1] What is meant by the terms depreciation and accumulated depreciation? In whic

Question

1] What is meant by the terms depreciation and accumulated depreciation? In which financial statement does each of these items appear? What is accrual accounting and how does it influence financial statement presentation?

2] Six months ago, you invested $350,000 to become a partner in a medical practice in which you have a 50% ownership interest. Today, your partner defaulted on the payments for a $2 million Open MRI system that is used by the partnership. What is the dollar amount of your personal liability exposure if you are a) the general partner, and b) if you are a limited partner? Discuss the characteristics of general and limited partners, and how these influence the liability amounts.

Explanation / Answer

Depreciation is the amount of fixed assets used up during an accounting period. It is reported in the income statement as an expense. Accumulated deprecation is a contra asset account in which all past depreciation expanse for an asset is recorded.

Accrual Accounting -An accounting method that measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur. The general idea is that economic events are recognized by matching revenues to expenses (the matching principle) at the time in which the transaction occurs rather than when payment is made (or received). This method allows the current cash inflows/outflows to be combined with future expected cash inflows/outflows to give a more accurate picture of a company's current financial condition.

Influence on Financial Statement- Accrual accounting records financial transactions as they occur, regardless of when cash changes hands, and offers some benefits for businesses when managing their financial information. Accrual accounting is typically more difficult for small-business owners to understand than other methods. It requires the use of reconciliations and journal entries to ensure that all financial information is properly recorded. However, business owners who master the accrual accounting method can meet generally accepted accounting principles (GAAP). These are the most authoritative accounting standards in the U.S. GAAP recognizes accrual accounting as the best method for preparing financial statements. Large companies are required to use the accrual accounting method for reporting financial information to internal and external business stakeholders.

2. a) the general partner - As general partner you have 50% of the personal liability exposure. You will owe= 50%*2 million = $1 million

b) if you are a limited partner - A limited partner's liability for the debt

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