Chapter 1: Partnership Formation  Ease of Formation

 Formation of partnership requires less

Partnership Defined: formality
According to Art, 1767 of the Civil Code, by the - Meeting of minds can do either oral or
contract of partnership, 2 or more persons bind written.
themselves to contribute money, property, or
industry to a common fund with the intention of  Separate Legal Personality
dividing the profits among themselves.  Has a juridical personality distinct
from the partners
Partnership is an unincorporated association of  Has the ability to transact and acquire
two or more individuals to carry on, as co- property in its own name
owners, a business, with the intention of
dividing the profits among themselves.  Limited Life.
3-Part Partnership Definition (Partnership - Madali mawala ang isang partnership.
Characteristics) The following dissolves the partnership:
By the contract of Partnership. a. Express will of any partner
 2 or more persons bind themselves b. Termination of definite term
 The definition of partnership under the stipulated
Civil Code did not provide for a c. Event that is unlawful to carry out
maximum number of partners in a the partnership
partnership. What is explicit is the d. Specific thing partner contributing
minimum number, which should be 2 perishes before delivery.
(partners) e. Expulsion, death, insolvency or
civil interdiction of a partner.
 To contribute MONEY, PROPERTY, or
INDUSTRY to a common fund.  Co-ownership of property
 When the property is invested in the
 Mutual Contribution – mutual partnership, the partners become co-
understanding of the things to owner (equal right) to the specific
contribution among the parties. partnership property for partnership
 Co-ownership of contributed assets – purposes.
once they contributed those
contribution would not be a personal  Co-ownership of Profits
property of the partner anymore. It  Partners are entitled to the shares of
would be the property of the each partner to the partnership.
partnership and your partner has co- Note: A stipulation which excludes one or
ownership with it, more partners from any share in the profits
or losses is void.
 With the intention of diving the profit
among themselves.
 Participation in Profit or Losses  Transfer of Ownership
 In cases of dissolution, the transfer of
ownership (new or existing partner)
Other Partnership Characteristics requires approval of the remaining
partner.
 Unlimited Liability b. Professional Partnership –
 Partners’ personal assets may be used General Professional
when the partnership assets are Partnership
insufficient to settle partnership
Partnership Formation
liabilities.

 Mutual Agency
 A partner can enter into a contract in
behalf of the partnership, provided Verbal
(Orally)
that the contract is within the normal Partnership
scope of its business. Articles of
Written
Partnership
Advantages of Partnership
1. More likely to raise more capital than
sole proprietorship.
2. Pooling of resources – combined skills A partnership is better formed when there is a
and expertise of the partners. written agreement to avoid future conflicts
3. Easier and less expensive to put up than between the partnership. This written agreement
corporation is represented by the Articles of Partnership.
a. To register to SEC, you only
need a partnership capital of P The Article of Partnership contains:
3,000 in money or property.  Name of the Partnership
Disadvantages of Partnership  Purpose and location
 Names and residents of the partners
1. Less effective in raising large amount of
 Partners’ contributions and methods
capital than corporation.
of sharing profits or losses.
2. Unlimited Liability and mutual agency
may create personal obligations to Note: When the capital of the partnership is P
partners. 3,000 and above then it should be in written
- Create personal obligation to the form since there are certain requirements that are
partners needed to pass in SEC.
Common Types of Partners Accounting for Partnership Formation
1. Accdg. to Contribution Who may form a partnership?
a. Capitalist Partner
b. Industrial Partner 1. 2 or more individuals
2. Accdg. to Liability 2. An individual and a proprietor
a. General Partner 3. 2 or more proprietors
b. Limited Partner Note: Regardless of how the partnership is
Common Types of Partnership formed, a new set of books is needed to be
prepared.
1. Accdg. to Liability
a. General Partnership - Separate Entity Principle –
b. Limited Partnership Transaction of the owners should not
2. Accdg. to Purpose be mixed with that of the business.
a. Commercial Partnership
The following are the major consideration in the “values agreed upon by the partners”
accounting for the equity of a partnership.
When measuring the contribution, the
a. Formation – accounting for initial following additional guidance of PFRSs shall
investments to the partnership. be observed:
b. Operations – division of profit or losses.
c. Dissolution – admission of a new partner Type of Measurement
Contribution
and withdrawal, retirement or death of a
Cash and Cash Face Amount
partner.
Equivalents
d. Liquidation – winding up of affairs Inventory LCNRV
Formation
Art 1771 and 1772 of PCC the partnership must Illustration 1: On October 1, 2020, Audrey and
be in public instrument and recorded in SEC Eljane decided to form a partnership. Audrey
when: invested cash of Php 100,000 and merchandise
inventories with a cost of Php 35,000. Eljane
a. Immovable property or real rights are contributed cash worth Php 80,000 and an
contributed office equipment with a book value of Php
b. Partnership has P 3,000 or more capital 50,000 and a current market value of Php
Note: Inventory of any immovable property 60,000
must be signed by the parties and attached in Audrey’s Contribution:
public instrument, otherwise partnership is
deemed void. Contributio Book Curren Value of
n Valu t Contributio
Measurement of Contribution e Market n
Value
 Money – Cash (book value) Cash 100k 100k 100k
- We don’t consider fluctuating prices. Merchandis 35k 30k 30k
 Property – Non-Cash Asset (current market e Inventory
TOTAL 130K
value)
 Industry – difficult to measure the value of
such contribution. Not recognized in the
books.
Eljane’s Contribution
“Assets and liabilities transferred are recorded
at the fair market values at the time of the Contributio Book Curren Value of
contribution.” n Valu t Contributio
e Market n
 Liabilities (transferred) – “net asset” (A Value
Cash 80k 80k 80k
minus L) is the capital distribution of a
Office 50k 60k 60k
partner since obligation may be assumed by Equipment
the partnership, TOTAL 140K
What is Fair Market Value?
Fair Value is the price that would be received Journal Entries on the Partnership Books
to sell an asset, or paid to transfer a liability, in Cash 100k
an orderly transaction between market Merchandise Inv 30k
participants at the measurement date. Audrey, Capital 130k
 Cash 80k
Office Equipment 60k
Eljane, Capital 140k

