Sto. Tomas College of Agriculture, Sciences and Technology: Week 3

Republic of the Philippines
Commission on Higher Education

Region XI
Sto. Tomas College of Agriculture, Sciences and Technology
Feeder Road 4, Tibal-og, Santo Tomas, 8112, Davao del Norte, Philippines
WEEK 3
Course syllabus in IC 101 – Principles of Accounting 2 PRETTY MAY D. CRUJIDO

Page 1 of 16
BACHELOR OF SCIENCE IN AGRI-BUSINESS Instructor
Region XI
Accounting for Partnership
PARTNERSHIP CONTRACT
Partnership is based on contract. Persons who are capable of entering into a contract and desire to form
a partnership business, should draw up an agreement which may either be oral or written, Said contract
will govern the formation, operation, division of profits and losses and dissolution of partnership.
There is a need for a partnership contract to be in writing and same shall appear in the public
instrument to be recorded in the office of the Securities and Exchange Commission (SEC) when:
1. The capital of the partnership is P3,000 Or more in money or property and

2. Immovable property or real rights are contributed into the partnership.
In an event wherein immovable property or real rights are contributed thereto, and if an inventory of
said property is not made, signed by the parties, and attached to the public instrument submitted to the
Securities and Exchange Commission, the partnership contract is deemed "void".
ARTICLES OF CO-PARTNERSHIP
Although a partnership may be formed by an oral agreement, it is always of advantage if the agreement
is made into writing so that misunderstanding between parties as to the nature and terms of the
contract can be minimized. This written contract by the partners which requires registration with the
Securities and Exchange Commission is referred to as "Articles of Co-Partnership".
The Articles of Co-Partnership must contain among others the following:
1) Name of partnership, nature and place of business

2) Names of partners, indicating whether they are general or limited partners, their
corresponding addresses and contributions
3) Effectively date and duration of the partnership
4) Accounting period to be adopted
5) Profit and loss sharing
6) Rights, powers and duties of the partners
7) Treatment of partners' additional investment and withdrawals
8) Provision pertinent to dissolution and liquidation
In case of failure to provide for the division of profits, the provision of law shall apply, and that is "profit
is divided based on capital contributions".

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Region XI
How to Register a Partnership Business in the Philippines?
Getting your business officially registered is one of the most important things that
must be accomplished for any starting company. Apparently, it can get really
tiring and confusing, especially for those who are not familiar with the
requirements and processes here in the country.
For business registrations, it’s always best to have legal assistance from an
experienced lawyer to save you time and effort. Nevertheless, if you are planni ng
to do it on your own, here are the steps on how to register a partnership business
in the Philippines:
1. Prepare the required documents for SEC Registration
The first thing you are required to accomplish is the registration of your business
with the Securities and Exchange Commission or SEC. A partnership (or a
corporation) is obliged to secure a certificate of registration with the SEC to own a
license to operate their business. The basic documentary requirements that need
to be prepared are:
• Name Verification Slip (which can be obtained from the SEC’s website if
you prefer to have it before going to an SEC office)
• Articles of Partnership or AP
• A Joint Affidavit of partners to change their partnership name if it has not

been stated in the AP
There are, however, additional requirements depending on the nature of your

business. These requisites may include:
• FIA Form – 105 (for partnerships with a foreigner as a partner)
2. Obtain a Certificate of Registration with the SEC
The initial steps can be done online through their website such as checking your
proposed company name’s availability through https://crs.sec.gov.ph/, once
verified that the name is not yet taken, you can then fill out the application form
on the same site. The rest of the application process is listed on that
corresponding page, however, this can all be accomplished at any SEC office as
well if you find it more convenient to just go there and be personally assisted by
an employee.

