1 Accounting For Partnership Basic Cionsiderations and Formation

ACCOUNTING FOR
PARTNERSHIP –
BASIC CONSIDERATIONS
AND FORMATION
Source: Partnership and Corporation, Ballada
Prepared by Greg O. Saclot
for ABM SHS/BSA 1st Year/BSBA 1st Year
REVIEW
1. In the 1983 accounting definition, “Accounting is a service

activity. Its function is to provide quantitative information, primarily
financial in nature about economic entities, that is intended to be
useful in making economic decisions.” This definition was provided
by
A. American Institute of Certified Public Accountants (AICPA)
B. Philippine Institute of Certified Public Accountants (PICPA)
C. Financial Accounting and Standards Board (FASB)
D. Accounting Standards Council (ASC)
E. Board of Accountancy (BOA)
REVIEW
2. Which of the following statements is correct?

A. Debit means increase and credit means decrease.
B. Unearned rent account is a liability account and increases on the
debit side.
C. Prepaid insurance account is a nominal account and has debit
normal balance.
D. Withdrawal is a permanent account and decreases on the credit
side.
E. Sales discount account is a contra-revenue account and increases
on the debit side.
REVIEW
3. Which of the following statements is/are correct?

A. There are three (3) trial balances in the accounting cycle.
B. The financial statements are prepared after the adjusted trial balance is
prepared but before closing entries are journalized and posted.
C. The post-closing trial balance is prepared before the closing entries are
journalized and posted.
D. The reversing entries are journalized and posted at end of the
accounting year.
E. After the closing entries are journalized and posted, only assets,
liabilities, capital, withdrawals and income summary accounts remain
open.
REVIEW
4. Income Summary is a permanent equity account

and has a credit normal balance.
A. True
B. False
REVIEW
5. There is no difference in the Philhealth

contribution table for employees and employer
between 2019 and 2020.
A. True
B. False
REVIEW
6. Which of the following is not used as initial

measurement of assets or liabilities?
A. Historical
B. Carrying amount
C. Replacement value
D. Net realizable value
E. Present Value
REVIEW
7. Relevance and faithful representations are qualitative

characteristics of useful financial information. What is not
a qualitative characteristics to enhance the usefulness of
information?
A. Comparability
B. Neutrality
C. Verifiability
D. Timeliness
E. Understandability
REVIEW
8. The purpose of adjusting entries is

A. to increase the account balance.
B. to decrease the account balance.
C. to update the account balance.
D. to close the account balance.
E. to reverse the account balance.
REVIEW
9. What is the preferred order of preparation of the

following?
Statement of Statement of Statement of Statement of Cash
Comprehensive Changes in Financial Position Flows
Income Owner’s Equity
A 1 2 3 4
B 1 4 2 3
C 2 4 1 3
D 2 3 1 4
E 4 1 2 3
REVIEW
10. In the terms of purchase include FOB destination,

what is the entry of the buyer on the freight paid
by seller?
Choices Account Debited Account Credited
A Freight In Cash
B Freight Out Cash
C Freight In Accounts Receivable
D Freight Out Accounts Payable
E No entry
LEARNING OBJECTIVES
1. Define partnership.
2. Identify the characteristics of a partnership.
3. Explain the advantages and disadvantages of a
partnership.
4. Distinguish a partnership and a corporation.
5. Identify and describe the different classification
of partners and the different kinds of partners
LEARNING OBJECTIVES
6. Outline the essential contents of the articles of

partnership
7. Summarize how a partnership is registered with SEC
8. Explain the accounting difference between a sole
proprietorship and a partnership.
9. Discuss the fair value concept.
10. Prepare and explain the entries for partnership
formation.
DEFINITION
In a contract of partnership, two or more persons

bind themselves to contribute money, property or
industry to a common fund with the intention of
dividing the profits among themselves. Two or
more persons also form a partnership for the exercise
of a profession. (Civil Code of the Philippines Article 1767)
CHARACTERISTICS OF A PARTNERSHIP
Mutual Contribution
Division of profits or losses
Co-ownership of contributed assets
Mutual agency
Unlimited liability
Income taxes
Partners’ equity accounts
Mutual Contribution. There cannot be a partnership

