ALDERSGATE COLLEGE
ACCOUNTING FOR SPECIAL TRANSACTIONS
1ST SEMESTER; A.Y. 2020 – 2021
PARTNERSHIP ACCOUNTING:
Formation and Operation
NATURE & DEFINITION OF A PARTNERSHIP
Partnership – an association of two or more persons who bind
themselves (through a contract of partnership called Articles of
Co-Partnership) to contribute, money, property or industry to a
common fund with the intention of dividing the profits among
themselves.
Notes to the definition:
➢ A partnership is created through a contract. For a
contract to be made, there should be meeting of minds.
A meeting of minds is achieved when an offer has been
accepted.
➢ All partners must share in the partnership profit. It is
illegal to exclude a partner in the sharing. If no profit-
sharing method is agreed upon the creation of the
business, the law requires all partnerships to give an
amount which is “just and equitable” as the salary or
profit-share of an industrialist partner.
A partnership’s life, like a sole proprietor, is depended on the
partners/owner. Once an owner dies, the business dies with him.
If the remaining/surviving partners chooses to continue, they
must reapply the business to the SEC.
CHARACTERISTICS OF A PARTNERSHIP:
1) Voluntary agreement
A partnership agreement is perfected by mere consent,
that is, upon express or implied agreement of two or
more partners
2) Mutual contribution of money, property, or
industry to a common fund
In order to become a partner in a partnership, one must
contribute money and/or property to a common fund.
An individual may also be a partner by investing his
services to the firm. Without the element of mutual
contribution, there can be no partnership.
3) Co-ownership of property
The assets contributed by each partner in a partnership
become the common property of all partners. No
partner owns any particular piece of partnership
property.
4) Mutual agency
Each partner acts as an agent for the other partners.
This means the partnership is legally held responsible
for the acts of any partner as long as those acts relate
to the normal partnership activities. However, the
partnership is not bound by an act committed by any
of the partner that is considered beyond the scope of
the partnership business.
5) Unlimited Liability
Each partner is held personally liable for all the debts
of the firm. Partnership obligations can be satisfied not
only with partnership assets but also with the personal
holdings or assets of each partner. When all
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partnership assets are exhausted and there are still
partnership obligations that have not been settled, the
partnership creditors can claim from the personal
assets of the partners.
6) Limited Life
The legal life of the partnership terminates with the
admission of a new partners, death, bankruptcy or
withdrawal of any partner, voluntary dissolution by the
partners, or by involuntary dissolution such as through
bankruptcy proceedings. A partnership may also come
to an end upon completion of the objective or goal for
which the partnership was formed. However, the
dissolution of the partnership does not necessarily
terminate the partnership as a reporting entity.
7) Division of profits among partners
Based on the definition of a partnership from the New
Civil Code, it is deemed that the primary purpose of a
partnership is to earn profits and to divide the same
among the partners in conformity with the terms of the
partnership agreement.
Form and other legal necessities
Although a partnership may be perfected in any form, it is
always preferable to have the contract in writing. Articles 1771
and 1772 of the New Civil Code require the partnership contract
to be in public instrument when an immovable property or real
rights are contributed thereto or when the partnership capital is
at least three thousand pesos (P3,000). The written contract of
partnership is called the Articles of Co-Partnership.
Classification of Partners:
Partners may be classified in a variety of ways, as follows:
➢ As to nature of contributions;
➢ As to the partners’ liabilities to third persons; and
➢ As to the partners’ interest or obligation to the business
According to Contribution:
1. Capitalist – one who contributed money or property
(whether tangible or intangible)
2. Industrialist – one who contributed his services
3. Capital-Industrial
According to Liability:
1. General – one who is liable for partnership debts to
the extent of their personal property after all the
partnership assets have been exhausted.
2. Limited – one whose liability is only to the extent of
his capital contribution to the partnership
- Once a partner in a partnership is a limited one,
the partnership’s name must contain the word
“Limited” or “Ltd.” (Example: ABC, Limited
ABC, Ltd.) The purpose of this is to act as a caveat
(beware) for creditors and let them know that
there is a possibility that the loans may not be
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 ALDERSGATE COLLEGE
ADVANCED FINANCIAL ACCOUNTING AND REPORTING 1
2ND SEMESTER; A.Y. 2019 – 2020

entirely paid back upon the due date.

According to Liability or Obligation to the Business: ACCOUNTING FOR THE OPERATIONS OF A

1. Managing Partner – one who manages the affairs of PARTNERSHIP
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
3. Silent Partner – one who does not take active part in
the business but is known by the third parties to be a
partner in the business
4. Dormant Partner – one who does not take active part
in the business and is not known by the third parties to
be a partner
The operations stage of the partnership happens after the
formation until the start of the liquidation. This pertains to the
profitability of the business, factors that may affect it and the
way in which the partners share the profit or loss.
Factors that may affect the profitability include: interest,
salaries and bonus. Giving out interest to partners based on
capital contribution is a medium to encourage said partners to
contribute more capital into the business. Salaries are given to
partners who devote their time and effort to manage the
business. Lastly, bonuses are given to managing partners who
proved themselves effective by making the business earn
profits. Take in mind that said factors (interest, salaries and
bonus) are not part of the business’ operating expenses.

5. Ostensible Partner – one who takes active part and is
known to the public as a partner in the business,
whether or not he has an actual interest in the firm. He
is also known as a Partner by Estoppel.
Partnerships, except general professional partnerships, are
subject to 30% income tax rate which is reported as an expense
but is shown separately in the income statement. The profit
then, after deducting the income tax, is the amount divided
among the partners

ACCOUNTING FOR FORMATION OF A When it comes to sharing the profits and losses, partners follow
PARTNERSHIP a sharing agreement which they have contracted at the
partnership’s formation. It is legally prohibited to exclude a
Formation pertains to the setting up of the business. partner from the sharing of profits.

In general, accounting procedures for a partnership are identical

to those of a single proprietorship. One primary difference is (Please refer to the partnership concept map – operations for
that there are separate drawing and capital accounts for each other helpful information)
partner in the partnership. A capital account is maintained for
each partner to record all permanent investments in and
permanent withdrawals from the partnership funds.

Assets invested in a partnership are recorded by crediting the

capital account of the contributing partner. An admission of an
industrial partner, having contributed nothing at the formation,
is recorded through a memorandum entry.

Non-cash assets contributed are recorded at values agreed upon

by all partners, which are generally the fair market values at the
time of contribution. These may be computed through reference
to values of similar resources in an active market or an
independent appraisal. If computation is impractical, it shall be
recorded at values agreed upon.

All other accounts, whether money, property or liability, are

recorded at their fair market value. If an asset is attached to a
liability, as a rule, the liability attaches itself to the property
(also recorded in the partnership books), unless it is assumed
personally (paid for) by a partner.

Accounting for formation may be done in two ways, either:

opening up a new book for the partnership; or using a partner’s
old book as the new partnership book.

Although the old set of books of one may be used for the
partnership transactions, it is preferable to use a new set of
books since a new basis of accountability arises upon formation
of the partnership. In addition, a new set of books is usually
required to be registered with the Bureau of Internal Revenue.

(Please refer to the partnership concept map - formation for

other helpful information)

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 ALDERSGATE COLLEGE
ADVANCED FINANCIAL ACCOUNTING AND REPORTING 1
2ND SEMESTER; A.Y. 2019 – 2020

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