Page 3 of 16
Region XI
3. Get a Barangay Clearance
All businesses are required to have a Barangay Clearance according to our Local
Government Code. This clearance is obtained at the local Barangay Office where
your business is or will be located and the fee in securing one, though varies per
location, is often minimal. A Barangay Clearance serves as an assurance that
your business adheres to the standards of the local Barangay and that your
business is a community-friendly company.
4. Register your business & employees with the Social Security System
(SSS)
Registering your business and employees (even if they are temporary or

provisional) is mandated and is considered a violation of the Social Security Law
if not performed. Employers are obliged to submit the SSS coverage of a worker
within 30 days of his or her employment. The SSS website (sss. gov.ph) presents
comprehensive information on the responsibilities and obligations of an SSS
employer. The following forms must be completely filled out and submitted to be a
registered SSS employer:
• SS Forms R-1 and R-1A
• Photocopy of SEC Articles of Partnership
• Business location sketch or map
• Validated Miscellaneous Payment Return also known as SS Form R-6 or

SS Form R-6 with Special Bank Receipt (proof of payment for the Employer
Registration Plate)
5. Register with other government-mandated agencies
Once your business began its operations and you’ve hired a number of
employees, registration with other government-mandated agencies must follow
through.
• The new National Health Insurance Act (RA 7875/RA 9241) is requiring all
employers in the Philippines to register their employees with Philippine
Health Insurance Corporation (Philhealth) and to remit their share of
contribution to the said agency. Registering your employees ensure that
they are going to be covered by this health insurance which can help
greatly in reducing hospitalization costs and their other health care needs.

Page 4 of 16
Region XI
• Pag-IBIG FUND. As stated in RA 7742, SSS members who earn at least
Php4,000 per month must be registered with the Home Development
Mutual Fund (HDMF) which is the agency that administ ers the Pag-IBIG
Fund. This agency works towards providing its members with sufficient
housing (loans) through an effective saving scheme.
NOTE: Registration with the Department of Labor and Employment (DOLE) is also
a must for business operations with five or more employees.
6. Obtain a Mayor’s/Business Permit
This document can only be acquired after securing a Certificate of Registration

from SEC, Barangay Clearance, and registration with the SSS since these
documents would be required to get a business perm it. The fees, requirements,
and processes may vary in different local offices. Fees for new applicants may
depend on their starting capital while charges for renewals depend on the
applicant’s prior year gross revenues or sales. Here are the basic requirem ents in
obtaining a Mayor’s Permit:
• Business Permit Application Form
• Barangay Clearance
• Certificate of SEC Registration
• Public Liability Insurance (for Restaurants, Cinemas, Malls, etc.)
• Authorization Letter of the owner/s with ID
• Contract of a lease (if renting a space) or land title/tax declaration (if you
own the place of business)
• SSS Certification or Clearance
• Community Tax Certificate or CEDULA
Depending on the type of business, other documents may also be required.

Business permits are renewed every year.
7. Register with the Bureau of Internal Revenue (BIR)
A Mayor’s Permit must be submitted before processing a Certificate of

Registration with the BIR since Mayor’s permit is actually a requirement to obtain
such a certificate. Registering with the Bureau of Internal Revenue will give you

Page 5 of 16
Region XI
permission to issue official receipts, register books of accounts, and (for
partnerships and corporations) to obtain a separate Tax Identification Number.
FORMATION AND OPENING OF PARTNERSHIP BOOKS
The opening entry to be made in the book of the partnership is to record the initial investment of
the partners. The investment may be in form of cash or non-cash assets except for an industrial
partner where his contribution is his personal service which has no assigned value. When non-
cash assets are invested to the partnership, the value assigned to these assets are at their fair
market values as of the date of transfer to the partnership and that the valuation must be agreed
upon. By fair market value, we mean the "estimated price of an asset that a seller is willing to
sell and the buyer is also willing to buy in an open market". To restate the value of an old asset
to conform to its fair market value is termed as "asset revaluation".
Per International Financial Reporting Standards (UFRS No, 3), fair value is the price at which an
asset or liability could be exchanged in a current transaction between knowledgeable, unrelated
willing parties.
A Partnership may be formed in any of the following ways:
1) STARTING A BUSINESS (The would-be partners are engaging in business for the first
time)
To illustrate:
On January 2, 20A, Cesario Edulan, Edgar Detoya and Pamela Tao formed a partnership
business with the following contributions,
*C. Edulan (General Partner) contributed cash of P100,000 and Shares profit of 45%.
*E. Detoya (Limited Partner) contributed a brand new motorcycle costing P120,000 in
which his liability of P15,000 from Cebu Motorama will be assumed by the partnership
and shares profit of 45%.
*P. Tao's (Industrial Partner) contribution will be her personal services and shares 10%
in profit:

Page 6 of 16
Region XI
SIMPLE OPENING JOURNAL ENTRY

January 2
Cash P100,0000
C. Edulan, Capital P100,000
Initial investment of C. Edulan.
Equipment P120,000
Accounts Payable P 15,000
E. Detoyo, Capital 105,000
Initial Investment of E. Detoya
with assumption of a liability.
Ms. Pamela Tao was admitted in the partnership as an industrial partner with a 10% share in profit.
Signed: C. Edulan
E. Detoya
P. Tao
Each partner affixed their signature in the journal.
A compound journal entry can also be prepared as desired to record the investments of C. Edulan and E.
Detoya while a separate notation or memorandum entry is made for that of P. Tao as follows:
COMPOUND OPENING JOURNAL ENTRY
January 2
Cash P100,0000
C. Edulan, Capital P100,000
Initial investment of C Edulan.
Equipment P120,000
Accounts Payable P 15,000
E. Detoyo, Capital 105,000
Initial investment of C. Edulan and
E. Detoya with assumption of a liability.
Ms. Pamela Tao was admitted in the partnership as an industrial partner with a 10% share in profit.
Signed: C. Edulan
E. Detoya
P. Tao

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Region XI
In an event wherein the partner’s contribution is in the form of property which has an outstanding
payable balance to be assumed by the partnership like in the case of Mr.Edgar Detoya’s investment, the
debit is the actual cost of the property and credit is the partnership liability equal to the balance
assumed and further a credit is made to the partner’s capital account for the difference.
The general ledger of the partnership will show the following postings:
Looking at the partner’s capital accounts, you noticed that parenthetical notations are
made at the center and at the upper right hand portion indicating each partner's share in
profit and as to the kind of partner (as general partner, limited partner, and industrial
partner) so that there is no need for the accountant to go over the Article of Co -
Partnership in cases where there are transactions that affect directly the capital
accounts of the partners.
You will further notice the plurality of the capital account that each partner has provided
with.

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Region XI
2) SOLE PROPRIETORSHIP BUSINESS CONVERTED INTO PARTNERSHIP
When either one of the partners or all of the prospective partners are sole proprietors
who have agreed to form a partnership, their respective sole proprietorship books are
closed and a new set of books will be opened by the partnership as required by the
Bureau of Internal Revenue. The partnership will not be allowed to use any of the sole
proprietor's books of accounts.
Before closing the sole proprietor's books of accounts, adjustments are needed in order
to fairly and reasonably establish the equities of the sole proprietors on the net assets
(assets less liabilities) transferred because their adjusted balances will be carried in the
book of the partnerships which greatly affect on their agreement to divide profits or
losses. The adjustments will include the following:
a) Non-cash assets are revalued to conform with their fair market values
b) Recognition of liability and other adjustments which may be deemed
necessary
Guide 1 - If the assets have a "contra-asset or "asset offset” account, the adjustment is
made through this contra account
Illustration 1
Accounts Receivable P 80,000

Estimated Uncollectible Accounts 3,000
Estimated Realizable Value P 77,000
As agreed, the provision for uncollectible accounts should be increased to 10% of the
outstanding receivable.
Explanation:
The Estimated Uncollectible Accounts is the contra-asset account of Accounts
Receivable. The adjustment should be made on this account. The amount of adjustment
is P5,000 as computed below:
Accounts Receivable P 80,000

