Accounting for Special Transactions

- Co-ownership of Contributed Assets

PARTNERSHIP o all assets contributed into the partnership are owned
DEFINITION o by the partnership by virtue of its separate and distinct juridical
personality
- two or more persons bind themselves to contribute money, property, or o if one partner contributes an asset to the business, all partners
industry to a common fund with the intention of dividing the profit among jointly own it in a special sense.
themselves. (Art. 1767, CC) o However, a partner has no right to possess a partnership property
- has a juridical personality separate and distinct from that of each of the for any other purpose without the consent of his partners.
partners (Art. 1768, CC)
- each owner is called a partner - Mutual Agency
- two or more persons may also form a partnership for the exercise of a o any partner can bind the others party to a contract if he is acting
profession- also called as “ GENERAL PROFESSIONAL PARTNERSHIP” within his express/implied authority
o ( generally associated with the practice of law, public accounting,
medicine) - Limited Life
o Partnership may be dissolved by the admission, death, insolvency,
CHARACTERISTICS and incapacity, withdrawal of a partner or expiration of the
term.
 express will of any partner
- Mutual Contribution  termination of a definite term stipulated in the
o there cannot be a partnership w/o a contribution of money, contract
property, or industry (work/services that may be personal manual  any event which makes it unlawful to carry out the
efforts or intellectual) partnership
 when a specific thing which a partner had promised to
- Ease of Formation distribute to the partnership perishes before the
o as compared to corporations, the formation of partnership requires delivery (Art.1830(4))
less formality  expulsion, death, insolvency, or civil interdiction of a
partner
- Separate Legal Personality - Transfer of Ownership
o partnership has a juridical personality separate and distinct from the o In case of dissolution, the transfer of ownership, whether to a new or
partners. existing partner, requires the approval of the remaining partners.

- Division of Profit or Losses - Unlimited Liability

o each partner must share in the profits/ losses of the venture o all partners (except limited partners), including industrial partners,
o A stipulation which excludes one or more partners from any are personally liable for all debts incurred by the partnership
share in the profits or losses is void (Art. 1799, CC) after all the partnerships debt have been exhausted
 o If a partners is personally insolvent, his share in the partnership
debt shall be assumed by the other solvent partners
 A partnership in which all partners are individually liable is
called a general partnership PARTNERSHIP DISTINGUISHEFD FROM CORPORATION
 A partnership in which at least one partner is personally
liable is called a limited partnership- includes at least one
general partner who maintains unlimited liability. Usually has PARTNERSHIP CORPORATION
LLP in its name. AS TO MANNER OF CREATION
created by mere agreement of the created by operation of law
- Income Taxes partners
o partnership, except general professional partnerships, are subject to AS TO NUMBER OF PERSONS
tax rate of 30% of taxable income two or more persons may form a not exceeding fifteen (15)
partnership - A corporation with a single
- Partner’s Equity Accounts stockholder is considered as One
o each partner has a capital account and a withdrawal account that Person Corporation (OPC)
serves similar functions as the related accounts for sole AS TO COMMENCEMENT OF JURIDICAL PERSONALITY
proprietorship juridical personality commences from juridical personality commences from the
the execution of the articles of issuance of certificate of incorporation
partnerships by the Securities and Exchange
Commission
ADVANTAGES AND DISADVANTAGES AS TO MANAGEMENT
every partner is an agent of management is vested on the Board of
ADVANTAGES DISADVANTAGES partnership if the partners did not Directors
vs. Proprietorship o easily dissolved; unstable appoint a managing partner
o greater financial capability o mutual agency and unlimited liability AS TO EXTENT OF LIABILITY
o combines special skills, expertise, and may create a personal obligation to each of the partners except a limited Stockholders are liable only to the
experience partners partners is liable to the extent of his extent of their interest or investment
o offers relative freedom and flexibility of o less effective than corporation in personal assets in the corporation
action in decision making raising large amounts of capital AS TO RIGHT OF SUCCESSION
vs. Corporation Has no right of succession has a right of succession
o easier and less expensive to organize - A corporation has the capacity of
o more personal and informal continued existence regardless of
the death, withdrawal, insolvency
or incapacity of its directors or
stockholders.
AS TO TERMS OF EXISTENCE
For any period of time stipulated by the shall have perpetual existence unless its
partners article of incorporation provides otherwise.
 ACCOUNTING FOR PARTNERSHIPS
 Valuation of Investments by Partners

