Loans 
Receivable from partner
2.1 Accounting Principles
for Partnership
Accounting for Partnership
 Accounting for partnership and sole proprietorship are
the same in recording assets/liabilities/income and
expenses except for capital and drawing accounts
 A capital and drawing account should be established
for each partner.
Partner’s Capital Account
 credited for his initial investment
 credited for his additional net investment (assets –
liabilities  ) assumed by the partner
 credit balance of the drawing account at the end of the
period (income)
 debited for permanent withdrawals
 debit balance of the drawing account at the end of the
period + loss
Partner's  Drawing  Account
 debited for personal advances during the period,
salaries (manager)
 balances are closed to the corresponding capital
accounts at the end of the  period
 if a partner withdraws a substantial amount of money
with the intention of repaying it
Loans  Payable to Partners
 If a partner lends to the partnership amounts in excess
of his agreed investment
 Loans payable to partners should be distinguished from
claims of outside creditors.
 The partner will only be paid in full after outside claims
had been settled in case of liquidation.
 
Valuation of investment by partners
 Books of the partnership are opened with entries
reflecting the net contribution of the partner (Assets-
Liabilities = Capital Accounts)
  Non-cash assets are recorded at values agreed
upon; in the absence of an agreement,   at fair market
values at the date of transfer to the partnership; if the
fair market value is not available, use the net book
value or carrying value of the asset.
Adjustment of accounts prior to formation
 In cases wherein partners have existing businesses, 
treatment of assets and liabilities will be the same.
 However, when nominal accounts (income and
expenses) are to be adjusted, the capital account will be
debited or credited

The Total Agreed Capital (TAC)
 Normally, this is the difference between the assets and
liabilities contributed by the partner or
 the equity or interest of the partner on the total capital
contribution which can be more or less his actual
contribution depending on the agreement of the
partners.
 
Goodwill
 an intangible asset attributed to the good name of the
partner, experience, profitability of the business
transferred.
 the difference between the agreed capital of the partner
and his capital contribution.
 effect is an increase in the assets of the partnership.
 
2.2 Partnership
Formation
Partnership Formation
A partnership may be formed in any of the following ways:
1. Individuals with no existing business on the date of
the formation
 two or more persons will start a business for the first time
2.  Sole Proprietors on the date of the formation
 conversion of a single proprietorship into a partnership
 two (2) or more sole proprietors combine their businesses
and form a partnership
 an existing business will be dissolved in favor of a new
partnership
 
Remember:
 When two (2) or more business combine, it is advisable
to use a new set of books for the partnership:
1. the old books will be adjusted and closed,
and
2. the adjusted balances will be carried to the
new books.
 If the partnership will use the old books of one of the
partners:
1. all the books will be adjusted;
2. close the books of the partners which will no
longer be used and
3. transfer the adjusted balances to the books of
the partner that will be used.
The journal entries  required to record the formation will
depend on how it is formed
2.2.1 Partnership
between two(2) or more
Individuals without
existing business
Partnership between Individuals with no Existing
Business
 
 
  Illustrative Problem:
2.2.2 Partnership
between an Individual
and a Sole Proprietor
2.2.3 Partnership
between two (2) or more
Sole Proprietors
2.2.4 Total Agreed
Capital and Goodwill
  Total Agreed Capital (TAC) on the date of formation

 represents the total net assets invested or contributed

by the partners
 if the total agreed capital on the date of formation is not
known, the implied total capital can be computed by this
formula:
o Total Agreed Capital (TAC) = capital of any of
the partner (given)

                                                                               interest or equity

of the partner (given)
 
Illustration: 
Case 1:Mr. A and Mr. B will form a partnership.
             Compute for the TAC based on the net assets given
below.

Given

Mr. A Mr. B To

Assets P 300,000 P 250,000

Liabilities 50,000 100,000

Capital P 250,000 P 150,000

 Total Agreed Capital = P 250,000 + P 150,000 = P 400,000

 
Case 2 : Implied TAC         

Step 1 Goodwill
Mr. A Mr. B
 the ability to earn more than the normal of a business.
Investment P 300,000    attributed to the good name of a partner or an existing 
profitable business.
Interest or Equity 50%     the difference between the agreed new capital and the
actual contribution of the partners.
     an intangible asset which gives rise to an increase in the
capital of the partnership
 Total Agreed Capital = P 300,000/ 50% = P 600,000
 
 
Illustration:
Step 2 Mr. C  and Mr.  D want to combine their businesses and form a
partnership.Mr. D's business is very profitable.Their net assets
Mr. A Mr. B
prior to the determination of the new capital are as follows:
Investment P 300,000   Given
Interest or Equity 50%  50%  Assets Liabilities
    Mr. C P 100,000 P 40,000

  Interest of Mr. B = 100% -50% = 50% Mr. D 200,000 60,000

     Total P 300,000 P 100,000

Step 3
 
Mr. A Mr. B
Case 1 :
Investment P 300,000 P 300,000 
 If Mr. C will have a 25% interest in the new partnership,
Interest or Equity 50%  50% What is the agreed new capital?
 How much is the goodwill of Mr. D?
   
Basis: Mr. C, Capital P 60,000, his interest in the partnership -25%
Interest of Mr.  B = 50%  x  TAC = 50%  x P 600,000 = P 300,000 Solution
 2.1 Partnership Accounting

Agreed new capital  Actual Capital  Each partner shall have its'own capital and drawing
account.
(P 60,000/ 25%)  Loans  Receivable from partner -account used if the
partner withdraws a substantial amount of money has
P 240,000 P 200,000
the intention of repaying it.
 Loans  Payable to Partners- account used If a partner
  lends to the partnership amounts in excess of his
agreed investment.
Case 2 :  Non-cash investments are recorded at values agreed
upon, or at fair market values , in the absence of an
 If Mr. D will have a 50% interest in the new partnership, agreement.
What is the agreed new capital?  Adjustments of accounts of an existing business shall be
 How much is the goodwill of Mr. C? made prior to formation.
 Total Agreed Capital (TAC)  -normally, this is the
Basis: Mr. D, Capital P 140,000, his interest in the partnership difference between the assets and liabilities contributed
50% by the partner or the equity or interest of partner on the
total capital contribution.
Solution
 Goodwill -an intangible asset attributed to the good
Agreed new capital  Actual Capital name of the partner, experience, profitability of the
business transferred.
(P 140,000/ 50%)
 
P 280,000 P 200,000
2.2 Formation of  a Partnership


2.3 Summary: Accounting
When two (2) or more individuals will put up a business
for the first time , a new set of books will be used.
 Cash investments are recorded at face value.

for Partnership Formation  investment in properties must be recorded at an agreed

Summary of Module 2
Accounting for Partnership Formation
 
value or the fair market value whichever is available in
that order.
 In the case of conversion of a sole proprietorship in to a
partnership and new books will be used, the following
procedures shall be followed;
1. adjust the books of the partners
2. close the old books of the partners
3. transfer the adjusted balances to the new
books.
 In cases wherein, the old books of one of the partner's
will be used, the following procedures shall be followed:
1. adjust the books of the partners
2. close the old books of the partners  except
the partner whose books will be retained.
3. transfer the adjusted balances to the  books
of the partnership.
 if the Total Agreed Capital of the new partnership is not
known, it is simply computed by dividing his capital
contribution by his interest.
 If the Total Agreed Capital exceeds the actual capital
contribution of the partners, the difference is
called Goodwill.