is usually formed by at least one general partner and at least one limited partner.
General partners are the operators who control and manage the partnership, and are jointly
and severally liable for all its debts and obligations. The limited partners cannot, in any way,
control or participate in the management of the partnership (otherwise they will lose their
limited liability protection are liable only up to the sums invested by them, and cannot
withdraw their investments without the consent of the general partners.

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 The last type is The Limited Liability Partnership (LLP) is essentially a general
partnership in form, with one important difference. Unlike a general partnership, in which
individual partners are liable for the partnership's debts and obligations, an LLP provides
each of its individual partners protection against personal liability for certain partnership
liabilities. A limited liability partnership is formed in the state in which the partnership does
business. Most states have a business filings section in their office of the Secretary of State or
an equivalent department.

The partnership must register specifically as an LLP, filing a form as a "limited

liability partnership" or a similar type of declaration. The partnership should also create a
partnership agreement to spell out how the partnership will be run and what happens in
various circumstances. Most states allow all professionals to form LLPs, but a few states limit
the ability to form an LLP to just accountants and attorneys.

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 2. DISSOLUTION OF PARTNERSHIP

A dissolution of a partnership generally occurs when one of the partners ceases to be a

partner in the firm. Dissolution is distinct from the termination of a partnership and the
"winding up" of partnership business. Although the term dissolution implies termination,
dissolution is actually the beginning of the process that ultimately terminates a partnership. It
is, in essence, a change in the relationship between the partners. Accordingly, if a partner
resigns or if a partnership expels a partner, the partnership is considered legally dissolved.

Other causes of dissolution are the BANKRUPTCY or death of a partner, an agreement

of all partners to dissolve, or an event that makes the partnership business illegal. For
instance, if a partnership operates a gambling casino and gambling subsequently becomes
illegal, the partnership will be considered legally dissolved. In addition, a partner may
withdraw from the partnership and thereby cause a dissolution. If, however, the partner
withdraws in violation of a partnership agreement, the partner may be liable for damages as a
result of the untimely or unauthorized withdrawal.

After dissolution, the remaining partners may carry on the partnership business, but the
partnership is legally a new and different partnership. A partnership agreement may provide
for a partner to leave the partnership without dissolving the partnership but only if the
departing partner's interests are bought by the continuing partnership. Nevertheless, unless
the partnership agreement states otherwise, dissolution begins the process whereby the
partnership's business will ultimately be wound up and terminated.

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 3. CAUSES OF PARTNERSHIP

No matter how successful your business is, it is inevitable that partnership disputes will
arise from time to time. Left unresolved, they can lead to missed opportunities, lost profits,
low morale, and, in the worst case, the eventual dissolution of the business. Below is a list of
five common causes of partnership disputes, all of which can be avoided with a well-crafted
partnership agreement.

Financial Rights and Obligations

Disputes about the the financial rights and obligations of business owners is one of the
most common causes of partnership disagreements. It frequently arises when a business is
experiencing financial difficulties. If there is no clear direction in the partnership agreement
as to how liabilities are handled and profits shared, serious management level problems are
likely to result.

Breach of Fiduciary Duty

When a partnership is formed, each partner has a duty to act in the best interest of the
company. A partner may not divert company opportunities for himself (or herself), or
misappropriate company funds, or take any other action that intentionally hurts the business
or the other partner(s).

Poorly Delineated Authority

If there is no clearly established role for each partner, things will either not get done
or boundaries will be constantly breached, and no one can be properly held accountable for
anything. Resulting disputes can prevent the team from focusing on the company’s success.

Misappropriation of Business Assets

Using company assets for personal expenses and activities is another major source of
partnership discord. If a partner uses company funds to pay for a personal expense, or uses
the company car to take a private road trip, it can create a serious problem for the company.

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Utilization of Partnership Resources

Disagreements over allocation of partnership resources can bring operations to a halt.

Perhaps one partner wants to exhibit at a trade show in Chicago while the other thinks New
York is a better option. Or one partner wants to move to a more spacious set of offices while
the other would prefer to deal with cramped conditions and save money. If there is no
mechanism in place to resolve management differences, small disputes can devolve into large
headaches for the company.

If you are involved in a dispute with a business partner, or have a question about how
to avoid one, contact Ken Cohen to arrange for an initial consultation. The Cohen Law Office
has helped business partners resolve their disputes, and we welcome the opportunity to help
you too.