 PFRS and Conceptual Framework for Financial Reporting are applicable to Article 1787 of the Civil Code states that “when the capital or part thereof
all reporting entities regardless of the type of organization. which a partner is bound to contribute consists of goods, their
 Most accounting procedures used for other type of business organizations APPRAISAL (measured at fair value) must be made in the manner
are also applicable to partnerships prescribed in the contract of partnership, and in THE ABSENCE OF
 The accounting for partnerships should also comply with the relevant STIPULATION, it shall be made by experts chosen by the partners, and
provisions of the Civil Code of the Philippines according to the current prices, the subsequent charges thereof being for
the account of the partnership”.
 Major considerations in the accounting for equity of a partnership
o Formation- accounting for initial investments to the partnership
- NON CASH ASSETS must be recorded at values agreed upon by the
o Operations- division of profits or losses
partners. In the absence of any agreements, the contribution will be
o Dissolution- admission of a new partner and withdrawal, retirement
recognized at their fair market value at the date of transfer to
or death of a partner
the partnership
o Liquidation- winding-up affairs
- The provision of PFRS 2 Share-based payments that equity
instruments issued for non-cash items should be valued at the
fair value of non-cash items received parallels that of Art.1787

PARTNERSHIP FORMATION
 A contract of partnership is consensual; created by the agreement of Type of Contribution Measurement
the partners which may be constituted in any form such as oral or Cash and cash equivalents Face amount (PAS 7)
written Inventory Lower of Cost and Net Realizable Value
 Article 1771 and 1772 of the Philippine Civil Code requires that a (PAS 2)
partnership must be made in a public instrument and recorded
with Securities and Exchange Commission(SEC) when:
 immovable property or real rights are contributed to the - the books of partnership are opened with entries reflecting the net
partnership (e.g., PPE); or contributions of the partners to the firm
 the partnership has a capital of P3,000 or more - Asset accounts are debited for assets contributed to partnership; liability
 Art. 1773 further requires an inventory of any immovable property accounts are credited for any liabilities assumed by the partnership; and
contributed to the partnership, signed by the parties and attached to separate capital accounts are credited for the amount of each partner’s net
the public instrument, otherwise the partnership is deemed void. investment (asset less liabilities)
- No contribution shall be valued at an amount that exceeds the
 A partnership’s legal existence begins from the execution of the
contribution’s recoverable amount
contract, unless otherwise stipulated.
- Each partner’s contribution shall be adjusted accordingly before the
recognition in the partnership’s books.
-Each partner’s contribution shall be adjusted accordingly before recognition in the MR. X, Capital
partnership’s book DR. CR
.
TIPS: xx Initial
Investment
Necessary Adjustments to the Capital Account
xx Additional
Owner’s Equity Account investment
Debit Credit s
1. Decrease in asset 1. Increase in asset Permanent xx
2. Increase in liability 2. Decrease in liability withdrawal
3. Increase in contra-asset 3. Decrease in contra-asset s of capital
Share in xx xx Share in
losses Profits
PARTNER’S LEDGER ACCOUNTS Debit xx
balance of
The partners’ ledger accounts are: drawings
account
a. Capital accounts
b. Drawing accounts
c. Receivable from/Payable to a partner  Drawing Account
o debited to reflects assets temporarily withdrawn by the
OWNER’S EQUITY ACCOUNTS partner from the partnership
o nominal account that is closed to the related capital
 recording of assets, liabilities, income and expenses is consistent for account at the end of the period; contra equity account and
both proprietorships and partnerships has a normal debit balance
o similar to the corporate paid in capital, retained earnings,
 differences arise between the two forms of business concerning
owners’ equity and dividends accounts
 separate capital and drawing accounts are established for each Mr. X Drawings
partner Dr. Cr.
 Capital Account Temporary xx xx Recurring
o credited for partner’s initial and additional net withdrawals reimbursabl
investments; credit balance of the drawing account at the during the e costs paid
end of the period period by the
o debited for partner’s permanent withdrawals; debit partner
balance of the drawing account at the end of the period Temporary xx
finds held to
 be remitted to - must be paid after the claims of outside creditors have been paid in
the full
partnership - have priority over partners equity

