Partnership- unincorporated association of two or more
individuals to carry on, as co-owners, a business, with
the intention of dividing the profits among themselves.
Distinguishing partnership from other types of entities:
 It is owned by two or more individuals, while a
sole proprietorship is owned by one individual.
 Created by agreement between the partners,
while a corporation is created by the operation
of law.
 It is formed for a business undertaking that is
normally of continuing nature, while a joint
venture may be formed for a limited purpose
and ends when its goal is achieved.
Characteristics of a partnership
 Ease of formation- formation requires less
formality unlike the corporations
 Separate legal personality- it has a juridical
separate and distinct from the partners. The
partnership can transact and acquire properties
in its name.
 Mutual agency- partners are agents of the
partnership; a partner may legally bind the
partnership to a contract/agreement that is in
line with the partnership’s operations.
 Co-ownership of property- each partner has an
equal right with his partners to possess specific
partnership property for partnership purposes.
But partner has no right to possess a
partnership property without the consent of the
other.
 Co-ownership of profits- each partner is
entitled to his share in the partnership profit. A
stipulation which excludes one or more
partners from any share in the profits or losses
is void. Article 1799 of the Civil Code
 Limited life- easily dissolved when by the
express will of any partner, termination of a
definite term stipulated in contract, any event
which makes it unlawful to carry out the
partnership, when a specific thing which a
partner had promised to contribute to the
partnership perishes before the delivery,
expulsion, death, insolvency or civil interdiction
of a partner.
 Transfer of ownership- in case of dissolution,
transfer of ownership requires the approval of
the remaining partners.
 Unlimited liability- each partner may be held
personally liable for partnership debt after all
partnership assets has been exhausted. If one
partner is personally insolvent, his share debt
shall be assumed by the other solvent partners.
General partnership- all partners are
individually liable
Limited partnership- at least one partner is
personally liable. It includes at least one general
partner who maintains unlimited liability.
Advantage of partnership
 Ease of formation
 Shared responsibility of running the business
 Flexibility in decision making
 Greater capital compared to sole proprietorship
 Relative lack of regulation by the government as
compared to corporations
Disadvantage of partnership
 Limited life or easily dissolved
 Unlimited liability
 Conflict among partners
 Lesser capital compared to corporation
 A partnership (other than GPP) is taxed like a
corporation
Major considerations in the accounting for the equity
of a partnership
 Formation- accounting for initial investments to
the partnership
 Operations- division of profits or losses
 Dissolution- admission of a new partner and
withdrawal, retirement, or death of a partner
 Liquidation- winding-up of affairs
Formation- it is created by the agreement of the
partners which may be constituted in any form, such as
oral or written.
Articles 1771 and 1772 of the Philippines Civil Code-
requires that a partnership agreement must be made in
PUBLIC INSTRUMENT and recorded with the Securities
and Exchange Commission (SEC) when:
 Immovable property or real rights are
contributed to partnership. E.g. PPE
 The partnership has a capital of 3,000 or more.
Article 1773- requires an inventory of any immovable
property contributed to the partnership, signed by the
parties, and attached to public instrument, otherwise
the partnership is deemed void.
- Legal existence of partnership begins from the
execution of the contract, unless otherwise
stipulated.
Valuation of contributions of partners
Article 1787 of the civil code- when the capital or part
thereof which a partner is bound to contribute consists
of goods, their appraisal must be made in a manner
prescribed in the contract of partnership, and in the
absence of stipulation, it shall be made by experts
chosen by the partners, and according to current prices,
the subsequent changes thereof being for the account
of the partnership.
Appraisal- valuation of capital contributions at fair
value.
- Accordingly, all assets contributed to (and
related liabilities assumed by) the partnership
are initially measured at fair value.
Fair value- the price that would be received to sell an
asset or paid to transfer a liability in an orderly
transaction between market participants at the
measurement date. (PFRS 13)
Equity instrument- any contract that evidences a
residual interest in the assets of an entity after
deducting all its liabilities.
Measuring the contributions of partners:
Type of contribution Measurement
Cash and cash equivalents Face amount (PAS 7)
Inventory Lower of cost and net
realizable value (PAS 2)
- No contribution shall be valued at an amount
that exceeds the contribution’s recoverable
amount. Each partner’s contribution shall be
adjusted accordingly before recognition in the
partnership’s books.
Recoverable amount- the higher between an asset’s fair
value less cost to sell and value in use.
Partner’s subsequent share in profits (losses)- credited
(debited) to his capital account.
Permanent withdrawals- debited to the partner’s
capital account.
Temporary withdrawals- debited to the partner’s
drawings account.
Partners’ ledger accounts
 Capital accounts
 Drawings accounts
 Receivable from/ payable to a partner
Capital and drawings accounts
Capital- real account
Debit- permanent withdrawals of capital, share in
losses, and debit balance of drawings account
Credit- initial investment, additional investments, and
share in profits.
Drawings- nominal account (closed to capital account)
Debit- temporary withdrawals during the period,
temporary funds held to be remitted to the partnership.
Credit- recurring reimbursement costs paid by the
partner.
Receivable from/ Payable to a partner
Receivable from the partner- loan extended to
partnership
Payable to the partner- loan obtained by the
partnership from a partner
Bonus on initial investments
Bonus- additional credit to the partner’s capital. It is
accounted for as a deduction from the capital of the
other partners.
Asset contribution of a partner- initially recorded at fair
value
Liability assumed by the partnership- initially recorded
at fair value
Credit of partner’s capital account- either at: fair value
(no bonus), above fair value (bonus to the partner), or
below fair value (bonus to the other partner(s))
Variations to the bonus method
Capital adjustment is accounted for as either:
 Cash settlement among the partners
 Additional investment or withdrawal of
investment of a partner