X 10%
The required allowance P 8,000
The recorded allowance 3,000
Needed amount of adjustment to increase the provision P 5,000

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Region XI
Analysis:
The Estimated Uncollectible Accounts should be increased by P5,000 to meet the

required balance of P8,000 (P3,000+ P5,000). To increase its balance is to credit the
said account. The debit therefore is the "Owner's Equity account".
Adjusting Journal Entry
Proprietor, Capital P 5,000

Estimated Uncollectible Accounts P 5,000
The other way of viewing the situation is: "the account that should have been
debited is Uncollectible Accounts. Being an Expense account, it has the effect
of decreasing the capital account. Instead of using the Uncollectible Account,
use "Proprietor's Capital” account to directly effect the decrease."
If the adjustment requires a decrease in the amount provided for doubtful accounts, the
Estimated Uncollectible Accounts is debited and Proprietor's Capital accounts is
credited. This is a case wherein the provision was over set-up.
Illustration 2
Building P 120,000
Less: Acc. Depreclation-Bldg. 70,000
Net book Value P 50,000
As agreed, the building has a fair market value of P 80,000.
Expłanation:
Accumulated Depreciation-Building is the "contra asset" accounts of Building. The adjustment should be
made on this account as shown below:
Per Book Per Appraisal

Building P 120,000
Acc. Depreciation 70, 000
Net Book Value P 50,000 - 80,000 = P 30,000 – excess of fair market
value over net book value.
Analysis:
To adjust the net book value of the building from P50,000 to its fair market value of P80,000 was
done through the Acc. Depreciation account and not directly through the asset account, Building.
The Accumulated Depreciation balance should be decreased by P 30,000 so that the net book value
can be increased by P30,000 also. Thus,

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Region XI
Acc. Depreciation – Building P 30, 000

The other way of viewing the situation is: "as if the building is over deprecated or the depreciation
is over recorded. Since Depreciation is an expense account, it was closed to the capital accounts
already. The over recorded depreciation of the building caused it to understate the capital. To
correct this, credit directly the Proprietor's Capital account instead of Depreciation Expense".
If the adjustment requires an increase in the Acc. Depreciation account, this account should be credited
and the account to be debited is Proprietor's Capital account. This is a case wherein the recorded
depreciation is understated. (This is very important in preparing the closing entries In the book of the
sole proprietors.)
The debit and credit entries of Proprietor's Capital Account to effect adjustments are summarized
below:
Proprietors, Capital
1. decrease in asset 1. increase in asset

2. increase in contra-asset 2. decreased in contra-asset
3. increase in liability 3. decrease in liability
Guide 2 - It the assets do not have the contra-asset or asset-offset account, the adjustments is made to
the asset account itself like for example, land and merchandise.
lllustration 3
Fair Market Value P 100,000

Land (per record) 60,000
Needed amount of adjustment to P 40,000
increase the value of land
Land P 40,000
Illustration 4
Fair Market Value of merchandise P 360,000

Merchandise per Record 310,000
Needed amount of adjustment to P 50,000
increase the value of merchandise

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Region XI
Merchandise P 50,000
Illustration 5- Adjustment on Recognition of Liability
Assume: An accrued interest on Notes Payable was not yet recorded, P500
Proprietor, Capital P 500

Accrued Interest Expense P 500
Explanation:
The adjusting entry should have been a debit to Interest Expense. If Interest Expense account was
debited, being a nominal account, it will be closed to capital account. To directly effect the decrease,
the Proprietors Capital account was debited instead. The credit to Accrued Interest Expense is to
set-up the liability account.
ILLUSTRATION:
Let us assume that Marivic Peñaflor, proprietor of Dadiangas Merchandising and Rommel Cahayag,
proprietor of Dadiangas Grocery have agreed to form a partnership business. The firm has been
registered with the Department of Trade and Industry under business trade name "Gensan Commercial.
Prior to its formation on August 1, 20A, the Statements of Financial Position of the sole proprietors
before any adjustments were taken up are presented below:

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Region XI
The prospective partners have agreed further that the following adjustments should be made on their
respective sole proprietorship books:
1) Their respective provision for Uncollectible Accounts should be adjusted to equal to 10% of the
outstanding receivable.
2) The merchandise of M. Peñaflor shall be revalued at P160,000 while that of R. Cahayag, at
P185,000 due to damages and obsolescence.
3) The Equipment of M. Peñaflor is under depreciated by P8,000 while the Furniture and Fixtures of
R. Cahayag should be revalued at P22,000.
4) Unpaid Utilities Expense:
M. Peñaflor P 3,000
R. Cahayag 2,000
The sole proprietorship books of M. Peñaflor and R. Cahayag are adjusted to conform with the
prospective partners' agreement as shown below:
The above adjusting entries are posted to their respective General Ledger. Only the accounts involved in
the adjusting entries are shown with postings:

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Region XI
After the adjusments, the capital balance of M. Peñaflor has been decreased from P495,000 to P490,000
while the capital of R. Cahayag has been increased from P485,000 to P460,000.
The statement of Financial Position as of the date of partnership formation on August 1, 20A is shown
below.
The above adjusted accounts of both prospective partners are the bases for recording their respective
investments in the partnership.

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Region XI
The opening journal entries in the book of GENSAN COMMERCIAL to record the investments of M.
Peñaflor and R. Cahayag are as follows:
August 1
Cash in Bonk P260,000
Accounts Receivable 90,000
Merchandise inventory 160,000
Equipment 42,000
Est. Uncollectible Accounts P9,000
Accounts Payable 50,000
Accrued Expenses 3,000
M. Peñoflor, Capital 290,000
To record initial investments of
M. Peñafior in the Gensan Commercial
partnership.
Cash in Bonk P280,000

Merchandise inventory 185,000
Furniture & Fixture 22,000
Est. Uncollectible Accounts P 5,000
Accrued Expenses 2,000
R. Cahayag, Capital 460,000
To record initial investments of
R. Cahayag in the Gensan Commercial
partnership.
Take note that the Equipment in the b0ok of M. Peñaflor and Furniture and Fixtures in the book of
R.Cahayag were recorded in the book of partnership at net book value or carrying value of P42,000
(P70,000-P28,000) and P22,000 (P40,000-P18,000)respectively based on fair market values. In contrast
with Accounts Receivable, it is shown at a gross amount to8etner with corresponding Estimated
Uncollectible Accounts because these were only mere provision and there is still hope of collection. If
the Accounts Receivable will be carried in the partnership books at net realizable value, the subsidiary
ledger account will not reconcile with its controlling account.
Although our primary concern is now to record in the partnership book the transfer of assets and
liabilities of the prospective partners, you should also have an idea on what must be done in their
respective sole proprietorship books. The books of the sole proprietors are closed as required.

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Region XI
CLOSING ENTRY IN THE BOOK OF DADIANGAS MERCHANDISING
July 31
Accumulated Depreciation 28,000
Accrued Expense 3,000
M. Peñaflor, Capital 490,000
Cash in Bank P260,000
Merchandise Inventory 160,000
Equipment 70,000
To close the book of Dadiangas Merchandising
for transfer to Gensan Commercial book.
CLOSING ENTRY IN THE BOOK OF DADIANGAS GROCERY
July 31
Accumulated Depreciation 18,000
Accrued Expense 2,000
R. Cahayag, Capital 460,000
Cash in Bank P280,000
Merchandise Inventory 185,000
Furniture & Fixtures 40,000
To close the book of Dadiangas Merchandising
for transfer to Gensan Commercial book.
After posting the above entries in their respective General Ledgers, all account balances will be closed.
Your guide in closing the book of the sole proprietorship book is: "to close is to debit all accounts with
credit balances and credit all accounts with debit balances".
In actual practice, the book of sole proprietorship is being closed first before opening entries are made
in the book of the partnership.