NOTES:
 Each partner’s capital account (for the
FV of his net contribution) and Note: Separate capital and drawing accounts are
subsequent share in profits is credited. established for each partner.
Receivable from/Payable to a Partner
 Permanent Drawings will be debited to
the partner’s capital account. While  Receivable from the partner – loan
Temporary Drawing debited to the extended galing sa partnership patungo
partner’s drawing account. sa partner.

 No contribution shall be valued at an  Payable to Partner – nagloan ang

amount above the contribution partnership kay partner.
recoverable amount (higher between
Bonus on Initial Investment
asset’s FVLCTS and Value in Use).
Partner’s contribution must be adjusted Accounting Problem:
before recognition in the partnership
books. 1. When partner’s capital account is
credited for an amount greater than or
less than the fair value of his
Partners’ ledger account contribution.
2. When partner’s agree on relative capital
a. Capital Accounts
interest that are not aligned with their
b. Drawing Accounts
investment of identifiable assets.
c. Receivable Accounts

Capital and Drawing Accounts

Example: A partnership agreement allowed the

Industrial partner to have a capital credit > FV
of his contribution.
Treatment:
 Bonus Method
The additional credit to the Industrial
partner’s capital (bonus) is a deduction from
the capital of the other partners.
- The credit to the partner’s capital may
vary due to the bonus. However, the
 debit to the asset must be still equal to
the FV of the contribution.
- The difference between the amount
CR and DR is treated as adjustment to
the capital accounts of the other
partners.
Summary:
Asset Liability Credit to partner’s
Contribution assumed by capital account
of a partner the
partnership
Initially Initially Either at:
recorded at recorded at
fair value fair value a. Fair value
(no bonus)
b. Above fair
value (bonus
to the
partner)
c. Below fair
value (bonus
to the other
partners)

Variation to the bonus method

Accounting Problem:
1. When a partnership may stipulate a
certain ratio to be maintained by the
partners representing their specific
interest in the equity of the partnership.
This could result to the adjustment on
the initial contribution of the partners.

 Any increase or decrease to the capital credit

of a partner is not a deduction from his co-
partners’ capital account. It is a capital
adjustment accounted for either:

a. Cash settlement among the partners, or

b. Additional investment or withdrawal of
investment of a partner