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Partnership Accounting Introduction

This document provides an introduction to partnership accounting. It defines a partnership as a contract between two or more persons to contribute money, property, or skills to a common fund with the intention of sharing profits. It outlines the key characteristics of partnerships including mutual agency, limited life, unlimited liability, co-ownership of property and profits, and a separate legal entity. The document also discusses the advantages and disadvantages of partnerships, different types of partnerships, kinds of partners, articles of co-partnership, and features of partnership accounting.

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Abigail Mendoza
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817 views5 pages

Partnership Accounting Introduction

This document provides an introduction to partnership accounting. It defines a partnership as a contract between two or more persons to contribute money, property, or skills to a common fund with the intention of sharing profits. It outlines the key characteristics of partnerships including mutual agency, limited life, unlimited liability, co-ownership of property and profits, and a separate legal entity. The document also discusses the advantages and disadvantages of partnerships, different types of partnerships, kinds of partners, articles of co-partnership, and features of partnership accounting.

Uploaded by

Abigail Mendoza
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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INTRODUCTION TO PARTNERSHIP ACCOUNTING

Partnership – a contract whereby two or more persons bind themselves to


contribute money, property or industry into a common fund with the intention of
dividing the profit among themselves (Article 1767 of the Civil Code of the
Philippines). The persons are usually individuals. Any natural person who
possesses the right to enter into a contract can become a partner. Partnerships
must attempt to make a profit. Non-profit organizations may not be partnerships.

Characteristics of a Partnership

1. Mutual agency – any partner may act as an agent of the partnership in


conducting its affairs. Each partner has an equal right to act for the
partnership and to enter into contracts binding upon it, as long as he acts
within the normal scope of business operations.

2. Limited life – a partnership may be dissolved at any time by action of the


partners or by operation of law. The withdrawal, death, retirement,
bankruptcy, incapacity of a partner and the admission of a new partner
dissolves the partnership.

3. Unlimited liability – the personal assets of a general partner may be


used to satisfy the claims of the creditors of the partnership if the
partnership assets are not enough to settle the liabilities to outsiders upon
liquidation.

4. Co-ownership of property – properties contributed to the partnership are


owned by the partnership. Properties invested by a partner cease to be his
own personal property.

5. Co-ownership of profit – a partner has the right to share in partnership


profits. The partners are entitled to share in the firm’s profits as a return
on their investment.

6. Legal entity – a partnership has a legal personality separate and distinct


from that of each of the partners. A partnership may, therefore, acquire
property in its own name and may enter into contracts.

Advantages of a Partnership
1. It is easy to form and to dissolve. A partnership is ended whenever there
are changes in the ownership structure such as withdrawal of a partner or
admission of a new partner.

2. Greater amount of capital may be raised compared to a sole


proprietorship. The source of capital investment comes from 2 or more
persons.

3. There is relative freedom and flexibility in decision-making compared to a


corporation. Decisions are effected simply by agreement among the
partners without the formalities necessary under a corporation.

4. It is better managed because business affairs are supervised by more


than one person. Better management results from the combined
experience and ability of several individuals.

5. The unlimited liability of a general partner makes it reliable from the point
of view of creditors.

Disadvantages of a Partnership

1. The unlimited liability of a partnership deters many from investing in a


partnership.

2. There is lack of business continuity because it can be easily dissolved.

3. There is difficulty in transferring ownership interest because ownership


interest in the partnership cannot be transferred without the consent of all
the partners.

4. Limited amount of capital may be raised compared to a corporation.

5. There is likelihood of dissension and disagreement when each of the


partners has the same authority in the management of the firm.

Kinds of Partnerships

1. According to activity

a. Service – main activity is the rendering of services


b. Merchandising or Trading – main activity is the purchase or sale of
goods
c. Manufacturing – main activity is the production of goods

2. According to liability

a. General – one consisting of general partners who are liable prorata


and sometimes solidarily with their separate property for
partnership liabilities.
b. Limited – one consisting of one or more general partners and one
or more limited partners. “LTD” is added to the name of the
partnership.

3. According to object

a. Universal partnership of all present property – one in which the


partners contribute all the property which actually belong to each of
them, at the time of the constitution of the partnership, to a common
fund with the intention of dividing the same among them as well as
the profits which they may acquire therewith. All assets contributed
to the partnership and subsequent acquisitions become common
partnership assets.

b. Universal partnership of profits – one which comprises all that the


partners may acquire by their industry or work during the existence
of the partnership and the usufruct of movable or immovable
property which each of the partners may possess at the time of the
institution of the contract. The original movable or immovable
property contributed do not become common partnership assets.

c. Particular partnership – one which has for its object determinate


things, their use or fruits or a specific undertaking or the exercise of
a profession of vocation.

Kinds of Partners

a. According to Investment

1. Capitalist – one who contributes capital in money or property.


2. Industrial – one who contributes industry, labor, skill or service.
3. Capitalist-Industrial – one who contributes money, property and industry

b. According to Liability
1. General – one whose liability to third persons extends to his private
property
2. Limited – one whose liability to third persons is limited only to the extent of
his capital contribution to the partnership.

c. According to Participation

1. Nominal- a partner in name only.


2. Secret – one who takes active part in the business but whose connection
with the partnership is concealed or unknown to the public.
3. Silent – one who does not participate actively in the management of
partnership affairs.
4. Managing Partner – one who manages actively the business of the
partnership

Articles of Co-Partnership – agreement in writing among the partners


governing the nature and terms of the partnership contract. This agreement is
the framework within which the partners are to operate or conduct partnership
business – from formation to operations then to the eventual dissolution and
liquidation of the partnership. Observations of these details will help minimize, if
not eliminate, the confusion and disputes that may arise between or among the
partners.

The written agreement among the partners governs the formation, operation and
dissolution of the partnership and is required to be registered with SEC. It
contains the following information:

1. The name of the partnership;


2. The names, addresses of the partners, classes of partners stating whether
the partner is a general or a limited partner;
3. The effective date of the contract;
4. The purpose and principal place of business of the business;
5. The capital of the partnership stating the contributions of each of the
partners;
6. The rights and duties of each of the partners;
7. The manner of dividing profit or loss among the partners;
8. The conditions under which the partners may withdraw money or other
assets;
9. The manner of keeping the books of accounts;
10. The causes for dissolution and the provision for arbitration in settling
disputes.
Features of Partnership Accounting

1. Plurality of capital and drawing accounts – there will be as many capital


accounts and as many drawing accounts as there are partners

2. Partner’s loans – partners may advance money to the partnership in the


form of loans when the business is in need of additional funds.

3. Partner’s borrowings – the partnership may advance money to partners


other than withdrawals in the form of loans.

4. Partner’s salaries – partners are paid salaries for services rendered in the
conduct of partnership business.

5. Interest on investment – interest is allowed to earn on the asset


investment of the partners.

6. Division of profit and losses – net profit or net loss is to be divided among
the partners based on their agreement.

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