CHAPTER 1- -PARTNERSHIP FORMATION

LEARNING OBJECTIVES:

At the end of this chapter, the student should be able to:

1. Define Partnership

2. Enumerate the Characteristics of Partnership

3. Enumerate the advantages and disadvantages of Partnership

4. Explain the elements of Partnership

5. Explain the essential requisites of Partnership

6. Enumerate the effects of Partnership

7. Enumerate the classification of Partnership

8. Enumerate the Kinds of Partners

9. To explain accounting for Partnership Formation

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According to Article 1767 of the Civil Code of the Philippines :

Partnership is defined as “two or more persons binding themselves to contribute money, property
or industry to a common fund with the intention of dividing profits among themselves.”

CHARACTERISTICS OF A PARTNERSHIP

1. Ease of Formation

 Partnership with less than P3, 000.00 capitals only need to register their name with
Department of Trade and Industry DTI.
 Partnership with more than P3, 000.00 capitals must register with Securities and Exchange
Commission (SEC) and the contract must appear in a public instrument.

2. Mutual Contribution- There cannot be a Partnership without contribution of money,

property or industry to a common fund.
3. Division of Profits or Losses- The essence of partnership is that each partner must share in
the profits or losses of the venture.
4. Co- Ownership of Contributed Assets- All assets contributed into the partnership are owned
by the partnership by virtue of its separate and distinct juridical personality. If one partner
contributes an asset to the business, all partners jointly own it in a special sense.
5. Mutual Agency- Any partner can bind the other partners to a contract if he is acting within
his express or implied authority.

ACCTG 102- INTERMEDIATE ACCOUNTING 1 1|P age

 6. Limited Life- A partnership has a limited life. It may be dissolved by the admission, death,
insolvency, and incapacity, withdrawal of a partner or expiration of the term specified in the
partnership agreement.
7. Unlimited Liability- All partners (except limited partners) including industrial partners, are
personally liable for all debts incurred by the partnership. If the partnership cannot settle
its obligations, creditors’ claims will be satisfied from the personal assets of the partners
without prejudice to the rights of the separate creditors of the partners.
8. Income Taxes- Partnerships, except general professional partnerships are subject to tax at
the rate of P 30% on taxable income.

ADVANTAGES & DISADVANTAGES OF A PARTNERSHIP

Advantages Disadvantages

More Capital Available Risk of dissolution

Better Management Possibility of Disagreement

More interests in the business Unlimited liability of partners

Simple organization Limited in size

Low taxes General agency

A Partnership has access to greater or

better credit standings

ELEMENTS OF PARTNERSHIP

The contract of partnership is:

1. Consensual- it is perfected by mere consent, that is, upon the express or implied
agreement of two or more persons.
2. Bilateral- it is entered into by two or more persons and the rights and obligations
arising there from are always reciprocal.
3. Onerous- each of the parties aspires to procure for himself a benefit through the
giving of something. The partners contribute money, property, or industry to a
common fund.
4. Commutative- Undertaking of each of the partner is considered as the equivalent of
that of the others.

ESSENTIAL REQUISITES OF A PARTNERSHIP

1. There must be a valid contract

2. The parties must have legal capacity to enter into the contract

ACCTG 102- INTERMEDIATE ACCOUNTING 1 2|P age

 3. There must be a mutual contribution of money, property or industry to a common
fund

4. The object must be lawful

5. The purpose or primary purpose must be to obtain profits and to divide the same
among the parties.

THE FOLLOWING CANNOT GIVE THEIR CONSENT TO A CONTRACT OF PARTNERSHIP

1. Unemancipated Minors
2. Insane or demented persons
3. Deaf-mutes who do not know how to write
4. Persons who are suffering from civil interdiction

EFFECTS OF AN UNLAWFUL PARTNERSHIP

1. The contract is void and the partnership never existed in the eyes of the law
2. The profits shall be confiscated in favour of the government
3. The instruments or tools and proceeds of the crime shall also be forfeited in favour of the
government
4. The contributions of the partners shall not be confiscated unless they fall under no. 3

CLASSIFICATIONS OF PARTNERSHIP

A. According to Object:

1. Universal Partnership of all present property- All contributions become part of the
partnership fund.

2. Universal Partnership of all profits- All that the partners may acquire by their industry or
work during the existence of the partnership and the use of whatever the partners
contributed at the time of the institution of the contract belong to the partnership.

B. According to Liability:

1. General Partnership- All partners are liable to the extent of their separate
properties.

2. Limited Partnership- The limited partners are liable only to the extent of
their personal contributions. In a limited partnership, the law states that
there shall be at least one general partner.

