PARTNERSHIP

Basic Consideration and Formation

“Learning is the only thing the mind never

exhausts, never fears, and never regrets.” –
Leonardo da Vinci, inventor and polymath.
 Partnership: Basic Consideration and Formation
Learning Objectives:
• Define partnership and identify its essential characteristics.
• Identify the different classifications of partnerships and the
different kinds of partners.
• Differentiate between the accounting for partnerships, sole
proprietorships, and corporations.
• State the valuation of contributions of partners.
• Account for the initial investments of the partners to the
partnership.
• State the peculiar accounts used in a partnership and identify the
transactions that affect these accounts.
Image source: https://encrypted-tbn0.gstatic.com/i
Let’s review! Fill in the blanks!

In a contract of partnership, _____________ persons bind

themselves to contribute money, _____________, or
__________ to a common fund, with the intention of dividing
the __________ among themselves.
______ persons may also form a partnership for the exercise of
a profession. (Civil code of the Philippines, Article 1767)

Question to ponder:
Does a partnership has its own personality?
 Essential Characteristics of a Partnership:

1. Ease of formation
2. Separate legal personality
3. Mutual agency
4. Co-ownership of property
5. Co- ownership of profits
6. Limited life
7. Transfer of ownership
8. Unlimited liability
 Classification of Partnerships
1. According to object:
a. Universal partnership of all present property
b. Universal partnership of profits
c. Particular partnership

2. According to liability:
a. General
b. Limited

3. According to duration:
a. Partnership with a fixed term
b. Partnership at will
 Classification of Partnerships

4. According to purpose:
a. Commercial or trading
b. Professional

5. According to legality of existence:

a. De jure partnership
b. De facto partnership
 Kinds of Partners
1. General partner
2. Limited partner
3. Capitalist partner
4. Industrial partner
5. Managing partner
6. Liquidating partner
7. Dormant partner
8. Silent partner
9. Secret partner
10. Nominal partner
 Accounting for Partnership
The accounting for assets and liabilities remains the same
regardless of the form of a business organization.
What changes is the accounting for equity.
The following are the major considerations in the accounting
for the equity of a partnership:
1. Formation – accounting for the initial investments to the
partnership
2. Operation – division of profits or losses
3. Dissolution – admission of a new partner and
withdrawal, retirement or death of a partner
4. Liquidation – winding up of affairs of the partnership.
 Accounting for Partnership
Partner’s Capital Account
Debit Credit
1. Permanent Withdrawals 1. Initial investment of the owner
2. Share in losses 2. Additional investments
3. Debit balance of drawing 3. Share in profits
accounts
 Accounting for Partnership
Partner’s Drawing Account
Debit Credit
1. Temporary Withdrawals 1. Share in profit( this may be directly
2. Share in losses ( this may credited to capital)
be debited directly to capital)
 Accounting for Partnership
Loan Receivable from a Partner – account used
when a loan is extended by the partnership to a
partner.

Loan Payable to a Partner – account used when

a loan is obtained by the partnership from a
partner
 Partnership Formation
Valuation of contributions of partners:
Type of Contribution Measurement

Cash and cash equivalents Face amount of cash and cash equivalents
contributed (PAS 7)
Non cash assets At values agreed upon by the partners which
generally are the assets’ fair market values
at the time of the contribution.
Notes: *Inventory- LCNRV
• Fair market value – is the price at which an asset or liability could be
exchanged in a current transaction between knowledgeable, unrelated
willing parties.
• The admission of an industrial partner is recorded through a memorandum
entry.
• Any obligation assumed by the partnership is credited to the specific
liability account involved.
Illustrative Problem-Valuation of contributions of partners:

Mr. A and Mr. B agreed to form a partnership. The contributions of

the partners are as follow:
Mr. A Mr. B
Cash P20,000 P30,000
Inventory 20,000
Building 40,000
Furniture & Fixtures 40,000
The building has a fair value of P60,000 and is subject to a
mortgage of P10,000, which the partnership has assumed. The
partnership agreement also specified that profits and losses are to be
distributed evenly.
Required: Provide the entry to record the contributions of the
partners in the partnership books.
 Bonus on Initial Investments

 A bonus exists when the capital account of a

partner is credited for an amount greater than
or less than the fair value of his
contributions.