without contribution of money, property or industry
(i.e. work or services which may either be personal
manual efforts or intellectual) to a common fund.
Division of Profits or losses. The essence of

partnership is that each partner must share in the
profits or losses of the venture.
Co-ownership of contributed assets. All assets

contributed into the partnership are owned by the
partnership by virtue of its separate and distinct
personality. If one partner contributes an asset to the
business, all partners jointly own it in a special sense.
Mutual agency. Any partner can bind the other

partners to a contract if he is acting within his express
or implied authority.
Limited life. A partnership has a limited life. It may

be dissolved by the admission, death, insolvency,
incapacity, withdrawal of a partner or expiration of
term specified in the partnership agreement.
Unlimited liability. All partners (except limited

partners), including industrial partners are personally
liable for all debts incurred by the partnership. If the
partnership cannot settle its obligations, creditors’
claims will be satisfied from the personal assets of the
partners without prejudice to the rights of the separate
creditors of the partners.
Income taxes. Partnership, except general

professional partnerships, are subject to tax at the rate
of 30% (per R.A. 9337) of taxable income.
Partners’ equity accounts. Accounting for

partnership are much like accounting for sole
proprietorships. The difference lies in the number of
partners’ equity accounts. Each partner has a capital
account and a withdrawal account that serves similar
functions as the related accounts for sole
proprietorships.
DEFINITION OF CORPORATION
It is an artificial being created by operation of law,

having the right of succession, and the powers,
attributes and properties expressly authorized by law
or incident to its existence (Revised Corporation Code of
the Philippine (RCCP), Section 2).
ADVANTAGES OF PARTNERSHIP VS
SOLE PROPRIETORSHIP
1. Brings greater financial capability to the business.

2. Combines special skills, expertise and experience
of the partners.
3. Offers relative freedom and flexibility of action in
decision-making.
ADVANTAGES OF PARTNERSHIP VS
CORPORATION
1. Easier and less expensive to organize.

2. More personal and informal.
DISADVANTAGES OF PARTNERSHIP VS
CORPORATION
1. Easily dissolved and thus unstable compared to a

corporation.
2. Mutual agency and unlimited liability may create
personal obligations to partners.
3. Less effective than a corporation in raising large
amounts of capital.
PARTNERSHIP DISTINGUISHED FROM CORPORATION
Partnership Corporation
Manner of Creation Mere agreement of the partners Created by operation of law
Number of Person Two or more persons Not exceeding 15. (One Person
Corporation, RCCP Sec 10)
Commencement of Juridical Commences from the execution of Commences from the issuance of
Personality articles of partnership certificate of incorporation by the
Securities and Exchange
Commission (SEC)
Management Every partner is an agent of the Management is vested in the

partnership if the partners did not board of directors.
appoint a managing partner.
PARTNERSHIP DISTINGUISHED FROM CORPORATION
Partnership Corporation
Extent of Liability Each of the partners, except a Stockholders are liable only to the
limited partner, is liable to the extent of their interest or
extent of his personal assets. involvement in the corporation.
Right of Succession There is no right of succession. There is right of succession. A
corporation has the capacity of
continued existence regardless of
the death, withdrawal, insolvency
or incapacity of its director or
stockholders.
Term of Existence In a partnership, for any period of The corporation shall have
time stipulated by the partners. perpetual existence unless its
articles of incorporation provides
otherwise (RCCP, Section 11).
CLASSIFICATION OF PARTNERSHIP
Legality of
Object Liability Duration Purpose Existence
1. Universal 1. General 1. Partnership with 1. Commercial or 1. De jure
partnership of all 2. Limited a fixed term Trading partnership
present property 2. Partnership at Partnership 2. De facto
2. Universal will 2. Professional or partnership
partnership of Non-trading
profits Partnership
3. Particular
Partnership
KINDS OF PARTNERS
1. General partner – One who is liable to the

extent of his separate property after all assets of
the partnership are exhausted.
2. Limited partner – One who is liable only to the
extent of his capital contribution. He is not
allowed to contribute industry or services only.
KINDS OF PARTNERS
3. Capitalist partner – One who contributes money

