PARCOR

Chapter One: Nature of Partnership

Partnership: -Art. 1767 of the civil code

-“ by the contract of the partnership, two or more person bind themselves to contribute
money, property, or industry to a common fund with the intention of dividing profits
among themselves”
-voluntary contract (oral/written), 3000 above must be written
-Articles of Co-Partnership (contract)
-no limit to number of partners
-note that today, partnership does not anymore recognized goodwill

Elements of Partnership

1. Must be voluntary agreement

2. Agree to contribute money, property and industry to a common fund
3. Have an intention of dividing profits
4. Established for a lawful purpose/ legal purpose

Characteristics of Partnership

1. Mutual Agency -acts within the authority

-each partner is an agent of partnership

2. Separate Legal Personality -can sue and be sued

-has a juridical personality
-distinct from owners

3. Limited life -easy to dissolved

4. Unlimited Liability -general partners (creditors can claim against the partners
property)
5. Voluntary Association -freewill (walang sapilitan, masakit yung alam mong napipilitan
lang siya)
6. Co-ownership of Partnership’s Property
7. Participation in Partnership’s profit

Advantages

1. Easier and less expensive

2. Less decision makers
Disadvantage

1. Uncertainty of continuity ( ei siya ba sigurado na sayo?hahaa chos)

2. Unlimited liability

Kinds of Partnership

1. As to activities
a. Commercial Partnership – service, manufacturing, pays income tax
b. Professional – vocation or profession, tax is paid by partners not the p-ship
2. As to liability of Partners
a. General Partnership- all partners are general who are subj to unlimited liability
b. Limited Partnership- one or more but not all partners is limited, law provides that there
must be at least one as general
3. As to Duration of the Partnership
a. Partnership at will - no foxed term, can be terminate anytime
b. Partnership with fixed term
4. As to Legality of Its Existence
a. De Jure Partnership – complied with all legal requirements
b. De Facto Partnership- not complied with all legal requirements

Kinds of Partners

1. As to Contribution
a. Capitalist
b. Industrial
c. Capitalist-Industrial
2. As to Liability Outside
a. General
b. Limited
3. As to Participation in Management
a. Managing – active and known
b. Secret- active but not known
c. Silent- not active and known
d. Dormant not active and not known

Basic Rights of a Partner

1. Right share in profit

2. Right to participate in management
3. Right to share in assets after satisfying all claims in case partnership will be liquidated
 Chapter Two: Partnership Formation

Capital

DEBIT CREDIT
Permanent Reduction Initial Investment
Additional Investment

Drawing

DEBIT CREDIT
Share in Loss Share in Profits
Regular Withdrawals

 Partners may closed their share in profits as an additional to their investment or can withdraw
or pull out their share in profits

Partnership Formation may be form in ff ways:

1. No existing business on the date of formation – will start a business for the very first time
2. With Existing business on the date of formation
a. Conversion of Single Proprietorship to Partnership
b. 2 or more Single Proprietorship will combine
c. Existing Partnership will be dissolve in favor of new partnership

HIERARCHY OF VALUES

1. Cash – Face value

2. Non-cash assets- a. agreed value
b. Fair market value
c. book value/carrying amount
3. Industry – memo entry (agreed value)

Illustration 1: Two or more persons will start a business for the very first time

a. Elvie and Mary Joy formed P-ship by investing cash of P10,000 and P15,000 respectively. In
addition, they invested the following:
Acquisition Cost Fair Market Value
Elvie – Office equipment P25,000 P24,000
Mary Joy – Delivery Truck P180,000 P120,000
 Cash (10,000+15,000) 25,000
Office Equipment 24,000
Delivery Truck 120,000
Elvie Capital 34,000
Mary Joy Capital 135,000

b. Nica and Vince formed P-ship by investing cash of P10,000 and P15,000 respectively. In addition,
they invested the following:
Acquisition Cost Fair Market Value
Nica – Land P50,000 P120,000
Vince – Delivery Truck P180,000 P120,000
-the land is mortgaged with a bank and has an outstanding balance of P20,000