C. According to Duration:

1. Partnership with a fixed term or for a particular undertaking.

ACCTG 102- INTERMEDIATE ACCOUNTING 1 3|P age

 2. Partnership at will- One in which no term is specified and is not formed for
any particular undertaking.

D. According to Purpose:

1. Commercial or Trading Partnership- one formed for the transaction of

business.

2. Professional or Non- Trading Partnership- one formed for the exercise of

profession

E. According to Legality of Existence

1. De Jure Partnership- One which has complied with all the legal requirements
for its establishment.

2. De Facto Partnership- One which has failed to comply with all the legal
requirements for its establishment.

KINDS OF PARTNERS

1.) General Partner- One who is liable to the extent of his separate property after all the
assets of the partnership is exhausted.

2.) Limited Partner- One who is liable only to the extent of his capital contribution.

3.) Capitalist Partner- one who contributes money or property to the common fund of the
partnership.

4.) Industrial Partner- One who contributes his knowledge or personal service to the
partnership.

5.) Managing Partner- One whom the partners has appointed as manager of the partnership

6.) Liquidating Partner-one who is designated to wind up or settle the affairs of the
partnership after dissolution.

7.) Dormant Partner- One who does not take active part in the business of the partnership
and is not known as a partner.

8.) Silent Partner- One who does not take active part in the business of the partnership
though may be known as a partner.

9.) Secret Partner- One who takes active part in the business but is not known to be a
partner by outside parties.

10.) Nominal Partner or Partner by Estoppel- One who is actually not a partner but who
represents himself as one.

ACCTG 102- INTERMEDIATE ACCOUNTING 1 4|P age

ACCOUNTING FOR PARTNERSHIPS

A Partnership has two or more capital accounts and therefore should also have two or more
drawing accounts. The partners may also have loans to or loan from the partnership which should
be clearly identified.

PARTNER’S LOAN TO THE PARTNERSHIP

A partner may lend money to the partnership. In this case, a debtor-creditor relationship
exists. The loan payable by the partnership to the partner, the loan should be recorded separately
because in case of liquidation, a partner’s loan takes priority over partner’s equity or capital.

PARTNER’S RECEIVABLE ACCOUNT

A partner may also borrow cash or buy on account from the partnership. It is shown as
receivable if the intention of the partner is to pay it later and not a charge against his share in the
income of the partnership business.

PARTNERSHIP TRANSACTIONS

1. Cash Contributions ONLY by the partners.

2. Cash and Non-Cash Contributions by the partners:

When non-cash assets are invested, they should be recorded at its fair value or
appraised value. Fair Market Value is the amount, which the seller will receive for
selling non-cash assets at the present time and its present condition

3. Cash contributions by one partner and services to be contributed by one partner

4. Non-Cash Assets Contributions by the partner with outstanding balance to be assumed by the
partnership.

5. A Sole Proprietor and an Individual form a Partnership

In this case, one of the expected partners is already engaged in business prior to the
formation of the partnership. In this case, the partner may transfer his/her assets and
liabilities (net assets) to the partnership at agreed values or at fair market values if there
are no agreed values. The partnership may either: 1) Use the books of the sole proprietor, or
2) Open new set of books

When individual set of books are kept by each partner or by any one of the partners, entries
are made on the separate books of the partners for adjustments to the recorded values. The
adjustments are made through the Capital Account.

The Capital Account is credited for increases in the value of the net assets and is debited for
decreases in the value of the net assets.

ACCTG 102- INTERMEDIATE ACCOUNTING 1 5|P age

 6. Two or More Sole Proprietors form a Partnership

When all the prospective partners are already in the business, they may decide to transfer
their assets and liabilities to the partnership at agreed values upon at fair market values.

REFERENCES:

Millan, Zeus Vernon. (2019). Financial Accounting and Reporting (Fundamentals). Baguio
City: Bandolin Enterprise

Millan, Zeus Vernon. (2020). Intermediate Accounting 1A. . Baguio City: Nations Foremost
CPA Review Inc. (NCPAR)

Peralta, Jose F., Valix, Conrado T., Valix, Christian Aris M. Intermediate Accounting.
Sampaloc, Manila: GIC Enterprises & Co. Inc.