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 4. REALIZATION ACCOUNT

Realisation Account is a nominal account which is prepared at the time of dissolution of

firm. It is prepared to find out the profit or loss realized by the firm on its closing or shutting
down. Being a nominal account, it is credited with all the incomes and debited with all the
expenses.

Firstly, all the assets are transferred to the debit side and all the liabilities are transferred
to the credit side of this account Then the assets realized resulting into income earned are
posted on the credit side and the liabilities paid off resulting in expenditure is posted on the
debit side of this account. The net result will be either profit or loss which is distributed
among the partners in their profit sharing ratio.

The purpose of preparing this account is to close the books of accounts of the dissolved
firm and to determine the gain or loss on the realisation of assets and liabilities.

STEPS TO PREPARE REALISATION ACCOUNT

STEP 1:

Transfer all the assets except cash/bank balance, fictitious assets, Debit balance of Profit and
Loss A/c, Debit balance of Partner’s Capital/ Current A/cs, Loan to partner).

STEP 2:

Transfer outside liabilities to the credit side of Realisation Account.

STEP 3:

Show the disposal of assets at the credit side of realisation account, with the actual amount
realized.

STEP 4:

Make the payment of the realisation expenses at the debit side of realisation account.

STEP 5:

Show the payment of outside liabilities at an agreed value or the book value at the debit side
of Realisation Account.

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STEP 6:

Show the disposal of unrecorded assets at the credit side of realisation account.

STEP 7:

Show the payment of unrecorded liabilities at the debit side of Realisation Account.

STEP 8:

Transfer investment Fluctuation reserve, Joint Life Policy reserve, Depreciation reserve, to
the credit of realisation account, if assets corresponding to these funds appear to the assets
side of Balance Sheet.

STEP 9:

Close the realisation Account. Excess of credit side over debit side represents profit will be
transferred to the credit side of Partner’s Capital Accounts. Excess of debit side over credit
side is loss which will be transferred to the Debit side of Partner’s Capital Accounts.

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 5. BANK ACCOUNT AND CAPITAL ACCOUNT

Current Account

The current account deals with a country's short-term transactions or the difference
between its savings and investments. These are also referred to as actual transactions (as they
have a real impact on income), output and employment levels through the movement of
goods and services in the economy.

The current account consists of visible trade (export and import of goods), invisible
trade (export and import of services), unilateral transfers, and investment income (income
from factors such as land or foreign shares). The credit and debit of foreign exchange from
these transactions are also recorded in the balance of the current account. The resulting
balance of the current account is approximated as the sum total of the balance of trade.

Transactions are recorded in the current account in the following ways:

 Exports are noted as credits in the balance of payments

 Imports are recorded as debits in the balance of payments

The current account gives economists and other analysts an idea of how the country is
faring economically. The difference between exports and imports, or the trade balance, will
determine whether a country's current balance is positive or negative. When it is positive, the
current account has a surplus, making the country a "net lender" to the rest of the world. A
deficit means the current account balance is negative. In this case, that country is considered
a net borrower.

If imports decline and exports increase to stronger economies during a recession, the
country's current account deficit drops. But if exports stagnate as imports grow when the
economy grows, the current account deficit grows.

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Capital Account

The capital account is a record of the inflows and outflows of capital that directly
affect a nation’s foreign assets and liabilities. It is concerned with all international trade
transactions between citizens of one country and those in other countries.

The components of the capital account include foreign investment and loans, banking
and other forms of capital, as well as monetary movements or changes in the foreign
exchange reserve. The capital account flow reflects factors such as commercial borrowings,
banking, investments, loans, and capital.

A surplus in the capital account means there is an inflow of money into the country,
while a deficit indicates money moving out of the country. In this case, the country may be
increasing its foreign holdings.

In other words, the capital account is concerned with payments of debts and claims,
regardless of the time period. The balance of the capital account also includes all items
reflecting changes in stocks.

The term capital account is also used in accounting. It is a general ledger account used
to record the contributed capital of corporate owners as well as their retained earnings. These
balances are reported in a balance sheet's shareholder's equity section.

