Basic Consideration and Formation 9. Differentiate a partnership from a corporation.

Review Questions
1. Define partnership.
a. -Owned by 2 or more persons who entered into a contract

2. Discuss the phrase "exercise of a profession".

- means that the person is using (exercising) the profession for which
the person was trained. This usually implies that this use/exercise is
brought about by an unusual situation.

3. What are the essential characteristics of a partnership?

4. Liwayway Ables and Teresita Galang are partners in a drilling operation. 

Ables purchased a drilling rig to be used in the entity's operations.  Is this
purchase binding on Galang even though she was not involved in it?  Explain.

5. What is meant by mutual agency and unlimited liability?

- A partnership agreement where one partner can bind all partners in an

agreement to partnership debts. This is also called unlimited liability.

6. Identify three advantages of a partnership in comparison with a sole

proprietorship.
- Brings greater financial capability to the business
- Combines special skills, expertise and experience of the partners
- Offers relative freedom and flexibility of action in decision-making
7. Identify three advantages of a partnership in comparison with a corporation.
- Easier and less expensive to organize, subject to less legal requirements
- Suited to the practice of profession
- Flexibility in operations
8. Identify three disadvantages of a partnership form of business organization.
- Easily dissolved and thus unstable compared to a corporation.
- Mutual agency and unlimited liability may create personal obligations to
partners.
- Less effective than a corporation in raising large amounts of capital.
10. Identify the kinds of partnership as to object, liability, duration, purpose and
legality of existence.
According to object
1. Universal partnership of all present property
All contributions become part of the partnership fund.
2. Universal partnership of profits
If the articles of universal partnership did not specify its nature, it will be
considered universal partnership of profits.
3. Particular partnership
The object of the partnership is determinate—its use or fruit, specific
undertaking, or the exercise of a profession or vocation.
According to liability 12. Differentiate a capitalist from an industrial partner.
1. General Capitalist Partner - Contributes money or property
All partners are liable to the extent of their separate properties. Industrial Partner - Contributes knowledge or personal service to the
partnership
2. Limited
13. How do dormant, secret and silent partners differ from one another?
The limited partners are liable only the extent of their personal
Dormant Partner – Does not take active part in the partnership and not
contributions. In a limited partnership, the law states that there shall be at
known as partner
least one general partner.
Secret Partner – Takes active part in the partnership but is not known as
According to duration partner by outsiders
1. Partnership with a fixed term or for a particular undertaking Silent Partner - Does not take active part in the partnership though may be
Partnership with a fixed term or for a particular undertaking known as partner
14. Define articles of partnership.  Name seven important provision to be
2. Partnership at will incorporated in this instrument.
One in which no term is specified and is not formed for any particular 1) Partnership name, nature, purpose and location
undertaking. 2) Name, citizenship and residence of the partners
3) Date of formation and the duration of partnership
According to purpose
1. Commercial or trading partnership
4) Capital contribution of each partner
One formed for the transaction of business 5) Rights and duties of each partner
6) Accounting period to be adopted
2. Professional or non-trading partnership 7) Method of sharing profit and loss
One formed for the exercise of profession 8) Drawings and salaries to be allowed to partners
9) Provision for arbitration of disputes, dissolution and liquidation
According to legality of existence
1. De jure partnership 7 Provisions to be incorporated in this instrument.
De jure (concerning law) One which has complied with all the legal
PART I-Preliminary
requirements for its establishment.
PART II-Partnerships without Separate Legal Personality.
PART III-Partnership with Separate Legal Personality
2. De facto partnership
PART IV-Conversions and Mergers
De facto (concerning fact) One has failed to comply with all the legal
PART V-Limited Liability Partnerships
requirements for its establishment.
PART VI-Foreign Limited Liability
PART VII-Miscellaneous Provisions
11. Differentiate a general from a limited partner.
 General Partner – Liable to the extent of his personal properties
 Limited Partner - Liable to the extent of his capital contribution but not
allowed to contribute industry or services only
15. What are the steps involved in the SEC registration of partnerships? 16. What are the transactions normally debited and credited to the partner's
capital account?

