Question

PLEASE WRITE AN ORIGINAL ANSWER

Nitty and Gritty are considering the formation of a partnership to operate a crafts and hobbies store. They have come to you to obtain information about the basic elements of a partnership agreement. These agreements usually specify an income and loss–sharing ratio. They also may provide for additional income and loss–sharing features such as salaries, bonuses, interest allowances on invested capital.

Required:

Discuss why a partnership agreement may need features in addition to the income and loss–sharing ratio. Discuss the arguments in favor of recording salary and bonus allowances to partners as expenses included in computing net income. What ethical issues may arise in a partnership agreement?

Answer 1

’’Partnership” is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually “partners” and collectively a “firm”, and the name under which their business is carried on is called the “firm name”.

Thus, in partnership agreement apart from sharing profits, various others things are taken into consideration. such as division of authories and responsibilities, Duties are demarked clearly. Approach to be adopted under various scenarios are clearly stated i.e Retirement, Admission etc.

Remuneration salary and bonus paid are treated as expense because of entity concept. Partnership firm is an different entity from the partners. Thus amount paid for remuneration is income of partner but is expense for the firm.

Ethical issues such as opposite thinking direction, Lack of trust, Different core beliefs, etc many arise in partnership aggrement