 Adjustments of Account Prior to Formation

NOTE!
- In cases when the prospective partners have existing businesses, their
 Permanent withdrawals; permanently decreasing the
respective books will have to be adjusted to reflect their fair market values of
partner’s capital
their assets or to correct misstatements in the accounts
 Temporary withdrawals; regular advances made by the
- if the adjustments will not be made, the initial capital balances of the partners
partners in anticipation of their share in profit
may be inequitable
- increases in asset values accruing before formation should be for the benefit
 profit (or loss) is credited (or debited) either to the drawing account or
of the contributing partner
to the capital account
- when the adjustments involves a debit or credit to a nominal account, the
Capital account would instead be debited or credited ( this is because the
o Drawing account- maintain capital accounts for investments
business has ceased to be a going concern; a business is not viewed as a
and permanent withdrawals going concern if liquidation appear imminent)
o Capital account- make profit or loss part of the capital
TIPS:

Necessary Adjustments to the Capital Account

Owner’s Equity Account

LOANS RECEIVABLE FROM OR PAYABLE TO PARTNERS Debit Credit
1. Decrease in asset 1. Increase in asset
 if a partner withdraws a substantial amount of money with the 2. Increase in liability 2. Decrease in liability
intention of repaying it, the debit should be LOANS RECEIVABLE- 3. Increase in contra-asset 3. Decrease in contra-asset
PARTNER account
- this account should be classified separately from other receivable of
the partnership
BONUS ON INIITIAL INVESTMENTS
 a partner may lend amount to the partnership in excess of his
intended permanent investment, these should be credited to LOANS  An accounting problem exists when a partner’s capital account is
PAYABLE PARTNER account credited for an amount greater than the fair value of his contributions.
- this account is classified among liabilities but separate from
liabilities to outsiders (distinction is important in case of liquidation)
  A partnership agreement may allow a certain partner who is bringing in  a sole proprietors and an individual w/o an existing business
expertise or special skill to have a capital credit greater than the fair form a partnership
value of his contributions  two or more sole proprietors form a partnership
 In such case, the additional credit to the partner’s capital is accounted  Admission or retirement of a partner
for as deduction from the capital of other partners. This accounting
method is called the “bonus” method
Individuals with No Existing Business Form a Partnership

- simply debit the assets contributed, and to credit the liabilities assumed and
Variation to the bonus method
the capital account of each partner
A partnership agreement may stipulate a certain ratio to be maintained by the
A Sole Proprietor and Another Individual Form a Partnership
partners representing their specific interest in the equity of partnership.
- assets and liabilities of the proprietorship will be transferred to the newly
May give rise to adjustments to the initial contributions of the partners
formed partnership at values agreed upon by al the partners or at their
Any increase or decrease to the capital credit of a partner is not deducted from his current fair prices
co-partners’ capital accounts. Instead, the capital adjustment is accounted for as
Two or More Sole Proprietors Form a Partnership
either:
- assets and liabilities of the proprietorship will be transferred to the newly
a. Cash settlement among the partners; or
formed partnership at values agreed upon by al the partners or at their
b, Additional investment or withdrawal of investment of a partner current fair prices

OPENING ENTRIES OF A PARTNERSHIP UPON FORMATION

LIMITED LIABILITY COMPANY
- is a hybrid form of business for it combines the best features of partnership
A partnership may be formed in any of the following ways:
and a corporation
 Individuals with no existing business form a partnership
- form of legal entity that provides limited liability to its owners
 Conversion of sole proprietorship to a partnership
- owners of an LLC are called members that may be individuals, partnerships,
corporation, and other entities
- the accounting for LLC is similar to partnerships
- the term “member” and “member’s equity” are used instead of “partner” and
“partner’s equity”