or property to the common funds of the
partnership.
4. Industrial partner – One who contributes his
knowledge or personal services to the
partnership.
KINDS OF PARTNERS
5. Managing partner – One whom the partners has

appointed as manager of the partnership.
6. Liquidating partner – One who is designated to
wind up or settle the affairs of the partnership
after dissolution.
KINDS OF PARTNERS
7. Dormant partner – One who does not take

active part in the business of the partnership and
is not known as a partner.
8. Silent partner – One who does not take active
part in the business of the partnership though may
be known as a partner.
KINDS OF PARTNERS
9. Secret partner – One who takes active part in the

business but is not known to be a partner by
outside parties.
10. Nominal or partner by estoppel – One who is
actually not a partner but who represents himself
as one.
ARTICLES OF PARTNERSHIP
A partnership may be constituted orally or in writing.

In the latter case, partnership agreements are
embodied in the Articles of Partnership.
Essential provisions may be contained in the

agreement:
1. The partnership name, nature, purpose and
location.
2. The names, citizenship and residences of the
partners.
3. The date of formation and the duration of the
partnership.

agreement (continuation):
4. The capital contribution of each partner, the
procedure for valuing noncash investments, treatment
of excess contribution (as capital or as loan) and the
penalties for a partner’s failure to invest and maintain
the agreed capital.

5. The rights and duties of each partners.
6. The accounting period to be adopted, the nature
of accounting records, financial statements and
audits by independent public accountants.

7. The method of sharing profit or loss, frequency of
income measurement and distribution, including any
provisions for the recognition of differences in
contributions.

8. The drawings or salaries to be allowed to
partners.
9. The provision for arbitration of disputes,
dissolutions and liquidation.
SEC REGISTRATION
When the partnership capital is P3,000 or more, in

money or property, the public instrument must be
recorded with the Securities and Exchange
Commission (SEC) Even if it is not registered, the
partnership having a capital of P3,000 or more is still
valid and therefore has legal personality.
SEC REGISTRATION
The SEC shall not register any corporation organized

for the practice of public accountancy (The Philippine
Accountancy Act 2004, Section 28)
SEC REGISTRATION
The purpose of the registration is to set “a condition

for the issuance of the licenses to engage in business
or trade. In this way, the tax liabilities of big
partnership cannot be evaded, and the public also
determine more accurately their membership and
capital before dealing with them.
SEC REGISTRATION
Documents to be submitted:
 Articles of partnership
 Verification slip for the Business Name
 Written undertaking to change business name, if required
 Tax Identification Number (TIN) of each partner and that of the partnership
 Registration data sheet for partnership duly accomplished in six (6) copies
 Other documents that may be required:
1. Endorsement from other government agencies if the proposed partnership

will engage in an industry required by the government
2. For partnership with foreign partners, SEC Form F-105, bank certificate on
the capital contribution of partners, proof of remittance of contribution of
foreign partners.
SEC REGISTRATION
 Pay the registration/filing and miscellaneous filing

fee equivalent to 1/5 of 1% of the partnership
capital but not less than P1,000 and legal research
fee which is 1% of the filing fee.
 Forward documents to the SEC Commissioner for
signature.
ACCOUNTING FOR PARTNERSHIP
 Owners’ Equity Accounts
 Loan Receivable From or Payable to Partners

PARTNERSHIP FORMATION
Valuation of Investment by Partners
Partners may invest cash or non-cash assets in the

partnership. When a partner invests non-cash
assets, they are to be recorded at values agreed
upon by the partners. In the absence of any
agreement, the contribution will be recognized at
their fair values at the date of transfer to the
partnership.
Valuation of Investment by Partners
Fair market value of an asset is the estimated amount

that a willing seller would receive from a financially
capable buyer for the sale of the asset in a free market.
Per International Financial Reporting Standards
(IFRS) No. 3, fair value is the price at which an asset
or liability could be exchanged in a current transaction
between knowledgeable, unrelated willing parties.
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 to a partnership
a. A sole proprietor and an individual without an existing
business form a partnership.
b. Two or more sole proprietors form a partnership
3. Admission or retirement of a partner (to be discussed in
dissolution of partnership)
4. Two or more partnerships form a partnership (to be discussed
in advanced accounting)
INDIVIDUALS WITH NO EXISTING BUSINESS
On May 1, 2020, Antonio Beltran and Carlos

Domingo agreed to form a partnership. The
partnership agreement specified that Beltran is to
invest P500,000 cash and Domingo is to contribute
land with a fair market value of P1,500,000 with
P200,000 mortgage to be assumed by the partnership.
What happened between the parties?