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 6. GARNER VERSUS MURRAY CONCEPT

Dissolution of Partnership Firm means the firm closes down its operations and comes to
an end. On the dissolution of the firm, the assets of the firm are sold and liabilities are paid
off. The balance, if any, is paid to the partners in settlement of their accounts. If there is
shortfall in meeting outside liabilities, it is met by the partners from their private assets. For
such settlement Garner Vs. Murray Rule is to be applied.

When a partner is unable to contribute fully or partially the debit balance appearing in his
capital account, the portion of the debit balance which he is unable to contribute is known as
insolvency loss.

Loss arising on account of insolvency of a partner is not treated as an ordinary business

loss to be shared by partners in their profit-sharing ratio. Section 48 of Indian Partnership
Act, 1932 requires that the assets of the firm including any sum contributed by partners to
make up deficiency of capital are utilized in first place to settle liabilities and partner loan and
the rest of the amount, if any, shall be applied in paying each partner. The amount is payable
in the ratio of what due to the partners.

The deficiency of capital RM 300 being realization loss, is divided among partners in
their profit sharing ratio. Then each partner contributes to the assets an equal share of the
deficiency i.e. RM 100 each. After this is done, the assets then available of RM 800
(300+500) plus the debit balance of RM 200 in the capital account of the William is
distributed between Garner and Murray with the result of which each partner will suffer a
loss of RM 100. In actual practice, the matter is worked out on the basis of the notional cash
contribution by Garner and the Murray, so that William pays RM 300 and out of the amount
of (500+300), Garner takes RM 500 and Murray takes RM 300.

The difficulty will arise when the deficiency in assets is caused by the inability of the
William to contribute RM 300 or a part of it. If nothing is recoverable from William, the
assets of RM 500 are distributed as follows:

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 Garner and Murray in first place to contribute their share of the deficiency of capital of
RM100 each. The cash (500+100+100) then available is distributed between Garner and
Murray in the proportion of their contribution to the capital i.e. 3:2. The ultimate result is that
the deficiency of assets due to insolvency of William is shared by the Garner and Murray in
their capital ratio. This settlement was in accordance with the Garner Vs. Murray Rule.

CASE: GARNER VS. MURRAY RULE

The details of Garner Vs. Murray Rule is as follows:

Garner, Murray and Wilkins were equal partners with unequal capitals. The assets of
the firm on dissolution, after satisfying all the liabilities to creditors and advance from
partners was insufficient to repay the capitals in full. There was a deficiency of Rs. 635 and
the capital account of Wilkins was showing a debit balance of Rs.263. Nothing could be
recovered from Wilkins owing to insolvency.

DECISION OF THE CASE

The solvent partners are only liable to make good their share of deficiency, and that
the remaining assets should be divided among them in the proportion of their capitals.

EFFECT OF THIS CASE

The solvent partner should contribute to the deficiency of capital in cash of their share
only and not the insolvent partner’s share.

The net effect is that the deficiency of capital of the insolvent partner gets distributed
among the solvent partners in the ratio of their last agreed capitals.

CRITICISM OF GARNER VS. MURRAY RULE

It does not apply when the firm is having only two partners. It considers only the book
capitals of the partners, ignoring the private assets of the solvent partners. If a partner
contributed more capital than that of the other partners, he will have to bear more burden than
the other partners who had contributed less capital. If a partner having zero capital balance or
debit balance, will not have to bear the deficiency of the insolvent partner.

Introduction of cash by the solvent partners to make good their share of loss on
realization is unnecessary, when the balance of capital accounts of the solvent partners are
sufficient to bear the deficiency of insolvent partner.

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APPLICABILITY OF GARNER VS. MURRAY RULE IN INDIA

Section 48 of Indian Partnership Act 1932 is similar to the Section 44 of the

Partnership Act in Great Britain and further there has been no case law in India to deal with
such situations. So, in India these are applicability with respect to following considerations:

Garner vs. Murray is applicable only when there is no agreement between the partners
for sharing the deficiency in capital account of insolvent partner. Realisation loss should be
divided in the profit sharing ratio in the usual manner. The solvent partners should bring in
cash to make good the loss on realization. Final debit balance of insolvent partner should be
distributed amongst the solvent partners in proportion in their last agreed capital. A solvent
partner having debit balance in capital account will not share any loss due to insolvency of a
partner.

CONCLUSION

To conclude, it can be said that it is not unjust and inequitable law to ask a partner with larger
capital to bear the larger portion of the loss. Psychologically, the partners with the lesser
capital will not react unfavourably.

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