UNIT 5

Accounting for Limited Liability Partnership

5.1 Meaning:

A typical partnership form of the business suffers from the problem of unlimited liability. Liabilities of partners of a firm extend right up to their personal assets. This makes regular partnerships undesirable for a lot of entrepreneurs. One solution for this issue exists in the form of Limited Liability Partnerships, better known as LLP.

LLP entities the worldwide Recognized form of business organization has now been introduced in India by way of LLP ACT, 2008. That came into effect by way of notification dated 31-03-2009.

LLP Companies advantages of both the company and partnership into a single form of organization.

In an LLP one partner is not responsible or liable for another partners miss conduct or negligence. In an LLP all partners have a Limited Liability. For each individual protection within the partnership, similar to that of shareholders of a corporation.

5.2 Agreement/ Schedule 1:

LLP is managed as per the LLP Agreement, however in the absence of such agreement LLP would be generated by the Framework provided in Schedule 1 of LLP ACT, 2008.

5.3 Features of LLP:

A limited liability partnership contains the following peculiar features:

1. Separate legal entity

Unlike regular partnership firms, limited liability partnerships are treated as separate legal entities. This means that LLPs can own assets and incur liabilities in their own names. They can also enter into contracts and sue and be sued in their own names.

2. Limited liability of partners

The liabilities of partners of an LLP are separate and limited. Their personal assets will not liable to attachment in case the LLP is winding up or suffering certain legal consequences of repayment of debt.

Partners’ liabilities, however, can become unlimited in cases of offenses like fraud, the commission of an offense, or any other wrongful and illegal act.

3. Sharing of profits

All partners of limited liability partnerships share profits of business just as partners of regular firms. They are, however, free to decide the ratio in which they will share profits.

4. Partners of LLPs

Partners of a limited liability partnership can be either natural persons, i.e. individuals, or even body corporates. Furthermore, an individual cannot be a partner if he suffers from unsoundness of mind or he is insolvent.

LLPs must have a minimum of two partners at all times. Also, the maximum number of partners is unlimited, while it is restricted to 50 for regular partnership firms. If at any time, the number of partners in an LLP becomes less than two, and the sole partner carries on business for more than six months under such circumstances, his liability towards the firm’s business will become unlimited.

5.4 Advantages:

1. Well known and accepted form of business worldwide in comparison to company.
2. Low cost of formation.
3. Easy to Establish as compared to company.
4. Easy to manage and run as compare to a company.
5. No requirement of any minimum capital contribution.
6. No restriction as to minimum number of partners.
7. LLP and its partner as distinct from each other.

5.5 Disadvantages:

1. Under some cases liability may extend to personal assets of partners.
2. LLP cannot raise money from Public like Company.

5.6 Statement of Assets and Liabilities _____ as at _____ (period)

(In Rupees ____________)

5.7 Statement of Income and Expenditure of _____________

For the period from _____ to _____

5.8 Notes to Accounts

5.9 Accounting procedure for conversion into LLP:

1. Calculation of Purchase Consideration:

There are two methods for calculation of PC:

1. Net Asset Method: In this case, asset and liabilities are taken over at Agreed value and then liabilities are deducted from assets. In case, agreed values are not given, net assets will be taken over at balance sheet value.
2. Net Payment Method: In this case, Purchase Consideration=Cash paid by new firm.

2.      Given in problem:

1. Balance sheet of Vendor
2. Adjustments

3.      Required in Solution:

1. Calculation of Purchase Consideration.
2. Close books of Vendor by preparing ledger accounts or bypassing journal entries.
3. Pass opening journal entries in new firm.
4. Prepare opening balance sheet in new firm.

4.      Proforma of journal entries in the books of vendor:

1. Transfer of Capital Reserves and Surplus to capital a\c:

Capital Reserve A\c             Dr.

Reserves and Surplus A\c      Dr.

To Capital A\c

Ii.            Transfer of Fictitious assets to Capital:

Capital A\c                                Dr.

To Fictitious assets A\c

Iii.            Transfer of Assets to Realization A\c:

Realization A\c                         Dr.

To Sundry Assets A\c

Iv.            Transfer of Sundry Liabilities to Realization A\c:

Sundry Liabilities A\c             Dr.

To Realization A\c

v.            Recording of PC:

New Firm A\c                          Dr.

To Realization A\c

Vi.            Transfer of Realization profit or loss to capital a\c:

1. If Profit:

Realization A\c          Dr.

To Capital A\c

b.     If Loss:

Capital A\c                 Dr.

To Realization A\c

Vii.            Balance in Capital A\c transfer to New firm:

Capital A\c.                            Dr.

To New Firm A\c

1. Proforma Journal entries in books of new firm:

Assets Taken Over (at Agreed Value)     Dr.

To Liabilities Taken Over (at agreed value)

To Capital (of vendor firm)

[As no Liquidation, so NO entries of Liquidation]