DEBIT
1. Permanent withdrawals
2. Debit balance of the drawing
account at the end of the
period
CREDIT
1. Original investment
2. Additional investment
3. Credit balance of the
drawing account at the
end of the period

1. Verification of proposed business name
2. Submission of the following documents
 Other documents that may be required:
 Endorsement from other government agencies if the proposed
partnership will engage in a government regulated industry
(i.e. for air transport, the endorsement will come from Civil
Aeronautics Board; for banks, pawnshops or other financial
intermediaries, from Banko Sentral and Pilipinas; for
charitable institutions and social welfare organizations, from
DSWD; for professional organizations, PRC; for educational
institution, DOE-CHED; for technical-vocational, TESDA; for
hospitals, DOH; for insurance and mutual benefits, Insurance
Commissions; recruitment agencies, POEA
 For partnership with foreign partners, SEC Form F-105, bank
certificate of capital contribution of partners, proof of
remittance of foreign partner’s contribution
 Pay the registration/filing and miscellaneous fees
3. Forward the documents to SEC Commissioner for Signature
17. Differentiate permanent withdrawals from temporary withdrawals.
Permanent withdrawals - are made with the intention of permanently
decreasing the partner’s capital
Temporary withdrawals - are regular advances made by the partners in
anticipation of their share in profit.
18. What is the proper accounting treatment of loans receivable from partners
and loans payable to partners?
 If a partner withdraws a substantial amount of money with the
intention of repaying it, the debit should be to Loans Receivable-
Partner account instead of to Partner’s drawing account.
 This account should be classified separately from the other
receivables of the partnership.
 A partner may lend amounts to the partnership in excess of his
intended permanent investment. These advances should be credited
to Loans Payable-Partner account and not to Partner’s Capital
account classified among the liabilities but separate from liabilities to
outsiders. This distinction is important in case of liquidation. Loans
payable to partners must be paid after the claims of outside creditors
have been paid in full. These loans have priority over the partner’s
equity.
19. What is the basis for recording the values of the non-cash assets contributed 22. Discuss the concept of a limited liability corporation.
to the partnership?  A limited liability company (LLC) is a hybrid form of business for it combines the best
 Partners may invest cash or non-cash assets in the partnership. When features of a partnership and a corporation. LLC is a form of legal entity that
a partner invests non-cash assets, they are to be recorded at values provides limited liability to its owners.
agreed upon by the partners. In the absence of any agreement, the  The owners of an LLC are called members. These owners may be individuals,
partnerships, corporations or other entities. Many states even allow one-person
contributions will be recognized at their fair market value at the date
LLCs. The members have limited liability even if they are active in the company.
of transfer to the partnership.
 This type of entity is attractive for professional service firms because the owners will
not have personal liability for the other owner’s malpractice.
20. What is meant by fair market value of an asset?  A limited liability partnership (LLP) is very similar to an LLC except that investment in
 The fair market value of an asset is the estimated amount that a LLP is restricted to professional.
willing seller would receive from a financially capable buyer for the  The four major international accounting firms KPMG, Ernst & Young, Price
sale of the asset in a free market. Per International Financial Waterhouse Coopers and Deloitte & Touche started as partnerships. As they grew
Reporting Standards No. 3. fair value is the price at which an asset or and the risk increased, these firms were allowed to change, by operation of law, to
liability could be exchanged in a current transaction between LLPs. The LLP concept is different from that of a limited partnership.
knowledgeable, unrelated willing parties.  The accounting for LLCs is similar to partnerships. The term “member” and
“member’s equity” are used instead of “partner” and “partner’s equity.”
21. Outline the accounting procedures involved in recording the formation of a
partnership by a sole proprietorship and an individual with no existing
business.
A Sole Proprietor and Another Individual form a partnership
New books for the Partnership (required per NIRC)
 The following procedures may be used in recording the formation of the
partnership:
Books of Galicano Del Mundo
1. Adjust the assets and liabilities of Galicano Del Mundo in accordance with the
agreement. Adjustment are to be made to his capital account.
2. Close the books
Books of the Partnership:
1. Record the investment of Galicano Del Mundo
2. Record the investment of Christine Resultay