Financial Accounting & Reporting

Presented by:
Mr. Francis H. Villamin
UPHSD – September, 2019
Introduction to Partnership as a
Business Organization
Partnership is a contract whereby 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 may also
form a partnership for the exercise of a
profession. (Civil Code of the Philippines,
Article 1767).
Introduction to Partnership as a
Business Organization
Partnership is an association of two or more
persons to carry on, as co-owners, a business for
profit. The owners of the partnership are called
“partners.” (Uniform Partnership Act,
Section 6).

The partnership has a juridical personality

separate and distinct from that of each of
the partners. (Civil Code of the Philippines,
Article 1768).
Introduction to Partnership as a
Business Organization
A partnership comprised two (2) essential
elements:
1. an agreement to contribute money, property,
or industry to a common fund
2. intent to divide profits among contracting
parties.
Introduction to Partnership as a
Business Organization
The agreement of partnership which may be
oral or in writing becomes the contract
(Articles of Co-Partnership) that binds all the
partners.
It can only be entered into by persons who are
legally capable to enter into a contract. It may
be formed orally; however, to avoid
misunderstanding, it must be taken into writing.
Introduction to Partnership as a
Business Organization
The law requires that the contract of partnership
be in public instrument when
(1) an immovable property or real rights are
contributed thereto,
(2) the partnership capital exceeds P3,000.
Introduction to Partnership as a
Business Organization
When the partnership capital exceeds P3,000,
the partnership contract must be registered with
Securities and Exchange Commission (SEC).
The purpose of registration is to set “a condition
for the issuance of the licenses to engage in
business or trade”.
Introduction to Partnership as a
Business Organization
The partnership name must bear the word
“Company” or “Co.” and if it is a limited
partnership, the word “Limited” or “Ltd.” A
professional partnership may bear the word
“Company,” “Associates” or “Partners” or other
similar descriptions. (SEC Memorandum Circular
5, Series of 2008).
 Characteristics of a Partnership
 Based on contract – Partnership is formed through the
mutual agreement of all the partners. The contract may
be oral or written.
 Voluntary association – No partner should be forced or
coerced in joining a partnership.
 Mutual agency – Any partner may act as agent of a
partnership in conducting its business.
 Unlimited liability – The personal assets of any partner
may be used to satisfy the partnership creditors’ claims
upon liquidation if partnership assets are not enough to
settle the liabilities of external creditors.
 Characteristics of a Partnership
 Limited life – A partnership may be dissolved by action
of the partners or by operation of law.
The withdrawal, death, retirement, bankruptcy,
incapacity of the partner and the admission of a new
partner dissolves the partnership.
 Mutual participation in profits – A partner has the
right to share in the partnership profits.
 Legal entity - A partnership has legal personality
separate and distinct from that of each partners.
 Co-ownership of contributed assets – Property
contributed to the partnership are owned by the
partnership by virtue of its separate legal personality.
 Income tax – Partnerships, except general professional
partnerships are subject to income tax.
 Advantages of a Partnership

1. Ease and less cost to form and dissolve.

2. Broader source of capital.
3. Relative freedom and flexibility in decision-
making. Decisions are effected simply by
agreement among the partners without the
formalities necessary under the
corporation.
 Advantages of a Partnership

4. Broader management base.

5. Unlimited liability of general partners
makes it reliable from the point of
view of creditors.
 Disadvantages of a Partnership
1. Lack of business continuity because it can
easily be dissolved.
2. Limited amount of capital may be raised as
compared to a corporation.
3. Unlimited liability of a partnership.
4. A general partner may be subjected to
personal liability for erroneous management
decisions made by his associates.
 Disadvantages of a Partnership
5. There is likelihood of dissension and
disagreement when each of the partners has
the same authority in the management of the
firm.
6. There is difficulty in transferring ownership
interest because ownership interest in the
partnership cannot be transferred without the
consent of all the partners.
 Articles of Co-Partnership

 This is an agreement in writing among

the partners governing the nature and
terms of the partnership contract and to
minimize misunderstandings and disputes
among the partners.
 It also covers the formation, operation and
dissolution of the partnership.
 Articles of Co-Partnership

1. The name of the partnership.

2. The names, addresses of the partners,
classes of partners stating whether the
partner is a general or limited partner.
3. The effective date of the contract.
4. The purpose and principal place of
business of the business.
 Articles of Co-Partnership
5. The capital of the partnership stating the
contribution of each of the partners.
6. The rights and duties of each of the
partner.
7. The manner of dividing profit or loss
among the partners.
8. The conditions under which the partners
may withdraw money or other assets.
 Articles of Co-Partnership

9. The manner of keeping the books of

accounts.
10. The cause for dissolution and the
provision for arbitration in settling
disputes.
 Kinds of Partners

 As to nature of contribution
1. Capitalist partner – one who
contributes money, property into the
partnership.
2. Industrial partner – one who
contributes only his industry or services to the
partnership.
3. Capitalist-industrialist partner – one who
contributes cash, property, and industry.
 Kinds of Partners