What happened between the partners?

They agreed to form a partnership.

When was the agreement of the partners?


When was the agreement of the partners?

May 1, 2020
Who are the partners?


Antonio Beltran and Carlos Domingo

What will the partners contribute?

What will the partners contribute?
Beltran to contribute P500,000 cash while Domingo
will contribute land with fair market value of
P1,500,000 with P200,000 mortgage to be assumed
by the partnership.
Accounting entries:
Cash 500,000
Beltran, Capital 500,000
To record Beltran’s P500,000 cash investment.
Accounting entries:
Land 1,500,000
Mortgage Payable 200,000
Domingo, Capital 1,300,000
To record Domingo’s investment of land with
fair market value P1,500,000 with mortgage
P200,000 assumed by partnership.
Accounting entry (consolidated):
Cash 500,000
Land 1,500,000
Mortgage Payable 200,000
To record the initial investments of Beltran and Domingo.
Beltran and Domingo Company
Statement of Financial Position
May 1, 2020
Assets
Cash P 500,000
Land 1,500,000
Total Assets P2,000,000
Liabilities and Partners’ Equity
Mortgage Payable P 200,000
Total Liabilities and Partners’ EquityP2,000,000
AN INDIVIDUAL AND SOLE PROPRIETOR
The statement of financial position of Elena Flores on July 1, 2020 before accepting Grace Hila
as partner is shown below:
Elena Flores
July 1, 2020
Assets
Cash P 50,000
Accounts Receivable P 210,000
Less Allowance for Uncollectible Accounts ( 10,000) 200,000
Merchandise Inventory 60,000
Furniture and Fixtures 140,000
Total Assets P 450,000
Liabilities and Equity
Accounts Payable P 100,000
Flores, Capital 350,000
Total Liabilities and Equity P 450,000
Grace Hila offered to invest cash to get capital credit equal

to one-half of Elena Flores’s capital after giving effect to
the adjustments below. Elena Flores accepted the offer.
1. The merchandise is to be valued at P55,000.
2. The accounts receivable is estimated to be 90%
collectible.
3. The furniture and fixtures are to be valued at P130,000.
4. The office supplies on hand that have been charged to
expense in the past amounted to P5,000. These will be
used by the partnership.
The following procedures may be used in recording the

formation of the partnership:
Books of Elena Flores:
1. Adjust the assets and liabilities of Elena Flores in
accordance with the agreement. Adjustments are to be
made to her capital accounts.
2. Close the books.
Books of Partnership:
3. Record the investment of Elena Flores.
4. Record the investment of Grace Hila.

Account Title Debit Credit
To value merchandise at P55,000 from P60,000 carrying amount.

Allowance for Uncollectible Accounts 11,000
To increase allowance from P10,000 to P21,000 to reflect 90% estimated collectible on accounts
P210,000.

Accumulated Depreciation 10,000
To adjust furniture and fixtures from P140,000 to P130,000 agreed value.
Office Supplies 5,000

To record office supplies on hand that was previously charged to expense.

Accounts Payable 100,000
Cash 50,000
Accounts Receivable 210,000
To close the books of Elena Flores.
Cash 50,000
To record investment of Elena Flores.
Cash 164,500
Hila, Capital 164,500
To record cash investment of Grace Hila.
Flores and Hila Company
July 1, 2020
Assets
Cash P 214,500
Accounts Receivable P210,000
Total Assets P 593,500
Accounts Payable P 100,000
Hila, Capital 164,500
Total Liabilities and Partners’ EquityP 593,500
TWO OR MORE SOLE PROPRIETORS FORM A PARTNERSHIP
Liza Oliver
Matalino White
Cash P 60,000 P 50,000
Accounts Receivable 110,000 90,000
Merchandise Inventory 90,000 110,000
Delivery Equipment 100,000
Accounts Payable 40,000 70,000
Matalino, Capital 290,000
White, Capital 280,000
Total P 330,000 P 350,000
The conditions and adjustments agreed upon by the partners for

purposes of determining their interests in the partnership are:
1. Actual count and bank reconciliation on Matalino proprietorship’s
cash account revealed cash shortage and unrecorded expense P1,000.
2. Establishment of 10% allowance for uncollectible accounts in each
book.
3. The merchandise of Matalino is to be decreased by P5,000 while
merchandise of White is to be increased by P10,000
4. The furniture and fixture of Matalino are to be depreciated by
P6,000.
5. The delivery equipment of White is to be depreciated by P9,000.
Books of Liza Matalino:

Cash 1,000
Cash shortage on Matalino’s account.

To provide 10% allowance on uncollectible accounts.

To revalue merchandise inventory according to agreement.

To revalue furniture and fixtures according to agreement.
Books of Liza Matalino:

Cash 59,000
To close the books of Matalino.
Books of Oliver White:

To provide 10% provision for uncollectible accounts.

White, Capital 10.000
To revalue inventories according to agreement.

To revalue delivery equipment according to agreement.
Books of Oliver White:

Accounts Payable 70.000
Cash 50,000
To close the books of Oliver White.
Cash 59,000
Accounts Receivable 110.000
Accounts Payable 40.000
To record the investment of Matalino.
Cash 50,000
To record the investment of White.
Matalino and White Company
July 22, 2020
Assets
Cash P109,000
Accounts Receivable P200,000
Total Assets P649,000
Accounts Payable P110,000
Total Liabilities and Partners’ Equity P649,000
ACTIVITY
Form your group (two to five members per group)

and discuss among yourselves how you are going to
form a partnership and present your idea to the class.
These should include, but not limited to: (a)
registration requirement, if any; (b) name of the
company; (c) contributions of each partner; and (d)
manner of distributing profits or losses. Present your
concept to the class.
Topic for next meeting:
Distribution of Profits or Losses
Thank you!

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ACCOUNTING FOR

1. In the 1983 accounting definition, “Accounting is a service

2. Which of the following statements is correct?

3. Which of the following statements is/are correct?

4. Income Summary is a permanent equity account

5. There is no difference in the Philhealth

6. Which of the following is not used as initial

7. Relevance and faithful representations are qualitative

8. The purpose of adjusting entries is

9. What is the preferred order of preparation of the

10. In the terms of purchase include FOB destination,

6. Outline the essential contents of the articles of

In a contract of partnership, two or more persons

Mutual Contribution. There cannot be a partnership

Division of Profits or losses. The essence of

Co-ownership of contributed assets. All assets

Mutual agency. Any partner can bind the other

Limited life. A partnership has a limited life. It may

Unlimited liability. All partners (except limited

Income taxes. Partnership, except general

Partners’ equity accounts. Accounting for

It is an artificial being created by operation of law,

1. Brings greater financial capability to the business.

1. Easier and less expensive to organize.

1. Easily dissolved and thus unstable compared to a

Management Every partner is an agent of the Management is vested in the

1. General partner – One who is liable to the

3. Capitalist partner – One who contributes money

5. Managing partner – One whom the partners has

7. Dormant partner – One who does not take

9. Secret partner – One who takes active part in the

A partnership may be constituted orally or in writing.

Essential provisions may be contained in the

Essential provisions may be contained in the

Essential provisions may be contained in the

Essential provisions may be contained in the

Essential provisions may be contained in the

When the partnership capital is P3,000 or more, in

The SEC shall not register any corporation organized

The purpose of the registration is to set “a condition

1. Endorsement from other government agencies if the proposed partnership

 Pay the registration/filing and miscellaneous filing

 Owners’ Equity Accounts

 Loan Receivable From or Payable to Partners

Valuation of Investment by Partners

Partners may invest cash or non-cash assets in the

Valuation of Investment by Partners

Fair market value of an asset is the estimated amount

A partnership may be formed in any of the following ways:

On May 1, 2020, Antonio Beltran and Carlos

What happened between the parties?

What happened between the partners?

What happened between the partners?

When was the agreement of the partners?

What happened between the partners?

When was the agreement of the partners?

Who are the partners?

Who are the partners?

Who are the partners?