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15.1 Describe How a Partnership Is Created, Including the Associated Journal Entries

Partnership Formation​

Partnership Agreement:

  • Defines partner relationships
  • Specifies capital contributions
  • Outlines profit/loss allocation
  • Establishes management structure

Initial Capital Contributions​

Partners Contribute:

  • Cash
  • Assets (equipment, vehicles, property, inventory)
  • Services (may be valued and recorded as capital)
  • Goodwill or other intangibles

Valuation:

  • Cash: Face value
  • Assets: Fair market value (agreed by partners)
  • Services: Agreed value
  • Must be documented in partnership agreement

Example:

  • Partner A contributes €50,000 cash
  • Partner B contributes €30,000 cash + equipment worth €20,000

Journal Entries:

510000 Cash                       €50,000
301000 Partner A, Capital                      €50,000
To record Partner A's contribution

510000 Cash                       €30,000
223000 Equipment                  20,000
302000 Partner B, Capital                      €50,000
To record Partner B's contribution

PCN Accounts:

  • 301000: Partner A, Capital (Class 1 - Equity)
  • 302000: Partner B, Capital (Class 1 - Equity)

Partnership Agreement Should Specify:

  • Capital contribution amounts
  • Valuation methods for non-cash contributions
  • Interest on capital (if any)
  • Profit/loss sharing ratios
  • Management responsibilities
  • Withdrawal procedures

Luxembourg Compliance Note​

Partnership formation in Luxembourg:

  • Must have partnership agreement
  • Must register with RCS
  • Must use proper PCN accounts
  • Must comply with partnership law
  • Must maintain capital accounts

Think It Through​

Why is a partnership agreement important? What should it include?