 The bonus is treated as adjustment to the

capital accounts of the other partners.
 Illustrative Problem- Bonus method

 A and B agreed to form a partnership. A

contributed cash of P600,000, while B
contributed equipment costing P700,000but
with fair value of P500,000. The partners
agreed that since B will be bringing his
expertise and experience into the business, A
and B shall have a 40:60 interest,
respectively. Their initial capital credit shall
reflect this agreement.
 Partnership Formation
A partnership may be formed in any of the following ways:

1. Individuals with no existing business form a partnership.

2. Conversion of a sole proprietorship into a partnership:
a. A sole proprietor and an individual with no
existing business form a partnership.
b. Two or more sole proprietors form a partnership.
3. Admission or retirement of a partner. (To be discussed
under dissolution)
Illustrative Problem 1: Individuals with no
existing business form a partnership

Ana, Bea, Candy organized a partnership. Their agreement

consist of the following:
⮚ Ana is to invest cash of P500,000
⮚ Bea is to contribute equipment originally costing
P600,000 and with accumulated depreciation of
P140,000. They agreed to a fair valuation of this
equipment at P480,000.
⮚ Candy is admitted as an industrial partner, with a 20%
share in partnership profits.
The entries to record the investment of each partner are as
follows:

Debit Credit
Cash P 500,000
Equipment 480,000
Ana, Capital P 500,000
Bea, Capital 480,000

Memorandum Entry:
Candy is admitted as an industrial partner with a 20% share in
profits.
Illustrative Problem 2 : A sole proprietor and an individual
without an existing business form a partnership

Under this type of formation, the assets and liabilities of

the proprietorship will be transferred to the newly formed
partnership at values agreed upon by all the partners or
at their current fair values.

⮚ Ann Cruz and Bing David agreed to form a partnership.

Ann Cruz is to contribute her existing business to the
partnership while Bing David is to invest cash after
giving effect on the conditions agreed upon.
Illustrative Problem 2: A sole proprietor and an individual
without an existing business form a partnership. Cont.

Ann Cruz has the following account balances in her books:

Cash P 200,000
Accounts Receivable 120,000
Allowance for Doubtful Accounts ( 30,000)
Inventories 140,000
Furniture & Fixtures 80,000
Accumulated Depreciation ( 20,000)
Total Assets P 490,000
Accounts Payable P 120,000
Cruz, Capital 370,000
Total Liabilities and Capital P 490,000
Illustrative Problem 2: A sole proprietor and an individuals
without an existing business form a partnership Cont.

The following conditions were agreed upon by Ann Cruz and

Bing David:
1. Assets of Cruz would be taken over under the following
valuation:
Accounts Receivable P 80,000
Inventories 130,000
Furniture & Fixtures 75,000
2. Additional accrued expenses of P25,000 in the books of
Cruz are to be recognized.
3. Liabilities would be assumed by the partnership.
4. The partners would contribute or withdraw cash to make
their capital equal to P 300,000 each.
Illustrative Problem 2: A sole proprietor and an individuals
without an existing business form a partnership Cont.
The following are the accounting procedures to be taken up:
⮚ In the books of Ann Cruz:
1. Adjust the assets and liabilities of Ann Cruz, charging or
crediting directly to her capital accounts.
2. Close all accounts at their adjusted balances.
⮚ In the new set of books of the partnership:
1. Record the assets and liabilities received from Ann Cruz. The
furniture and fixture account is taken up at the agreed value
without transferring to the books of the partnership the related
accumulated depreciation.
2. Record the additional investment or withdrawal to bring their
respective capital investment to the agreed amount of P300,000
each.
Illustrative Problem 2: A sole proprietor and an individuals
without an existing business form a partnership Cont.
In the books of Ann Cruz, the following adjusting and closing
entries should be made:

Debit Credit

Adjusting Entries:
Ann Cruz Capital 30,000
Accumulated Depreciation- F & F 15,000
Allowance for Doubtful Accounts 10,000
Inventories 10,000
Accrued Expenses 25,000
Illustrative Problem 2: A sole proprietor and an individuals without
an existing business form a partnership. Cont.

Accounts affected Agreed Book Adjustment

valuation Value

Accounts Receivable, net of P 80,000 P 90,000 Decrease of P10,000

Allowance for Doubtful
Accounts

Inventories 130,000 140,000 Decrease of P10,000

Furniture & Fixtures 75,000 60,000 Increase of P15,000

Accrued Expenses 25,000 -0- Increase of P25,000

Ann Cruz, Capital Net effect of

adjustment to
capital – decrease of
P30,000
Illustrative Problem 2: A sole proprietor and an individuals
without an existing business form a partnership. Cont.

Note:
⮚ Adjustment to Accounts Receivable and Furniture & Fixtures
are made through their related valuation accounts such as
allowance for doubtful accounts and accumulated depreciation
respectively.
⮚ Hence, to decrease the net realizable value of accounts
receivable, the allowance account is increased, hence credited.
⮚ To increase the book value of the furniture & fixture, the
related accumulated depreciation account is debited or
decreased.
⮚ In cases where the fair value of the property or equipment
exceeds the original cost, the existing accumulated depreciation
account is debited to the extent only of its balance, with the
excess being charged directly to the asset account.
⮚ The net effect of adjustments decreased Cruz, Capital to
P 340,000.
Illustrative Problem 2: A sole proprietor and an individuals
without an existing business form a partnership. Cont.
Debit Credit
Closing Entries:
Allowance for Doubtful Accounts 40,000
Accumulated Depreciation- F & F 5,000
Accrued Expenses 25,000
Accounts Payable 120,000
Ann Cruz Capital 340,000
Cash 200,000
Accounts Receivable 120,000
Inventories 130,000
Furniture & Fixtures 80,000
Illustrative Problem 2: A sole proprietor and an individuals
without an existing business form a partnership. Cont.

New Books of the Partnership:

Debit Credit
Cash 200,000
Accounts Receivable 120,000
Inventories 130,000
Furniture & Fixtures 75,000
Allowance for Doubtful Accounts 40,000
Accrued Expenses 25,000
Accounts Payable 120,000
Ann Cruz Capital 340,000
Illustrative Problem 2: A sole proprietor and an individuals
without an existing business form a partnership. Cont.

Debit Credit
Ann Cruz, Capital P 40,000
Cash P 40,000
Cash withdrawal of Cruz to bring
her capital to P300,000

Cash 300,000
Bing David, Capital 300,000
 Cruz and David
Statement of Financial Position
June 1, 2024

Assets
Cash P 460,000
Accounts Receivable P 120,000
Less: Allowance for Doubtful Accounts 40,000 80,000
Inventories 130,000
Furniture & Fixtures 75,000
Total Assets P 745,000
Liabilities & Owner’s Equity
Accounts Payable P120,000
Accrued Expenses 25,000
Cruz, Capital 300,000
David, Capital 300,000
Total Liabilities & Owners’ Capital P 745,000
 End of Presentation

GOD BLESS YOU!

References:
Milan, Zeus Vernon (2024), Basic Financial Accounting and Reporting/Bandolin Enterprise
Ballada, Win, Basic Financial Accounting and Reporting/ Domdane Publishers (prescribed textbook)
Manuel, Zenaida Vera Cruz, 21st Century Partnership and Corporation Accounting/ Zenaida Vera Cruz manuel