ACCTG 102- INTERMEDIATE ACCOUNTING 1 6|P age

 CHAPTER 2- -PARTNERSHIP OPERATION
LEARNING OBJECTIVES:

At the end of this chapter, the student should be able to:

1. Know the distribution of profits and losses

2. Explain the rules for dividing profits and losses

3. Explain the methods of distributing profits based on partner’s agreement

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DISTRIBUTION OF PROFITS AND LOSSES

In the Distribution of partnership profits and losses, the following factors should be
considered:

1. Services rendered by the partners to the partnership

2. Amount of capital contributed by the partners to the business

3. Entrepreneurial ability or managerial skills of the partners.

The distribution of division of profits and losses may be expressed in several ways as
follows:

1.) By percentage

2.) By fraction

3.) By decimal

4.) By ratio

RULES FOR DIVIDING PROFITS AND LOSSES

1. As to Capitalist Partners

a.) Division of Profits

a.1) In accordance with agreement

ACCTG 102- INTERMEDIATE ACCOUNTING 1 1|P age

 a.2) in the absence of an agreement, division of profits is in
accordance with capital contributions.

b.) Division of losses

a.1) In accordance with agreement

a.2) if only division of profits is agreed upon, the division of losses will
be the same as the agreement on the division of profits

a.3) in the absence of an agreement, division of losses is in accordance

with capital contributions.

2. As to Industrial Partners

a.) Division of Profits

a.1) In accordance with agreement

a.2) in the absence of an agreement, the industrial partner shall

receive a just and equitable share of the profits and the capitalist
partners shall receive profit in accordance with their capital
contributions

b.) Division of losses

a.1) In accordance with agreement

a.2) in the absence of an agreement, the industrial partner in his/her

character shall have no share in the losses.

METHODS OF DISTRIBUTING PROFITS BASED ON PARTNER’S AGREEMENT

1.) Equally

2.) Arbitrary Ratio ( Percentage, Decimal, Fraction, Ratio)

3.) Capital Ratio ( Beginning Capital, Average Capital, Ending Capital)

4.) Interest on capital and the balance on agreed ratio

5.) Salary allowances to partners and the balance on agreed ratio

ACCTG 102- INTERMEDIATE ACCOUNTING 1 2|P age

REFERENCES:

Millan, Zeus Vernon. (2019). Financial Accounting and Reporting (Fundamentals). Baguio
City: Bandolin Enterprise

Millan, Zeus Vernon. (2020). Intermediate Accounting 1A. . Baguio City: Nations Foremost
CPA Review Inc. (NCPAR)

Peralta, Jose F., Valix, Conrado T., Valix, Christian Aris M. Intermediate Accounting.
Sampaloc, Manila: GIC Enterprises & Co. Inc.

ACCTG 102- INTERMEDIATE ACCOUNTING 1 3|P age

 CHAPTER 3- -PARTNERSHIP DISSOLUTION
LEARNING OBJECTIVES:

At the end of this chapter, the student should be able to:

1. Explain the admission of a partner by purchase

2. Explain the admission of a partner by investment

3. Explain the death, insolvency and incapacity of a partner

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ARTICLE 1828

The Dissolution of a partnership is the change in the relation of the partners caused by any partner
ceasing to be associated in the carrying on as distinguished from the winding up of the business.

ARTICLE 1829

On Dissolution, the partnership is not terminated, but continues until the winding up of the
partnership affairs is completed.
For accounting purposes, the change in the relationship of the partners brought about by the
following:

1.) Admission of a new partner by a transfer of old partner to new partner

2.) Withdrawal or retirement of a partner by sale of equity or interest to the remaining

partners

3.) Withdrawal or retirement of a partner by sale of equity or interest to a new partner

4.) Death, Insolvency or Incapacity of a partner

ADMISSION OF A NEW PARTNER

A new partner may be admitted into a partnership by purchase of Interest from one or more of the
original (old partners)

ADMISSION BY PURCHASE

With the consent of all the partners, a new partner may be admitted in an existing partnership by
purchasing a capital equity interest directly from one or more of the old partners.

The only entry required on the partnership books is the recording of the transfer of capital from the
capital account of the selling partner to that of the buying partner. The pro-form entry is:

(Name of Seller), Capital

ACCTG 102- INTERMEDIATE ACCOUNTING 1 1|P age

 (Name of buyer), Capital

The purchase price of the interest sold to the new partner may be:

1.) Equal to the book value of interest sold

2.) Less than the book value of interest sold

3.) More than the book value of the interest sold.

The new partner may pay more than or less than the book value of the interest sold by the
old partner resulting in a gain or loss in the transaction. The gain or loss is a personal gain
or loss of the selling partner and not of the partnership. Therefore, no gain or loss is
recognized in the partnership books.