If the p-ship will assumed the mortgage (oh yun p-ship lang mag-aassume ah tigil tigilan mo)

Cash (10,000+15,000) 25,000

Land 120,000
Delivery Truck 120,000
Nica Capital (10+120-20) 110,000
Vince Capital 135,000
Mortgage Payable 20,000
If the p-ship will not assumed the mortgage

Cash (10,000+15,000) 25,000

Land 120,000
Delivery Truck 120,000
Nica Capital 130,000
Vince Capital 135,000

Illustration 2: Conversion of a sole proprietorship into a partnership

a. January 1, 2019, Diane invited Hyaz to join her as a partner who invested cash of P50,000. The
name of the new partnership is DIPINILI MART
The Balance Sheet of Diane Store on January 1, 2019 is reproduced below:

ASSETS

Cash 10,000
Accounts Receivable 16,000
Merchandise 25,000
Store Equipment 40,000
Total: 91,000
LIABILITIES
 Accounts Payable 26,000

OWNER’S EQUITY

Diane Capital 65,000

The partners agreed with the following adjustments to be made in the books of Diane:

1. The merchandise is to be valued at P28,000

2. An allowance for bad debts (impairment loss) of 10% of the accounts receivable will be provided
3. The store equipment must be depreciated by 20%
4. Prepaid expenses of P1,000 will be recognized
5. Accrued expenses of P2,500 are to be recognized

OLD BOOKS TO BE USED:

 If the partners decide to use the old books of the partner with existing business, the required
entries are adjusting entries (entries to adjust capital) and the entry to record the investment of
the new partner

Adjusting Entries to be done prior to the agreement:

1. Merchandise 3,000
Diane Capital 3,000
2. Diane Capital (16,000 x 10%) 1600
Allowance for Impairment Loss 1600
3. Diane Capital (20% x 40,000) 8,000
Accum. Depr.-Store Equipment 8,000
4. Prepaid Expenses 1,000
Diane Capital 1,000
5. Diane Capital 2,500
Accrued Expenses 2,500
6. Goodwill 9,000
Diane Capital 9,000
7. Cash 50,000
Hyaz Capital 50,000
NEW BOOKS TO BE USED:

 If the partners decide to use new books then the required entries are adjusting entries, closing
of the old books then journal entry necessary to transfer and then the investment of the new
partners

Adjusting Entries to be done prior to the agreement:

1. Merchandise 3,000
Diane Capital 3,000
2. Diane Capital (16,000 x 10%) 1600
Allowance for Impairment Loss 1600
3. Diane Capital (20% x 40,000) 8,000
Accum. Depr.-Store Equipment 8,000
4. Prepaid Expenses 1,000
Diane Capital 1,000
5. Diane Capital 2,500
Accrued Expenses 2,500
6. Goodwill 9,000
Diane Capital 9,000

Closing Entries for the old books of Diane:

1. Allowance for Impairment Loss 1,600

Accum. Depr. – Store Equipment 8,000
Accounts Payable 26,000
Accrued Expenses 2,500
Diane Capital 65,900
Cash 10,000
Accounts Receivable 16,000
Merchandise 28,000
Prepaid Expenses 1,000
Store equipment 40,000
Goodwill 9,000
 Books of the New Partnership

1. Cash 10,000
Accounts Receivable 16,000
Merchandise 28,000
Prepaid Expenses 1,000
Store equipment 40,000
Goodwill 9,000
Allowance for Impairment Loss 1,600
Accum. Depr. – Store Equipment 8,000
Accounts Payable 26,000
Accrued Expenses 2,500
Diane Capital 65,900
2. Cash 50,000
Hyaz Capital 50,000

Computation of the Total Agreed Capital

 Normally, the TAC of partnership represents the total of the net assets( asset- liab=equity
assumed by the partnership) invested or contributed by the partners
 If TAC is not known there can be computed by dividing the capital of any of the partner with the
given interest of equity of the another partner in the Total Capital

Capital Interest vs Profit and Loss Sharing Ratio

 Capital is not necessarily proportionate to P and L sharing ratio

1. Additional Investment/ Withdrawal Method

2. Bonus Method (Transfer Capital)