 As to liabilities to third parties

1. General partner – one whose liability
to partnership creditors extends to his
personal assets.
2. Limited partner – one whose liability
to partnership creditors is limited to his
capital contribution.
 Kinds of Partners

 As to their interest in or
obligation to the business
1. Managing partner – one who
manages the affairs of the business.
2. Secret partner – one who is not known
by third parties to be a partner in the
business but takes active part in the
business.
 Kinds of Partners
 As to their interest in or obligation to the
business
3. Silent partner – one who does not
take active part in the business but is
known by third parties to be a partner in the
business.
4. Dormant partner – one who does not take
part in the business and is not known by third
parties to be a partner.
5. Nominal partner – A partner in name only and
does not participate in the management of
business.
 Kinds of Partners

 As to their interest in or obligation to

the business
6. Ostensible Partner – one who takes
active part and known to the public as a
partner in the partnership, whether or
not he has an actual interest in the firm.
 Kinds of Partners

 As to their interest in or obligation to

the business
7. Liquidating Partner – one who takes
charge of the winding up of a
partnership affairs upon dissolution.
 Classifications of Partnership
 As to liability to partners
1. General partnership – one in which all
partners are general partners.
2. Limited partnership – one which is
composed of one or more general partners
and one or more limited partners. It shall
bear the word “Limited” or “Ltd.” in its
firm name.
 Classifications of Partnership

 As to object of partnership
1. Universal partnership of all present
property – One in which the partners
contribute all the property which actually
belongs to them to a common fund, with the
intention of dividing the same among
themselves, as well as the profits which they
may acquire therewith.
 Classifications of Partnership

 As to object of partnership
2. Universal partnership of profits -
One in which comprises all that the partners
may acquire by their industry or work during
the existence of the partnership.
 Classifications of Partnership

 As to object of partnership
3. Particular partnership – One which has
for its object determinate things, their use or
fruits, or a specific undertaking, or the
exercise of a profession or vocation.
Classifications of Partnership

 As to duration
1. Partnership at will – One in which
no time or period is specified for its
existence and is not formed for a
particular undertaking or venture. This
may be terminated anytime by mutual
agreement of the partners or by the will
of any one partner alone.
Classifications of Partnership

 As to duration
2. Partnership with a fixed term –
One in which the term for which the
partnership will exist is fixed or agreed
upon. This also applies to a partnership
that is formed for a particular objective or
undertaking.
Classifications of Partnership

 As to purpose
1. Commercial or trading
partnership – one that is organized to
undertake business transactions such as
merchandising or manufacturing
transactions.
Classifications of Partnership
 As to purpose
2. Professional partnership – one
that is formed for the practice of a
profession, such as accounting firm for
CPAs, law firms for lawyers, and similar
professions.
 Classification of Partnerships

 As to legality of existence.
1. De jure partnership – one that has
complied with the legal requirements
pertaining to its formation.
2. De facto partnership – one that has
not complied with the legal
requirements of the partnership.
 Classification of Partnerships

 As to publicity.
1. Secret partnership – one wherein the
existence of certain persons as partners is
not make known to the public by any of the
partners.
2. Open partnership – one wherein the
existence of certain persons as partners is
made known to the public by the members
of the firm.
 Classification of Partnerships

 As to publicity.
1. Secret partnership – one wherein the
existence of certain persons as partners is
not make known to the public by any of the
partners.
2. Open partnership – one wherein the
existence of certain persons as partners is
made known to the public by the members
of the firm.
 Classification of Partnerships

 As to representation to others.
1. Ordinary partnership – one which
actually exists among the partners and also
as to third parties.
2. Partnership by estoppel – one which in
reality is not a partnership but is considered
one only in relation to those who, by their
conduct or omission are precluded to deny
or disprove the partnership’s existence.
Basic Rights of a Partner

 The right to share in the profits.

 The right to participate in the
management of the business.
 In the event of liquidation, the right to
share in the assets of the business after
satisfying the claims of creditors.
 Basic Features of Partnership
Accounting

1. More than one capital and drawing

accounts.
2. Partner’s Loans.
3. Partner’s Borrowings.
4. Interest on Investment.
5. Division of Profits and Losses.
 Accounting for Partnership
Formation and Operating
Transactions

1. Accounting for capital contributions

a. Initial investment
b. Additional capital contributions
c. Drawings by partners
2. Loan to and from partners
Ledger Accounts for Partners

 Capital accounts
 Drawing accounts
 Accounts for loans to and from partners
 Partner’s Capital Account

Permanent reduction xxx Initial investment xxx

Additional investment xxx
 Partner’s Drawing Account

Share in the loss xxx Share in the profits xxx

Regular withdrawals xxx
Partnership Formation

A. No existing business
1. Two or more persons will start a
business for the first time and
form a partnership.
B. With existing business
2. Conversion of a single
proprietorship into a partnership.
 Partnership Formation

B. With existing business

3. Two or more single proprietors will
combine their businesses and form
a partnership.
4. An existing partnership will be
dissolved in favor of a new
partnership.
Thank you.
That’s all for today!!