Page 16 of 16

Sto. Tomas College of Agriculture, Sciences and Technology: Week 3

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Republic of the Philippines

Commission on Higher Education

Course syllabus in IC 101 – Principles of Accounting 2 PRETTY MAY D. CRUJIDO

Accounting for Partnership

1. The capital of the partnership is P3,000 Or more in money or property and

The Articles of Co-Partnership must contain among others the following:

1) Name of partnership, nature and place of business

Course syllabus in IC 101 – Principles of Accounting 2 PRETTY MAY D. CRUJIDO

How to Register a Partnership Business in the Philippines?

1. Prepare the required documents for SEC Registration

• A Joint Affidavit of partners to change their partnership name if it has not

There are, however, additional requirements depending on the nature of your

• FIA Form – 105 (for partnerships with a foreigner as a partner)

2. Obtain a Certificate of Registration with the SEC

Course syllabus in IC 101 – Principles of Accounting 2 PRETTY MAY D. CRUJIDO

3. Get a Barangay Clearance

Registering your business and employees (even if they are temporary or

• SS Forms R-1 and R-1A

• Photocopy of SEC Articles of Partnership

• Business location sketch or map

• Validated Miscellaneous Payment Return also known as SS Form R-6 or

5. Register with other government-mandated agencies

Course syllabus in IC 101 – Principles of Accounting 2 PRETTY MAY D. CRUJIDO

6. Obtain a Mayor’s/Business Permit

This document can only be acquired after securing a Certificate of Registration

• Business Permit Application Form

• Certificate of SEC Registration

• Public Liability Insurance (for Restaurants, Cinemas, Malls, etc.)

• Authorization Letter of the owner/s with ID

• SSS Certification or Clearance

• Community Tax Certificate or CEDULA

Depending on the type of business, other documents may also be required.

7. Register with the Bureau of Internal Revenue (BIR)

A Mayor’s Permit must be submitted before processing a Certificate of

Course syllabus in IC 101 – Principles of Accounting 2 PRETTY MAY D. CRUJIDO

FORMATION AND OPENING OF PARTNERSHIP BOOKS

A Partnership may be formed in any of the following ways:

Course syllabus in IC 101 – Principles of Accounting 2 PRETTY MAY D. CRUJIDO

SIMPLE OPENING JOURNAL ENTRY

Each partner affixed their signature in the journal.

COMPOUND OPENING JOURNAL ENTRY

Course syllabus in IC 101 – Principles of Accounting 2 PRETTY MAY D. CRUJIDO

Course syllabus in IC 101 – Principles of Accounting 2 PRETTY MAY D. CRUJIDO

2) SOLE PROPRIETORSHIP BUSINESS CONVERTED INTO PARTNERSHIP

Accounts Receivable P 80,000

Accounts Receivable P 80,000

Course syllabus in IC 101 – Principles of Accounting 2 PRETTY MAY D. CRUJIDO

The Estimated Uncollectible Accounts should be increased by P5,000 to meet the

Adjusting Journal Entry

Proprietor, Capital P 5,000

As agreed, the building has a fair market value of P 80,000.

Per Book Per Appraisal

Course syllabus in IC 101 – Principles of Accounting 2 PRETTY MAY D. CRUJIDO

Adjusting Journal Entry

Acc. Depreciation – Building P 30, 000

1. decrease in asset 1. increase in asset

Fair Market Value P 100,000

Adjusting Journal Entry

Fair Market Value of merchandise P 360,000

Course syllabus in IC 101 – Principles of Accounting 2 PRETTY MAY D. CRUJIDO

Adjusting Journal Entry

Illustration 5- Adjustment on Recognition of Liability