I.

Partnership Accounting – Formation

1. Concept of a partnership

2. Differences from other business structures

3. Types of partners and how to account when individuals decide to form a

partnership

II. Partnership Accounting – Operations

1. Division of profits and losses

2. Changes in the profit and loss ratio

III. Partnership Accounting – Dissolution

1. Concept of dissolution

2. Admission of partner

3. Withdrawal, retirement or death of a partner

IV. Partnership Accounting – Liquidation

1. Concept of liquidation

2. Methods of liquidation

3. Safe payment schedule and cash priority program

V. Construction Contracts

1. Application of the basic principles of PFRS 15

2. Methods for measuring progress

3. Accounting for construction contracts

4. Contract modifications

Partnership Formation

Partnerships are a popular form of business because they are easy to form and because

they allow several individuals to combine their talents and skills in a particular business

venture.

Partnerships are common in the service professions, especially law, medicine and

accounting.
Partnership Definition

By the contract of partnership, two or more persons bind themselves to contribute

money, property or industry to a common fund with the intention of dividing the profits

among themselves (a definition by law)

What is a natural person?

It is an individual human being.

What is common fund?

Collective investment scheme based upon contractual law.

Definition has 3 distinct factors:

1. Association of two or more persons – “persons” are individuals, any natural person who

possesses the right to enter into contract can be a partner.

2. To carry On as Co-owner – a partnership is an aggregation of partners’ individual rights, all

partners are co-owners of partnership property and are co-owner of the profits and losses of

the partnership.

3. Business for profit – partnership may be formed to perform any legal business, trade or

profession, or other service and must attempt to make a profit.

Question 1. Can a corporation be a partner in a partnership?

Ans. No, it cannot be a partner, because is not a natural person it’s a legal person.

Question 2. Can a non-profit organization be a partnership?

Ans. No, because it is a business that does not make a profit.

Differences between partnership and corporation

 PARTNERSHIP CORPORATION

1. Owned by a few – the partners - Owned by many (not less than 5),

called shareholders

2. A change in membership results - A change in membership does not result

in a dissolution of the partnership in the dissolution of the corporation

3. Any partner can bind the partnership - Only the BOD can bind the corporation

4. A partner is liable for partnership - A shareholder is liable for obligations of

obligations not only with his investment the corp. only to the extent of his

in the partnership but with properties shareholdings in the corporation

not invested as well

Characteristics of a Partnership

1. Ease of formation – requires less formality as compared to corporations

2. Separate legal personality – partnership has a juridical personality separate and distinct from
partners, it can

acquire property in its own name and enter into contract

3. Mutual agency – partners are agents of partnership for the purpose of its business and each
partner is also a

principal

4. Co-ownership of property – each partner is a co-owner of the properties of partnership with equal
rights

5. Co-ownership of profits – share in the partnership profit

6. Limited life – partnership is consensual – may be dissolved by express will of any partner,
termination of definite

term stipulated in the contract, by any event w/c makes it unlawful, death, insolvency, transfer of
ownership

to a new or existing partners

7. Unlimited liability – each partner may be liable for partnership debt after all partnership assets
have exhausted,

insolvency of a partner will be assuming by solvent partner

Types of partners in a partnership

1.Limited partner - a kind of partner whose liability for debts of partnership is

limited to the amount of his capital contribution in the firm.

2.General partner – one how’s liability for the partnership debts is unlimited

and therefore, may extent up to his personal assets.

3.Capitalist partner – one whose contribution to the partnership consist of

money and property.

4.Industrial partner – a partner whose contributions to the partnership in the

form of services.

5. Dormant partner – one who is not known to be a partner and does not

participates in running the affairs of the business.

6. Secret partner – one who participates actively in managing the

business but he is not known as a partner.

7. Silent partner - one who is known publicly as a partner but does

not participates in running the affair of the firm

8. Capitalist-Industrial partner – a partner whose contribution to the

partnership consists of money, property and services.

Formation

A contract of partnership is consensual. It is created by the agreement of the partners w/c

may be constituted in any form, such as oral or written.

Under the Phil. Civil Code partnership agreement must in public instrument and recorded in

the SEC when:

a. Immovable property or real rights are contributed to the partnership (e.g. PPE), or

b. Partnership has a capital of P3,000 or more.

A public instrument is a document subscribed and acknowledge before a Notary Public.

Question - A written contract is necessary for the legal formation of a Partnership, true or

false?

Ans. False, oral agreements are also binding, however written agreements are preferred and

also based on a and b above.

Valuation of contributions of partners

When the capital or part w/c a partner is bound to contribute consist of goods, appraisal must be made
based in the contract of partnership and in the absence of stipulation, it shall be made by experts.

The term appraisal suggests valuation of capital contributions at fair value.

Fair value is 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)

Cash and cash equivalent is measured at face amount of cash or cash equivalent contributed, (PAS 7)

Inventory is measured at net realizable value, (estimated selling price less costs to complete and sell) if
lower than cost. (PAS 2)

Partners’ Ledger accounts

a. Capital accounts

b. Drawing accounts or personal accounts

c. Receivables from partners/ payable to

partners

Capital account is credited for:

a. Original/initial investment

b. Additional investment

c. Partner’s share in the profits (sometimes this is

closed to drawing account)

Capital account is debited for:

a. Permanent withdrawal of capital

b. Debit balance of the drawing account

c. Partner’s share in the losses (sometimes this is

closed to the drawing account)

Drawing account is credited for:

a. Partnership obligation assumed or paid by the partner

b. Personal funds or claims of partners collected and

retained by the partnership

c. Periodic partner’s salaries depending on the accounting

and disbursement procedures agreed upon

 Drawing account is debited for:

a. Withdrawal of assets by the partners in anticipation of net

income

b. Partner’s personal indebtedness paid or assumed by the

partnership

c. Funds or claims of partnership collected and retained by the

partner

Question – A partner’s drawing account is, what type of account?

Ans. A contra-capital accounts

Receivable from /Payable to a partner

The partnership may enter into loan transaction with a partner. A loan

extended by the partnership to a partner is recorded as a receivable from

the partner while loan obtained by the partnership from a partner is recorded as a payable to the
partner.

Ways of forming a partnership:

1. Formation of a partnership for the first time (partners with no business)

2. Conversion of a sole proprietorship to a partnership

a. A sole proprietor allows another individual, w/ no business

b. Two or more sole proprietors form a partnership

3. Admission of a new partner

Partnership Formation for the First Time (both not engage in business)

Illustration 1- Cash Investment – Abad and Besa each invests P100,000 cash in a new partnership. The
entry to record the investments would be:

Cash 200,000

Abad, capital 100,000

Besa, capital 100,000

To record the investments of Abad and Besa

Illustration 2 - Cash and Noncash – Pedro and Jose form a partnership for the 1 st time .Their investment
are as

follows:

Pedro Jose

( Fair Value) (Fair Value)

Cash 70,000 -

Mdse Inventory (cost, P10,000) 20,000

Computer equip.(cost, P50,00) 30,000

Journal Entry:

Cash 70,000

Pedro, capital 70,000

Mdse Inventory 20,000

Computer equip 30,000

Jose, capital 50,000

Illustration 3 – Contribution in services – Pursuant to the article of Partnership, Mr. Dantes contributed
services as manager of the partnership for a 20% share in the profits. What the journal entry?

Memo Entry:

Mr. Dantes, partner, is to act as manager for a 20% share in the profits.

Illustration 4 – Two proprietors form a partnership – Gerry and Henry, competitors in business,

decided to consolidate their business to form a partnership. The statement of financial position of

Gerry and Henry on this date are:

Assets Gerry Co. Henry Co.

Cash 5,000 4,000

A/R 10,000 8,000

Mdse. Inventory 8,000 10,000

Furn. & Fixt. 6,000 9,000

Liabilities & Equity

A/P 3,000 6,000

Capital 26,000 25,000

The conditions agreed upon by partners are the ff:

a. 10% of A/R is to be set up as uncollectible in each book

b. Mdse. Inventory of Henry is to increase by P1,000

c. The Fur. &Fix of Gerry and Henry are to be depreciated by P600 and P900

respectively.

Required - Journal entries (assuming new sets of books is used)

Procedures: 1. Adjust the accounts of Gerry and Henry. Adjustments are made to their capital accounts.

Closed the books of Gerry and Henry

2. Record the investment of Gerry and Henry.

Journal entries – Books of Gerry

1) Gerry, capital 1,600

Allowance for doubtful accounts 1,000

Accu. depreciation-furn. and fixt 600

To adjust assets of Gerry

2) A/P 3,000

Allow. for doubtful accounts 1,000

Accu. Depreciation-furn. and fixt 600

Gerry, capital 24,400

Cash 5,000

A/R 10,000

Mdse Inventory 8,000

Furn and fixt 6,000

To close the books of Gerry

Books of Henry

1. Mdse Inventory 1,000

Henry, capital 700

Allow. For doubtful accounts 800

Accum. Depreciation-furn. and fixt 900

To record the adjustments of Henry

2. A/P 6,000

Allow for doubtful accounts 800

Accum depreciation-furn. and fixt 900

Henry , capital 24,300

Cash 4,000

A/R 8,000

Mdse 11,000

Furn and fixt 9,000

To close the books of Henry

New sets of books for the partnership

1. Cash 5,000

A/ R 10,000

Mdse Inv 8,000

Furn and fixt 5,400

A/P 3,000

Allow for doubtful accounts 1,000

Gerry, capital 24,400

To record the investment of Gerry

2) Cash 4,000

A/R 8,000

Mdse. Inv. 11,000

Furn. and fixt. 8,100

Accounts payable 6,000

Allow. For doubtful accounts 800

Henry, capital 24,300

To record the invest of Henry

 GH Partnership

Statement of Financial Position

June 30, 2016

Assets

Cash 9,000

Accounts receivable 18,000

Less: Allow for doubtful account 1,800 16,200

Mdse. Inv. 19,000

Furn. and fixt. 13,500

Total assets 57,700

Liabilities and Equity

A/P 9,000

Gerry, capital 24,400

Henry, capital 24,300

Total liabilities and equity 57,700

Procedures in Partnership Formation

I. Sole Proprietor and an individual form a partnership

1. Sole proprietor books are retained for the partnership

a. Adjust the assets and liabilities of the proprietor to their fair market values as agreed by
partners. Adjustments to be made to his capital account.

b. Record the investment of the individual.

2. New books are open for the partnership

Books of the proprietor

a. Adjust the assets and abilities of the proprietor according to the agreement, adjustments
are made to his capital account.

b. Closed the books of the proprietor.

New books of the partnership

 a. Record the investment of the proprietor, his assets and labilities

b. Record the investment of the individual

III. Two proprietor form a partnership partners A and B

1. Books of B are used as the partnership books

a. Adjust the account of A as agreed

b. Closed the books of A

2. Books of B (now the partnership books)

a. Adjust the accounts of B as agreed

b. Record the investment of A, his adjusted assets and liabilities

3. New partnership books will be used

Books of A and B

a. Adjust the accounts of A and B according to their agreement

b. Closed the books of A and B

New books of the Partnership

a. Record the investment of A, his adjusted assets and liabilities

b. Record the investment of B, his adjusted assets and liabilities