Sample Problem: Kolokoy and Butchokoy are partners with capital balances of P 200,000 and
P 320,000 respectively on May, 2021. They share profits and losses equally. Bachoy is a new
partner

Case 1: Purchase at book value from one partner only. Bachoy purchases 2/5 interest from
Kolokoy by paying P 80,000.

2021

May 1 Kolokoy, Capital 80,000

Bachoy, Capital 80,000

To record the purchase of

interest from Kolokoy

Case 2: Purchase at book value from more than one partner. Bachoy purchases 2/5 interest
from the Old Partners by paying P 208,000.

2021

May 1 Kolokoy, Capital 80,000

Butchokoy, Capital 128,000

Bachoy, Capital 208,000

To record the purchase of

interest from old partners

ACCTG 102- INTERMEDIATE ACCOUNTING 1 2|P age

 Case 3: Purchase at less than book value. Bachoy purchases 2/5 interest from the Old
Partners by paying P 190,000.

2021

May 1 Kolokoy, Capital 80,000

Butchokoy, Capital 128,000

Bachoy, Capital 208,000

To record the purchase of

interest from old partners

The 190,000 paid by Bachoy to Kolokoy and Butchokoy should not be reflected in the
partnership books because the said amount was paid directly to the partners. The difference
of 18,000 is a personal loss of the selling (old) partners.

SALE OF EQUITY OR INTEREST TO REMAININING PARTNERS

The interest of the retiring partner may be acquired by the remaining partners. The
partnership recognizes only the transfer of capital interest from the retiring partner to the
acquiring partner or partners.

Example: the following are the ending capital balances of the three partners for the month
of June 2021

Ding Dong Dhing Dhing

P 45,000 P 32,000 P 36,000

Dong sold his interest to Ding and Dhing Dhing for P30, 000 on June 15; the interest being
divided equally by the remaining partners.

2021

June 15 Dong, Capital 32,000

Ding, Capital 16,000

Dhing Dhing, Capital 16,000

To record the sale of interest to

remaining partners

ACCTG 102- INTERMEDIATE ACCOUNTING 1 3|P age

 The loss of 2,000 is a personal loss of Dong since the sale of interest to Ding and Dhing Dhing
is a personal transaction among the partners.

SALE OF EQUITY OR INTEREST TO A NEW PARTNER

With the consent of the remaining partners, the retiring partner may sell his interest to an
outsider. The partner recognizes only the transfer of capital interest from the retiring
partner to the new partner. Any gain or loss from the sale is a personal gain or loss of the
retiring partner.

Note: Same illustrative problem as above:

Dong sold his interest to Dhong Dhong for P 50,000

2021

June 15 Dong, Capital 32,000

Dhong Dhong, Capital 32,000

To record the sale of interest to

Dhong Dhong

The gain of P 18,000 is a personal gain of Dong since the sale of the interest to an outsider is a
personal transaction between the buying partner and Dong.

ADMISSION BY INVESTMENT

A person may be admitted into a partnership by investing cash or other assets in the business. The
assets are invested into the partnership and not given to the individual partners.

Definition of terms:

Total Contributed Capital- it is the sum of the capital balances of the old partners and the actual
investment of the new partner

Total Agreed Capital- it is the total capital of the partnership after considering the capital credits
given to each of the partners. Under the bonus method, total agreed capital is equal to the total
contributed capital.

A. Bonus to Old Partners

B. Bonus to New Partner

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 DEATH, INSOLVENCY OR INCAPACITY OF A PARTNER

ARTICLE 1831: On application by or for a partner, the court shall decree Dissolution
whenever:

1.) A partner has been declared insane in any judicial proceeding or is shown to be of
unsound mind

2.) A partner becomes in any other way incapable of performing his part of the partnership
contract

3.) A partner has been guilty of such conduct as tends to affect prejudicially the carrying on
of the business.

4.) A partner wilfully or persistently commits a breach of the partnership agreement.

5.) The partnership of the partnership can only be carried on at a loss

“As long as you have God, you’re always bigger than your problems, better than your past and
stronger than your pain”

“IN LIFE, YOU CAN BUY ANYTHING BUT NOT LOVE, YOU CAN FAKE YOUR SMILE BUT NOT YOUR
HAPPINESS. YOU CAN LIE TO OTHERS BUT NOT TO YOURSELF, AND YOU CAN ALWAYS CHANGE
YOUR MIND, BUT NEVER YOUR HEART

ACCTG 102- INTERMEDIATE ACCOUNTING 1 5|P age