Chapter 1: Partnership Formation 2.

Operations – division of profits or losses

3. Dissolution – admission of a new partner and withdrawal, retirement or death of a
Definition of Partnership
partner
 A partnership is owned by two or more individuals 4. Liquidation – winding-up of affairs
 A partnership is created by agreement between the partners Formation
 A partnership is formed for a business undertaking that is normally of continuing
nature  A contract of partnership is consensual
 Agreement can be oral or written
Characteristics of a Partnership
Exceptions: Must be made in a public instrument
1. Ease of formation – the formation of a partnership requires less formality unlike a. Immovable property or real rights are contributed to the partnership; must be
in corporations signed by the partners
2. Separate legal entity – the partnership has a juridical personality separate and b. The partnership has a capital of P3,000 or more
distinct from the partners  A partnership’s legal existence begins from the execution of the contract, unless
3. Mutual agency – the partners are agents of the partnership for the purpose of its otherwise stipulated.
business
Valuation of Contribution of Partners
4. Co-ownership of property – each partner has an equal right to possess specific
partnership property for partnership purposes Cash GR: Face value
5. Co-ownership of profits – each partner is entitled to his share in the partnership FC: exchange rate at contribution date
profit. Exclusion of any partner is considered void. Closed bank: NRV
6. Limited life – a partnership can be easily dissolved Non-cash FMV
7. Transfer of ownership – requires the approval of the remaining partners Accounts receivable NRV
8. Unlimited liability – each partner may be held personally liable for partnership Inventory LCNRV
liabilities after all partnership assets have been exhausted. Insolvency of a partner Fixed assets FMV
shall be assumed by the solvent partners.
a. General partnership – all partners are individually liable Chapter 2: Partnership Operation
b. Limited partnership – includes at least one general partner; limited partners
can only be held liable up to the extent of their contribution in the Factors to Consider in Distributing Profit and Loss
partnership. 1. Single method
Advantages and Disadvantages of a Partnership  Based on profit and loss sharing agreement
 If no loss ratio, use profit ratio
Advantages Disadvantages
 If no profit ratio but has loss ratio, use capital ratio
Ease of formation Limited life/easily dissolved
 If no profit and loss ratio, use capital ratio (beginning capital in the absence
Shared responsibility of running the Unlimited liability of original capital ratio)
business 2. Multiple bases
Flexibility in decision-making Conflict among partners  Provision for salaries – devotion of time in management
Greater capital compared to sole Less capital compared to a corporation  Provision for interest – recognition to capital differences
proprietorship
 Provision for bonus – contribute skills or expertise
Relative lack of regulation by the Taxed like a corporation (except
a. Based on profit before bonus and tax
government as compared to general professional partnership)
 B = Br (NI)
corporations
b. Based on profit after bonus but before tax
Accounting for Partnership Equity  B = Br (NI – B)
1. Formation – for initial investments to the partnership c. Based on profit before bonus but after tax
  B = Br (NI – T) or B = Br [NI – Tr (NI – B)] Definition of Liquidation
d. Based on profit after bonus and tax
 Liquidation is the termination of business operations or winding up of affairs.
 B = Br (NI – B – T) or B = Br [NI – B – Tr (NI – B)]
 Liquidation may be either voluntary or involuntary
 NCA are restated based on NRV
Chapter 3: Partnership Dissolution
Methods of Liquidation
Definition of Dissolution
1. Lump-sum – all NCA are sold simultaneously, settle all liabilities, then to
 Dissolution is the change in the relation of the partners caused by any partner partners in a single payment.
being disassociated from the business. 2. Installment – NCA are settled on installment basis
 Does not necessarily terminate the business; the business continues but new
Settlement of claims
articles of partnership should be drawn up.
1. Outside creditors
Causes of Dissolution
2. Inside creditors
1. Admission of a new partner 3. Owner’s capital balances
a. Purchase of interest
Lump-sum Installment
 Personal transaction between and among the partners
 Not recorded in the partnership books since it’s a personal transaction All NCA are converted to cash Some of NCA are converted to cash
between the partners Total gain or loss on sale is allocated The CA of unsold NCA is considered
 No gain or loss shall be recognized in the partnership based on P/L ratio as loss which is allocated based on P/L:
b. Investment ratio
 Invests directly to the partnership Actual liquidation expenses are Actual and estimated future liquidation
 Recorded in the partnership books allocated based on P/L ratio expenses are allocated based on P/L
 No gain or loss shall be recognized ratio
Revaluation of assets Liabilities to outside creditors are fully Liabilities to outside creditors are
 Any adjustment to the assets and liabilities is allocated first to the settled partially or fully settled
existing partners with fair values Liabilities to inside creditors are fully Liabilities to inside creditors are
2. Withdrawal or retirement settled partially or fully settled after full
3. Death or incapacity of a partner settlement to outside creditors
4. Incorporation of a partnership Remaining cash is distributed to the If all liabilities are settled, less cash set
partners in full settlement aside for liquidation expenses, cash is
Approach for the Capital Credit (for Investment to partnership) distributed to the partners as partial
1. Bonus approach settlement
 TCC = TAC Safe payment schedule
 If TAC > TCC = bonus to new partner  Unsold NCA are treated as loss
 If TAC < TCC = bonus to old partner  Expected future liquidation costa and potential unrecorded liabilities are
2. Asset revaluation approach recognized immediately as losses
 TCC = TAC – no adjustment  The some of the two above are the maximum loss possible
 TCC > TAC – overstated net assets
 TCC < TAC – understated net assets Cash priority program
 Maximum loss absorption capacity = total interest / P/L percentage
Chapter 4: Partnership Liquidation  Expected future liquidation costa and potential unrecorded liabilities are
recognized immediately as losses
Chapter 5: