MODULE 1a - Partnership Nature and Formation

CMPC 131-
MODULE 1A
(PARTNERSHIP NATURE
INSERT RELATED PICTURE HERE
AND FORMATION)
COURSE LEARNING OUTCOMES

At the end of the module, you should
be able to:
1. understand the nature of a
partnership;
2. know the different kinds of
partnerships and the classes of
partners;
3. learn the requirements in the
partnership formation;
4. know the accounting for partners’
initial investment; and
5. prepare the statement of financial
position for a new partnership.
FINANCIAL
ACCOUNTING AND
REPORTING
What comes easy won’t last long,

and what lasts long, will not come easy.
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COURSE INTRODUCTION
This course provides an introduction to accounting, within the context of business and
business decisions. Students explore the role of accounting information in the decision-
making process and learn how to use various types of accounting information found in
financial statements and annual reports. This course starts with a discussion of accounting
thought and the theoretical background of accounting and the accounting profession. The
next topic is the accounting cycle - recording, handling, and summarizing accounting data,
including the preparation and presentation of financial statements for merchandising and
service companies. Moreover, it continues with transactions, financial statements, and
problems peculiar to the operations of partnerships and corporations as distinguished from
sole proprietorships. Topics include accounting for partnership formation and operations;
share capital issuances, treasury shares, other related transactions affecting accumulated
profits. Emphasis is placed on understanding the reasons underlying basic accounting
concepts and providing students with an adequate background on the recording,
classification, and summarization functions of accounting to enable them to appreciate the
varied uses of accounting data.
The essence of a partnership form of business organization is captured by the proverb, “Two
heads are better than one”. A partnership is a voluntary association of two or more persons
for the purpose of conducting a business for profit.
The Partnership Law, of the Civil Code of the Philippines, governs the formation and
operation of partnerships in the Philippines. Article 1767 of the Partnership Law embodies the
definition of a partnership:
“By the contract of a partnership, two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profit among
themselves. Two or more persons may also form a partnership for the exercise of a profession.”
Any person who is legally capable of entering into a contract may become a partner.
Partnership agreements may be oral, but sound business practice demands a written
agreement to avoid misunderstanding. A written partnership agreement constitutes the
Articles of Partnership. Contribution to the common fund may consist of cash, non-cash
property – real or personal, tangible or intangible – and industry or service that may be
physical or mental. A limited partner, however, contributes cash or other property but not
services (see kinds of partners as to contribution of this chapter). The purpose of a
partnership is to secure profits and to divide the same among the partners. The agreement
as to division of profits is incorporated in the partnership contract. In case of failure to provide
for division of profits, the provisions of the law shall apply.
Paragraph 2 of Article 1767 relates to the exercise of a profession. A profession is a calling in

the preparation for or practice of which academic learning is required and which has for its
prime purpose the rendering of the public service. Thus, most professional practices such as
accounting, law, medicine, engineering and dentistry take advantage of a partnership form
of organization.
CHARACTERISTICS OF A PARTNERSHIP
There are certain characteristics peculiar to a partnership which must be understood clearly
before the discussion of accounting procedures and problems involving partnerships. These
characteristics are as follows:
1. Essentially a Contract - A business partnership is like a marriage. To be successful, the

partners must cooperate. However, business partners do not vow to remain together for
life. Business partnerships come and go. To make certain that each partner fully
understands how a particular partnership operates, and to cut down on the chances
that any partner might misunderstand how the business is run, partners may draw up a
partnership agreement.
The partnership contract is called the Articles of Partnership. It specifies all the rights,
duties and obligations of the partners among themselves and/or in relation to
the partnership. The articles should contain the following:
a. Name of the partnership, its nature and location
b. Names of the partners composing such
c. Date of effectivity of the agreement and its duration
d. Nature and amount of capital contribution of each partner
e. Manner of dividing the partnership net income or loss among the partners
f. Duties, rights, and obligations of the partners regarding the partnership affairs
g. Conditions and limitations on withdrawals by partners
h. Rate and other details in the computation of interest (if any) to be charged each
partner or to be allowed on capital
i. Provision for arbitration in settling disputes
j. Causes of dissolution before the termination of the term agreed upon
k. Date of closing of the books and calculation of profit or loss upon dissolution
l. Payment of liabilities and distribution of assets among the partners
A partnership may be constituted in any form, except where immovable property or real
rights are contributed, in which case a public instrument is necessary.
Every contract of partnership having a capital of three thousand pesos (P3,000) or more,
in money or property, should appear in a public instrument, which must be recorded and
registered with the Securities and Exchange Commission (SEC). However, submission of
such with SEC is not a requirement for its validity. This is necessary only for the purpose of
registration with the SEC. A partnership is conceived the moment the partners of the
contract reach an agreement. Registration with SEC is necessary as a condition for the
issuance of licenses to engage in business or trade.
2. Voluntary Association - Starting a partnership is voluntary. A person cannot be forced to

join a partnership and partners cannot be forced to accept another person as a partner.
This voluntary nature of a partnership is important because a person assumes some risks
by entering a partnership; i.e. each partner is legally responsible for the business acts of
his co-partners when these acts are within the scope of the partnership. Also, a partner
is personally liable to all the debts of his partnership. Because of these potential risks,
partnership law recognizes it as only fair that a person be permitted to select the people
he wishes to join in the partnership. Normally, a person will select only financially
responsible people who have good judgment.
3. Mutual Agency - Each partner is an agent of the other partners on matters relative to the
affairs of the partnership. The act of every partner, including the execution in the
partnership name of any instrument, for apparently carrying on in the usual way of the
business of the partnership of which he is a member binds the partnership. The exception
is when the partner so acting has in fact no authority to act for the partnership in
the particular matter, and the person with whom he is dealing has knowledge of the fact
that he has no such authority.
For example, KAT and NIEL are partners engaged in the vegetable delivery services in
Metro Manila. KAT, without NIEL’s knowledge, purchased a delivery truck from Hyundai
Motors Philippines in Pangasinan for P800,000. Although KAT acted without the consent
of NIEL, the partnership is still obligated to accept the delivery truck and to pay the price
of P800,000. KAT, being a partner, is an agent of the partnership and her actions were in
behalf of the said partnership.
Partners among themselves may agree to limit the right of any one or more of the
partners to negotiate certain contract for the partnership. Such agreement is binding to
the partners and to outsiders or third persons who know of the agreement. Outsiders who
are unaware of anything to the contrary have the right to assume that each partner has
the normal agency rights of a partner. Because of this characteristic, it is important for
an individual to choose business partners who have integrity and business objectives
similar to his own.
4. Limited Life - A partnership has a life limited by the length of time that all partners continue
to own the business. Because a partnership is a voluntary association of persons, many
events may cause its dissolution. Dissolution refers to the termination of the life of an
existing partnership. A partnership may be terminated by any of the following events:
expiration of the contract, accomplishment of the business objective, at will of any of the
partners, the admission of new partners, the withdrawal, death or bankruptcy of an
existing partner, and the issuance of a court decree because of a partner’s insanity,
incapacity or misconduct.
A dissolution of a partnership may result to either: a formation of a new partnership

whereby a new partnership is formed to carry on without interruption on the operations
of the former or the dissolved partnership, or; partnership liquidation whereby the business
operation is terminated, assets are sold or liquidated, liabilities are settled and remaining
cash is distributed to the partners. Thus, sometimes, while change in the membership
dissolves a partnership, business continuity may be unaffected. A new partnership is
formed to carry on without interruption on the operations of the former or dissolved
partnership. If the partners wish to terminate business affairs, then the partnership is
liquidated.
5. Separate Legal Personality - Article 1768 of the Partnership Law provides that “the
partnership has a juridical personality separate and distinct from that of each of the
partners”. A partnership duly formed under the law is a juridical or legal person.
Therefore, it may acquire, possess and dispose property of all kind, incur and liquidate
obligations, as well as bring civil or criminal actions in conformity with the laws and
regulations of its organizations just like a natural person. Its assets and liabilities should be
treated as separate and distinct from those of the owners.
6. Unlimited Liability - Partners, including industrial partners (see kinds of partners according
to contribution in this chapter), are liable with their separate properties for all obligations
contracted by the partnership. Each partner, except for the limited partner, is individually
liable for all the debts of the business. This means that if the assets of the partnership
cannot pay for its liabilities, then the personal assets of the partners, other than those
already contributed to the partnership, should be used to satisfy such liabilities after
paying his personal liabilities on a pro-rata basis. Furthermore, if the personal property of
a partner is insufficient to meet his share, the creditors may turn to the assets of the
remaining partners who are able to pay. Thus, a partner may be called on to pay all of
the debts of his partnership without prejudice to collecting the same from insolvent
partners when they become solvent. However, the liability of a limited partner is
restricted to his capital investment.
For example, Ding, Dong and Dantes are partners in D3 Partnership. On July 1, they
decided to terminate the partnership agreement. As of this date, their assets, liabilities
and partners' equity are as follows:
ASSETS LIABILITIES AND CAPITAL

Cash P 4,000 Liabilities P30,000
Non-cash 44,000 Ding, Capital 6,000
Dong, Capital 6,000
Dantes, Capital 6,000
Total P48,000 Total P48,000
On such date, the personal net assets (Personal assets – Personal liabilities) of the partners
are as follows: Ding- P 2,000; Dong - P 5,000; and Dantes - P 6,000.
The non-cash assets were sold for only P20,000. This leaves the partnership with just
P24,000 (including the P4,000 cash) with which to settle its liabilities. Since the total
liabilities of the partnership amount to P30,000, there is an unsettled liability of P6,000
(P30,000 liability - P24,000 cash). The unpaid creditors of the business can claim P2,000
(P6,000 / 3 partners) each from the personal assets of Ding, Dong and Dantes. If Ding
has only P1,000 as his personal net assets, then the unsettled liability of P1,000 can be
claimed at P500 each from Dong and Dantes. However, Dong and Dantes may look to
Ding for refund of their P500 if Ding ever becomes solvent in the future. If Ding is a limited
partner, then the creditors can claim P3,000 (P6,000 / 2 partners) each from Dong and
Dantes.
7. Joint Ownership of All Partnership Properties - Property contributed to the partnership is

owned by the partnership by virtue of its juridical personality. All assets invested in the
business become the assets of the business. A partner is no longer sole owner of the
specific assets that he invested into the business. His interest in the business is not
measured by the specific assets to which he lays claim but by the proportion of his capital
to the total partners' equity.
8. Joint Ownership of Profits - All partners are entitled to share in the profits of the company.
Losses should also be borne by all partners with the exception of the industrial partner.
The profit and loss agreement shall be clearly defined in the Articles of Partnership. The
exemption of the industrial partner to share in losses relates exclusively to the settlement
of the partnership affairs among the partners themselves. This exemption does not
extend to the liabilities of the partners to third persons, that is why industrial partners have
unlimited liability too.
9. Limited Right to Dispose of Interest in the Partnership - A partner may dispose of his
investment in the partnership only with consent from the other partners. This is due to the
concept that a partnership contract is one made out of trust and confidence. Thus, the
transferee of a partner’s interest may not enjoy the trust and confidence of the other
partners.
A partnership being essentially a contract is a voluntary association, wherein members of

the partnership have the right to select people with whom they will associate as partners.
Thus, their consent is necessary before a partner may dispose of his interest, as the other
partners may not want to associate with the transferee of the disposing partner’s interest.
10. Right to Dispose of Share in Profits - A partner may dispose of his right to share in profits on
the investment in the partnership even without the consent of the other partners. This is
so because a partner’s share in profits of the partnership is really his personal property.
Advantages
1. A partnership is relatively easier and less expensive to organize than a corporation.
2. A partnership is subject to less government regulations than a corporation.
3. A partnership has fewer constraints on their actions unlike a corporation. Certain
corporate actions require the approval of stockholders or directors.
4. A partnership provides for the combination of capital thus greater source of capital
as compared to a sole proprietorship.
5. A partnership provides better management resulting from the combined abilities of
the partners than a sole proprietorship.
6. A general professional partnership is exempted from payment of income tax. This
would mean savings of at least 35% tax. The partners are taxed individually. But the
other kinds of partnerships are treated as corporations for tax purposes.
Disadvantages
1. Unlimited liability for the debts of the firm - The business risk of each investor is not
limited to his capital contribution only, except if the investor is a limited partner, but
extends even to his personal assets.
2. Mutual agency that may result in losses due to acts of one or some of the agent-
partners.
3. Non-transferability of a partner's interest without the consent of all the other partners.
4. Misunderstanding and disputes which may arise among the partners.
5. Limited life of the business - Uncertainties regarding its life may hamper the estab-
lishment of long-term goals. Furthermore, profitable operations may have to be
stopped due to withdrawal or death of a partner.
6. Limited capital as compared to a corporation.
7. Less effective than a corporation in raising large amounts of capital.
KINDS OF PARTNERSHIPS
Partnerships may be classified into the following:
A. As to Object of Partnership
1. Universal Partnership - one in which the parties jointly agree to contribute to
the common fund their whole property.
a. Universal Partnership of all Present Property - One in which the whole property
of each partner at the time of the constitution of the partnership becomes the
common property of all of the partners, as well as the profits which they may acquire
therewith. It is the intention of the partners to divide the property and all the profits
that will be earned on the property among themselves.
b. Universal Partnership of Profits - One in which only all the property acquired
through the work and industry of the partners during the existence of the partnership
become part of the common fund. Movable and immovable property of each
partner at the time of the contract shall continue to be owned by each.
2. Particular Partnership - one in which the parties combine to pursue a single individual
transaction or enterprise and divide among themselves the benefits there from. It may
be formed for the exercise of a profession.
B. As to Liability of the Partners

1. General Co-partnership - one in which all the partners are general partners who may
act publicly in behalf of the firm. Furthermore, each of the partners may be held
individually liable for obligations of the partnership.
2. Limited Partnership - one in which there is at least one general partner and at least one
limited partner, with the limited partner not being liable for partnership debts except to
the extent of his contribution to the partnership. The word “Limited” or “Ltd.” is added to
the name of the partnership to inform the public that it is a limited partnership.
C. As to its Duration
1. Partnership at Will - one in which no time is specified and is not formed for a particular
undertaking or venture and which may be terminated anytime by mutual agreement of
the partners, or by will of any one partner alone; or one for a fixed term or particular
undertaking which is continued by the partners after the termination of such term or
particular undertaking without express agreement.
2. Partnership with a Fixed Term – one in which the term or period for which the
partnership is to exist is fixed or agreed upon; or one formed for a particular undertaking.
Upon expiration of the term or completion of the particular enterprise, the partnership is
dissolved, unless continued by the partners.
D. As to Representation to Others
1. Ordinary Partnership or Real Partnership - one that actually exists among the partners
and also as to third persons.
2. Partnership by Estoppel or Ostensible Partnership – one which in reality is not a
partnership but is considered a partnership only in relation to those who, by their conduct
or admission, are precluded to deny or disprove its existence.
E. As to Legality of its Existence

1. De Jure Partnership - one that has complied with all the requirements for its
establishment.
2. De Facto Partnership – one that has failed to comply with all the legal requirements for
its establishment.
F. As to Publicity
1. Secret Partnership – one, wherein the existence of certain persons as partners, are not
made known to the public by any of the partners.
2. Open Partnership or Notorious Partnership – one whose existence is made known to
the public by any of the partners.
G. As to Purpose or Activity
1. Commercial Partnership or Trading Partnership - one whose main activity is the
manufacture or purchase and sale of goods.
2. Professional Partnership or Non-Trading Partnership – one that is organized for the
purpose of rendering services, such as a firm of accountants, lawyers, engineers or
medical practitioners.
KINDS OF PARTNERS
The different classes of partners are:
A. As to Liability
1. General Partner - one who is liable for partnership debts up to the extent of his personal
assets or those not contributed to the partnership when all the partnership assets shall
have been exhausted. He is also known as Real Partner.
2. Limited Partner – one who is liable for partnership debts up to the extent of his capital
contribution. He is also known as Special Partner. It is to be noted that limited partners
are prohibited from having their own surnames in the partnership’s title or business name.
Violation of such would make the limited partner liable as a general partner insofar as
third parties without notice are concerned.
3. General-Limited Partner – one who has all the rights, powers and subject to all the
restrictions of a general partner as to creditors but whose liability is limited to his capital
contribution as to the other partners.
B. As to Contribution
1. Capitalist Partner - one who contributes money or other property to the common fund
of the partnership. The capitalist partner is prohibited in engaging to any operations that
is of the same kind of business in which the partnership is engaged, unless there is an
agreement to the contrary.
2. Industrial Partner – one who contributes his work, labor or services to the partnership.
An industrial partner shares in the partnership profits but not in losses. Such exception,
however, does not extend to third parties.
3. Capitalist-Industrial Partner – one who contributes money or property as well as his
services to the partnership.
C. As to Participation
1. Silent Partner – one who is not actively involved in the conduct of the business of the
partnership although he may be known to be a partner. If he withdraws from the
partnership, he must give notice to those persons who do business with the firm to avoid
liability in the future.
2. Dormant Partner – one who takes no active part in the business and is not known or held
out as a partner. The term is synonymous to Sleeping Partner. He may retire from the
partnership without giving notice and cannot be held liable for the obligations of the firm
subsequent to his withdrawal.
3. Nominal Partner – one who does not take active part in the business, makes no
investment, but permits his name to be used by the partnership for accommodation or for
a consideration. Nominal partners do not acquire the rights of a partner but they shall be
subject to the liability of a partner insofar as third persons without notice are concerned.
4. Managing Partner – one who manages the affairs of the partnership. He may be
appointed either in the Articles of Partnership or after the organization of the partnership.
It should be noted that the managing partner contemplated in the definition refers to a
partner, not a stranger, who has been appointed manager.
5. Liquidating Partner – one who takes charge of the winding up of partnership affairs
upon dissolution. In the absence of one, all the partners who have not wrongfully
dissolved the partnership may act as a liquidating partner.
6. Secret Partner – one who takes active part in the business but is not known to be a
partner by outside parties now held out as a partner by the other partners, although he
participates in the profits and losses of the partnership.
7. Ostensible Partner – one who takes active part and is known to the public as a partner
in the business, whether or not he has an actual interest in the firm. If he is not actually a
partner, he is subject to the doctrine of estoppel.
8. Quasi-Partner – one who is not really a partner or a party to a partnership agreement
but is liable as a partner for the protection of innocent third persons. Thus, he is liable as
a partner when, by word or by conduct, he directly or indirectly represents himself to
anyone as a partner in an existing or non-existing partnership. He is also known as a
Partner by Estoppel.
9. Real Partner – one who is in truth and in fact, connected with the partnership as a
partner in its strictest meaning.
10. Sub-partner – one who, not being a member of the partnership, contracts with a partner
with reference to the latter’s share in the partnership. The partnership formed between a
member of a partnership and the sub-partner is termed as Sub-partnership.
ACCOUNTING FOR PARTNERSHIPS
The principles of accounting for transactions of any business entity whether it is organized as
a sole proprietorship, partnership or corporation are basically the same. The same steps in
the accounting cycle are followed. Common transactions for purchases and sale of
merchandise, payment of expenses are similarly recorded.
The principal distinction between accounting for a sole proprietorship and partnership lies in:
a. Capital investments and withdrawals
b. Distribution of profit and loss
c. Dissolution and Liquidation
Partners' Capital and Drawing Accounts

A single proprietorship is owned by only one person and thus, only a single capital and
drawing account is maintained in recording the changes in the equity of the owner. A
partnership is jointly owned by two or more persons. It becomes necessary to maintain
separate capital and drawing accounts for each partner so that the changes in each
partner's equity due to investment, withdrawals and share of profit or loss may be recorded.
The capital account is used for the permanent capital contribution of the partner while
the drawing account is used to summarize the temporary changes in his capital in
the form of shares in earnings and withdrawals. The postings to the partners' accounts are
as follows:
Name of Partner, CAPITAL Name of Partner, DRAWING

• Permanent • Original • Personal • Share in the net
withdrawal investment withdrawal income
of cash or other including
• Share in the net • Share in the net assets salaries, interest
loss from income from • Share in losses and bonus
operations (if no operations (if no from operations • Debts of the firm
drawing account drawing account • Partners’ paid by the
is used) is used) personal debts partner
paid by the • Partners’
partnership personal
• Partnership receivable
funds collected and
collected and retained by the
retained by the partnership
partner
Partners' Loans Receivable and Loans Payable Accounts
Occasionally, a partner may advance amounts to the partnership beyond the intended
permanent investment. These advances should be credited to the partner’s loan account,
Loans Payable to Partner or Due to Partner, and classified among the liabilities, separate
from liabilities to outsiders. A partner’s loan to the partnership should be distinguished from
a capital investment. This is considered as an accountable transaction between the partner
and the partnership having a separate legal identity from the partners. A loan is payable to
the partner at some future date and represents a liability of the partnership to the partner.
In the event of partnership liquidation, partners’ loans must be paid after the claims of
outside creditors have been paid in full, but before any payment is made to partners on
account of their capital investments.
On the other hand, if a partner withdraws money with the intention of repaying it, the debit
should go to the partner’s advance account, Loans Receivable from Partner or Due from
Partner, and be classified separately among the partnership’s receivables.
PARTNERSHIP FORMATION
Generally, the partnership is formed from the moment the partners agree on the terms and
conditions of the partnership contract. A partnership may be formed under any of the
following arrangements:
1. A partnership is formed by two or more individuals for the first time.
2. A partnership is formed between the owner of an existing sole proprietorship and an
individual, with the former contributing his entire business and the latter investing cash
or property.
3. A partnership is formed by two or more existing sole proprietorships, wherein the
owners will contribute their entire business as their capital investments.
4. A partnership is formed when an existing partnership, with the consent of all the
partners, admits a new partner.
VALUATION OF ASSETS AND LIABILITIES CONTRIBUTED

Upon organization of a partnership, the first entries on the partnership books – the opening
entries - will be the entries to record the investments of partners. These investments or
contributions may be in the form of cash, non-cash assets or industry or a combination of
any or all of these. Sometimes liabilities are transferred to the new partnership together with
assets. The following rules on the valuation of contributions shall be applied in preparing the
opening entries:
1. Cash contributed to the partnership is recorded at Face Value.
2. Non-cash assets contributed by the partners should be valued at Agreed Values, or in

the absence of an agreement, at their Fair Market Value.
PFRS 13 (based on the Philippine Financial Reporting Standards) defines FAIR MARKET
VALUE as the amount by which an asset can be exchanged between knowledgeable
willing parties, on an arms-length transaction. Simply stated it is the estimated amount
that a seller will receive from a willing buyer for the sale of an item in the open market. In
the absence of the agreed or stipulated value, the fair market value is the amount
recorded on the books of the partnership regardless of whether it is equal to, less than or
greater than their cost. Any increase in the value of the assets before the formation of
the partnership should accrue to the benefit of the partner who was the sole owner.
Consequently, any decrease in the value of the asset before the formation of the
partnership should also be borne by its sole owner.
To illustrate this rule and point out why it is just: Kat agrees to invest land owned by her in
a partnership. This land was bought by her five years ago at a cost of P15,000. At present,
its fair market value is P75,000; that is, if Kat were to sell the land today, she could ask for,
and receive a price of P75,000 for the property. Should she invest her land in the
partnership, it should be recorded on the partnership books at its present fair market
value of P75,000 and not at its original cost to Kat of P15,000.
The property should be recorded at P75,000 because that is its value on the date it is
turned over to the partnership. If the partnership had bought the land from another party
it would have paid P75,000. Furthermore, if the land is recorded at P15,000, Kat would be
credited with a capital investment of P15,000 only, although the property invested by her
is worth and can be sold for P75,000.
Moreover, if the land is recorded on the partnership books at P15,000 and immediately
after its transfer to the partnership, it is sold for P75,000, a profit of P60,000 would be
reported by the partnership. Since the land has become the partnership property and is
jointly owned by all the partners when it was sold, the entire profit of P60,000 would be
shared by all the partners. This would not be just to Kat since the profit of P60,000 resulting
from increase in the value of property from P15,000 to P75,000 took place while Kat was
the sole owner of the property. Therefore, the entire profit of P60,000 properly belongs to
Kat only.
If, however, the land should further increase in value after it is transferred to the
partnership, then any increase in value which takes place while the land is partnership
property, may properly be shared by all the partners, as joint-owners. To illustrate,
suppose that two years after the land is invested, it is sold by the partnership for P100,000.
the profit of P25,000 which resulted from increases in the value of property from P75,000
to P100,000 while it is held by the partnership, may now be properly shared by all the
partners in accordance with their agreed profit and loss sharing ratio.
3. When industry is contributed into the partnership, a memorandum entry is prepared.
4. When assets are received by the partnership and certain liabilities are assumed, it results
to the following:
a. The partnership assets would increase. Debit the individual asset accounts at agreed
values.
b. The partnership liabilities would increase. Credit the appropriate liability amounts at
agreed values.
c. The partner’s equity in the net assets of the firm would increase. Credit the capital
account of the partner at net (assets – liabilities).
A. Two or More Individuals Forming a Partnership for the First Time
When two or more individuals form a partnership for the first time, their contributions may
be in the form of cash, properties other than cash, industry or a combination thereof.
Basically, the entry to record the investment would be to debit the asset(s) contributed
and credit the capital account.
1. Cash contribution only

Kim and Xian formed a partnership and agreed to contribute a total of P1,000,000 in
cash to the partnership fund. They further agreed that the amount shall be supplied
by them in the ratio of 40% and 60%, by Kim and Xian, respectively.
The journal entry to record the investment is:
Cash 1,000,000
Kim, Capital 400,000
Xian, Capital 600,000
To record original investment of partners.
2. Cash and other Property contributed

It is necessary for partners to agree on the fair market value of the assets at the time
of their investment. The assets are debited in accordance with the agreement,
liabilities, if any, are credited for the amounts assumed by the firm and the partners'
capital accounts are credited for the amounts of their respective investments.
Coco and Martin agreed to make the following contributions to form a partnership
on July 1, 2020:
Coco Martin
Cash P 100,000 P 80,000
Merchandise Inventory, cost 60,000
Merchandise Inventory, fair market value 50,000
Land, cost 200,000
Land, fair market value 250,000
Real property taxes still unpaid & to be assumed by the partnership 35,000
As discussed previously, it is necessary for partners to agree on the valuation of the

assets at the time of their investment. In the absence of any agreement the fair
market value of the assets are assigned as the value of the noncash assets
contributed. The assets are therefore debited at fair market value, liabilities, if any,
are credited for the amounts assumed by the firm and the partners' capital accounts
are credited for the amounts of their respective investments.
The entries to record the investments of Coco and Martin would be:
Cash 100,000
Merchandise inventory 50,000
Coco, Capital 150,000
To record initial investment.
Cash 80,000
Land 250,000
Property taxes payable 35,000
Martin, Capital 295,000
Take note in the above entries, the partner's capital credit is based upon the net
assets (Total Assets - Total Liabilities) contributed by the particular partner.
3. Cash, property and industry contributed

Tito, Vic, and Joey formed a partnership. They are to engage themselves in the auto
repair business. Tito contributes cash of P400,000, Vic contributes tools with a cost of
P150,000 and a fair market value of P250,000. Joey being a mechanic is to contribute
his skills to the partnership. Profits are shared 40% to Tito, 25% to Vic and 35% to Joey.
Losses are shared 60% to Tito and 40% to Vic.
The entry to record their investments is as follows:
Cash 400,000
Tools 250,000
Tito, Capital 400,000
Vic, Capital 250,000
The contribution of Joey to the partnership is recorded by a memorandum entry as

follows:
“Joey is admitted into the partnership as an industrial partner. He shares 35% of

the profits of the partnership.”
➢ Sometimes, a partner will contribute intangible benefit to the partnership like good
management skills, good business reputation, business connections, or anything
that will bring in higher income to the business. The partners may quantify this in
the form of either BONUS or REVALUATION (GOODWILL) APPROACH.
To illustrate, assuming Boy and Kris agreed to form a partnership, with Boy
contributing P200,000 cash and Kris contributing P300,000 cash. Assuming that each
partner is to receive an equal capital interest in the partnership:
BONUS APPROACH:
Cash 500,000
Boy, Capital 200,000
Kris, Capital 300,000
Kris, capital 50,000

Boy, Capital 50,000
To record bonus to Boy.
Under the bonus approach, there is a capital interest transfer of P50,000 from Kris to
Boy to equalize the capital balances. Such an entry is made if Kris recognizes that
Boy is contributing something to the firm other than the tangible assets, but the
partners are reluctant to recognize an intangible asset, or a value for it cannot be
determined objectively.
REVALUATION (GOODWILL) APPROACH:
Cash 500,000
Kris, Capital 300,000
Goodwill 100,000
To record goodwill to Boy.
Under the revaluation (goodwill) approach, if equal capital interests were to be given
to each partner, Boy’s capital is increased by P100,000. This is accomplished by
recognizing an intangible asset of P100,000. It should be noted that that capital of
Kris was used as a basis to determine the total agreed capital instead of the capital
of Boy which may not give rise to a positive revaluation of asset (goodwill). It is
therefore assumed that Boy is contributing something of value to the partnership that
is intangible in nature, and which could not be specifically identified, unless the
intangible is specifically identifiable, such as a patent.
BONUS versus REVALUATION (GOODWILL) APPROACH

Both approaches achieve the intent of the partnership agreement, that is, to record
equal capital balances despite a difference in the partners’ cash contributions. The
bonus approach allocates P500,000 invested capital according to the percentages
designated by the partners, whereas goodwill approach capitalizes the implied value of
Boy’s intangible contribution.
Although partnership accounting does not prohibit the use of either technique, the
recognition of goodwill approach poses definite theoretical problems. In business
combination, goodwill is recognized but only as a result of an acquisition made by the
reporting entity. Consequently, this asset had a historical cost in the traditional
accounting sense. Partnership goodwill has no such cost; the business recognizes an
asset even though no funds have been spent.
The partnership of Boy and Kris, for example, was able to record P100,000 in goodwill
without any expenditure. Furthermore, the value attributed to this asset is based solely
on a negotiated agreement between the partners. Thus, although partnership goodwill
is sometimes encountered in actual practice, the authors believe that this “asset” should
be viewed with skepticism.
KEY POINT
A decision to use one approach over the other will depend on the
partner’s agreement. In the absence of any agreement, the BONUS
APPROACH IS PREFERABLE OVER THE GOODWILL APPROACH.
B. Sole Proprietorship and Another Individual Forming a Partnership

The accounting procedures and journal entries to record the conversion of an existing
sole proprietorship to a partnership where the sole proprietor would allow another
individual who has no business of his own to join the new business, is dependent on either:
1. The new partners agree to open a new set of books; or
2. The new partners agree that the books of the sole proprietorship will be retained and
used as partnership books.
To illustrate, suppose Cheez, a sole proprietor of Cheez Grocery, invites Heart to join him
in his business on November 1 of the current year. Heart is to invest cash equal to one-
half of Cheez’s interest therein. As of this date, the statement of financial position of
Cheez's Grocery shows the following:
ASSETS LIABILITY AND CAPITAL

Cash P 110,000 Accounts payable P 450,000
Accounts Receivable 250,000 Cheez, Capital 621,000
Allowance for Bad Debts (30,000)
Merchandise Inventory 560,000
Store Furniture & Equipment 370,000
Accumulated Depreciation (189,000) -
Total Assets P1,071,000 Total Liability and Capital P1,071,000
Both parties agreed on the values of some of the assets as follows:

Accounts Receivable 180,000
Store Furniture and Equipment 210,000
NEW PARTNERSHIP BOOKS OPENED

If new books are to be opened for the partnership, the following procedures may be used in
recording the formation of the partnership:
STEP 1: In the Books of the Sole Proprietor:
A. Adjust the assets and liabilities of the sole proprietorship according to the agreement.
The adjusting entries are recorded through the capital accounts of the partners; they
are not like the year-end adjusting entries which are recorded through nominal
accounts. If adjustments are made through the nominal accounts, the latter
accounts are finally closed to the capital account. In outline form, the adjustments
on the capital account are as follows:
Name of Owner, Capital

Debit Credit
• Decrease in Asset • Increase in Asset
• Increase in Contra-asset • Decrease in Contra-asset
• Increase in Liability • Decrease in Liability
B. Close the books by debiting the liabilities and other contra-asset accounts, crediting
the assets and the difference either charged or credited to capital account.
STEP 2: In the NEW Books of the Partnership:
A. Record the investment of the sole proprietorship – debit assets, credit liabilities, contra-
asset accounts and capital account.
B. Record the investment of individual.
Using the procedures, the entries are:
STEP 1: Books of Cheez Grocery (SOLE PROPRIETOR)

Analysis
A. Adjust the books of Cheez Agreed Value Book Value Difference
(a) Cheez, Capital 40,000 180,000 220,000 (40,000)
Allowance for Bad Debts* 40,000
(b) Merchandise Inventory50,000 610,000 560,000 50,000

Cheez, Capital 50,000
(c) Accumulated Depreciation* 29,000 210,000 181,000 29,000

*Adjustments of assets with contra accounts, like accounts receivable and fixed assets,
are usually recorded with their contra accounts. These contra accounts represent
estimates which may either be correct or wrong. Any increase in the value of adjusted
assets would decrease the value of the contra account, like adjustment (c). On the
other hand, a decrease in the value of the adjusted asset will increase the value of the
contra account, like adjustment (a).
B. Close the books of Cheez Grocery Cheez, Capital
Accounts Payable 450,000 (a) 40,000 Bal. 621,000
Allowance for Bad Debts 70,000 (b) 50,000
Accumulated Depreciation 160,000 (c) 29,000
Cash 110,000 40,000 700,000
Merchandise Inventory 610,000 Bal. 660,000
STEP 2: NEW Books of the Partnership
A. Record investment of Cheez, (the sole proprietor)
Cash 110,000
Accounts receivable 250,000
Store furniture and equipment 210,000
Accounts payable 450,000
Allowance for bad debts** 70,000
To record investment of Cheez.
* In common practices, fixed assets are normally recorded in the new set of books at
net of accumulated depreciation. This practice would place the fixed assets on the
books of the new business at their actual cost to the new partnership. Recording the
Accumulated Depreciation in the new set of books would mislead financial
statement users - as the presence of such account would indicate that the business
has been in existence for some time, when in truth and in fact, the partnership is a
new entity.
**Both the total of the Accounts Receivable and the Allowance for Bad Debts
accounts must be recorded because the exact Accounts Receivable that will prove
uncollectible is not known at the time of the reorganization.
B. Record the investment of Heart (an individual)
Cash ( ½ x P660,000) 330,000

Heart, Capital 330,000
To record investment of Heart.
BOOKS OF THE SOLE PROPRIETORSHIP TO BE RETAINED BY THE PARTNERSHIP
If the books of the sole proprietorship are to be retained for the partnership, the following
accounting procedures may be used in recording the formation of the partnership:
STEP 1: Adjust the books of CHEEZ in accordance with the agreement. Adjustments are to
be made to his capital account.
STEP 2: Record the investment of the individual.
Using the procedures, the entries are in the Books of Cheez Grocery (SOLE PROPRIETOR)
STEP 1: Adjust the books of Cheez Grocery

Accumulated Depreciation 29,000
Allowance for bad debts 40,000
To record adjustments.

Store Furniture and equipment 160,000
To close accumulated depreciation
account.
STEP 2: Record the investment of Heart (an individual)

Cash ( ½ x P660,000) 330,000
Heart, Capital 330,000
To record investment of Heart.
After the formation of the partnership, the statement of financial position is prepared as
follows:
Cheezy-Heart Trading
Statement of Financial Position
November 1, 2020
Assets Liability and Capital

Cash P 440,000 Accounts Payable P 450,000
Accounts Receivable 250,000 Cheez, Capital 660,000
Allowance for Bad Debts (70,000) Heart, Capital 330,000
Total Assets P 1,440,000 Total Liability and Capital P 1,440,000
C. Two or More Sole Proprietorships Form a Partnership
The accounting procedures described in the preceding section are also applicable when
two or more businesses join together to form a partnership. There should be an agreement
on the determination of the partners' interests in the new partnership. Books of one of the
sole proprietorships may be retained for the newly formed partnership or a new set of books
may be opened.
To illustrate, assume that on September 1, 2020 John and Lloyd, competitors in business,
decided to consolidate their business to form a partnership. Their statements of financial
position on this date are:
John Trading
September 1, 2020

Accounts Receivable 100,000 John, Capital 260,000
Equipment 60,000
Total Assets P 290,000 Total Liability and Capital P 290,000
Lloyd Enterprises
September 1, 2020

Accounts Receivable 80,000 Lloyd, Capital 250,000
Furniture 90,000
The following are agreed upon by the partners in determining their interests in the partnership:
1. 10% of accounts receivable is to be set up as uncollectible in each book.
2. Merchandise Inventory of Lloyd is to be increased by P10,000.
3. The equipment of John is to be depreciated by P6,000.
4. The furniture of Lloyd is to be depreciated by P9,000.
1. NEW PARTNERSHIP BOOKS ARE OPENED

The following procedures may be used in recording the formation of the partnership:
STEP 1: In the Books of All Sole Proprietorships:

A. Adjust the books of all sole proprietorships according to the agreement. Adjustments are
to be made to their respective capital accounts.
B. Close the books of all the sole proprietorships.
STEP 2: In the NEW Books of the Partnership:

➢ Record the investments of all sole proprietors.
Using the procedures, the entries are:
STEP 1: Books of the SOLE PROPRIETORS
Books of John Trading

A. Adjust the books
(a) John, Capital 10,000
Allowance for Bad Debts 10,000
(b) John, Capital 6,000

B. Close the books

Accounts Payable 30,000 John, Capital
Allowance for Bad Debts 10,000 (a) 10,000 Bal. 260,000
Accumulated Depreciation 6,000 (b) 6,000
John, Capital 244,000
Cash 50,000 16,000 260,000
Equipment 60,000
Books of Lloyd Enterprises

A. Adjust the books
(a) Lloyd, Capital 8,000
(b) Merchandise Inventory 10,000

Lloyd, Capital 10,000
(c) Lloyd, Capital 9,000

B. Close the books

Accounts Payable 60,000 Lloyd, Capital
Allowance for Bad Debts 8,000 (a) 8,000 Bal. 250,000
Accumulated Depreciation 9,000 (c) 9,000 (b) 10,000
Cash 40,000 17,000 260,000
Furniture 90,000
STEP 2: NEW Books of the Partnership
A1: Record the investment of John
Cash 50,000
Equipment 54,000
Accounts Payable 30,000
Allowance for Bad debts 10,000
John, Capital 244,000
To record investment of John.
A2: Record the investment of Lloyd

Cash 40,000
Furniture 81,000
To record investment of Lloyd.
2. BOOKS OF ONE OF THE SOLE PROPRIETORSHIPS ARE RETAINED AS BOOKS OF THE

PARTNERSHIP
The procedures in recording the formation of the partnership are:
STEP 1: In the Books of the Sole Proprietorship (which are not retained)
A. Adjust the books of the sole proprietorship as agreed. Adjustments are to be made to his
capital account.
B. Close the books.
STEP 2: In the Books of the Sole Proprietorship which is retained (Now the books of the
partnership):
A. Adjust the books of the sole proprietorship as agreed. Adjustments are to be made to his
capital account.
B. Record the investment of the other sole proprietorships whose books were closed.
Thus, to illustrate, assuming the books of John Trading is retained:
STEP 1: Books of Sole Proprietor NOT retained (LLOYD ENTERPRISES)
A. Adjust the books of Lloyd Enterprises

Accumulated depreciation 9,000
B. Close the books
Accounts payable 60,000
Cash 40,000
Furniture 90,000
To close the books of Lloyd.
STEP 2: Books of the Sole Proprietor to be retained as partnership books (JOHN TRADING)
A. Adjust the books of John Trading
John Trading 16,000

Equipment 6,000
To close Accum. depreciation account.
B. Record the investment of Lloyd

Cash 40,000
Furniture 81,000
To record investment of Lloyd.
After the formation of the partnership, the statement of financial position is:
JOHN LLOYD ENTERPRISES

September 1, 2020

Accounts Receivable 180,000 John, Capital 244,000
Allowance for Bad Debts (18,000) Lloyd, Capital 243,000
Furniture 81,000
Equipment 54,000
Practice Exercise 5-1: MULTIPLE CHOICE - CONCEPTUAL
Select the letter of the best possible answer to each of the following items.
_____1. Which of the following is not an advantage of a partnership over a corporation?
A. Ease of formation
B. Unlimited liability
C. The elimination of taxes at the entity level
D. All of the above
E. None of the above
_____2. For financial accounting purposes, assets of an individual partner contributed to a

partnership are recorded by the partnership at
A. Historical cost
B. Book value
C. Fair market value
D. Lower of cost or market
_____3. The disadvantages of the partnership form of business organization, compared to

corporations, include
A. The legal requirements for formation
B. Unlimited liability for the partners
C. The requirement for the partnership to pay income taxes
D. The extent of government regulation
E. The complexity of operations
_____4. When property other than cash is invested in a partnership, at what amount should
the non-cash property be credited to the contributing partner’s capital account?
A. Fair value at the date of contribution
B. Contributing partner’s original cost
C. Assessed valuation for property tax purposes
D. Contributing partner’s tax basis
_____5. Which of the following statements concerning partnership is true?

A. A partnership is a legal entity, separate and distinct from the individual
partners
B. Individual partners are jointly liable for the debts and obligations of a
partnership
C. Income tax is levied on the individual partners’ shares of the net income of
a partnership and is reported in their personal tax returns
D. All of the above is true
E. None of the above is true
_____6. The drawing ledger accounts of limited liability partners are used:
A. To record the partner’s salaries
B. To reduce the partner’s capital account balances at the end of an
accounting period
C. In the same manner as the partners’ loan accounts
D. To record the partners’ share of net income or loss for an accounting period
_____7. Which of the following statements are true when comparing corporations and
partnerships?
A. Partnership entities provide for taxes at the same rates used by corporations
B. In theory, partnerships are more able to attract capital
C. Like corporations, partnerships are more able to attract capital
D. Unlike shareholders, general partners may have limited liability beyond their
capital accounts
_____8. On June 30, 2020, Tara, Mara, and Lara formed a partnership by combining their
separate business proprietorships. Tara contributed cash of P25,000. Mara contributed
property with a P18,000 book value, a P20,000 original cost, and P40,000 fair value.
The partnership accepted responsibility for the P17,500 mortgage attached to the
property. Lara contributed equipment with a P15,000 book value, a P37,500 original
cost, and P27,500 fair value. The partnership agreement specifies that profits and
losses are to be shared equally but is silent regarding capital contributions. Which
partners has the largest capital on June 30?
A. Tara
B. Mara
C. Lara
D. All capital account balances are equal
_____9. Partner’s interest in a partnership is generally equal to:

A. The fair value of net assets at date of contribution
B. The sum of the fair values of the assets the partner contributes to the firm,
increased by any liabilities of other partners assumed and decreased by
any personal liabilities that are assumed by other partners
C. The sum of the bases of the individual assets the partner contributes to the
firm decreased by the partner’s share of partnership liabilities
D. The unamortized cost of the assets to the partner
_____10. A partner’s withdrawal of assets from a partnership that is considered a permanent

reduction in the partner’s equity is debited to the partner’s:
A. Drawing account
B. Capital account
C. Loan receivable account
D. Any of the above
Practice Exercise 5-2: (Two or more individuals form a partnership for the first time)
Jo, Lee, and Vi agreed to form a partnership for the first time and establish a day care center.
Jo contributed cash amounting to P90,000 and an idle building which she acquired 5 years ago
at total acquisition price of P550,000 and with a current market value of P285,000. Lee on the
other hand, contributed P410,000 to be used to renovate the building and to acquire day care
center facilities. Vi agreed to contribute her time, skills and talents to the partnership. Profits are
shared equally among the partners while losses shall be shared equally between the capitalist
partners only.
Instruction: Prepare entries to record the contribution of each of the partners to the
partnership.
GENERAL JOURNAL
DATE PARTICULARS PR DEBIT CREDIT
1 1
2 2
3 3
4 4
5 5
6 6
7 7
8 8
9 9
10 10
11 11
12 12
13 13
14 14
15 15
16 16
17 17
18 18
19 19
20 20
Coco and Martin agreed to form a partnership which shall be engaged in the buy and sell
of RTW apparels. The following items are being invested to form CM Partnership:
Agreed Valuation
COCO MARTIN
Cash P 100,000 P 100,000
Land 200,000
Building 400,000
Equipment 200,000
Subtotals P 400,000 P 700,000
Mortgage on building assumed by the partnership (200,000)
Totals P 400,000 P 500,000
Instruction: Prepare journal entries to record the formation of CM Partnership:
A. Assuming that Coco and Martin agree that each partner is to receive a capital credit
equal to the agreed valuation of the net assets each partner invested.
GENERAL JOURNAL
POST
DATE PARTICULARS DEBIT CREDIT
REF
1 1
2 2
3 3
4 4
5 5
6 6
7 7
8 8
9 9
10 10
11 11
12 12
13 13
14 14
15 15
16 16
17 17
18 18
B. Assuming that Coco and Martin agree that each partner is to receive an equal capital
interest
GENERAL JOURNAL – GOODWILL APPROACH

POST
REF
1 1
2 2
3 3
4 4
5 5
6 6
7 7
8 8
9 9
10 10
11 11
12 12
13 13
14 14
15 15
16 16
17 17
18 18
C. Assuming that Coco and Martin agree that each partner is to receive an equal capital
interest
GENERAL JOURNAL – BONUS APPROACH

POST
REF
1 1
2 2
3 3
4 4
5 5
6 6
7 7
8 8
9 9
10 10
11 11
12 12
13 13
Kay, Eff, and Cee decided to contribute cash and noncash assets to a common fund and
agreed to operate a videoke bar and restaurant partnership business. Kay invests cash
P400,000 and kitchen equipment valued at P300,000. Eff invested cash of P700,000. Cee
invested several videos in the videoke machines with a total market value of P300,000 plus
enough cash to have exactly 30% interest in the partnership.
Instruction: Prepare the entry to record the contribution of the partners (including supporting
computation to determine additional cash contribution of Cee)
GENERAL JOURNAL
POST
REF
1 1
2 2
3 3
4 4
5 5
6 6
7 7
8 8
9 9
10 10
11 11
12 12
13 13
Practice Exercise 5-5: (Sole Proprietorship and an Individual form a partnership)
Angel, a sole proprietor dealing with buy and sell of used car needed additional funding for
her business and accepted Luis as a partner in business on January 1 of the current year.
Accounts in the ledger for Angel on December 31 of the most recent year, just before the
admission of Luis, show the following balances:

Accounts Receivable 240,000 Angel, Capital 528,000
Inventories 360,000
It is agreed that for purposes of establishing Luis’ interest, the following adjustments and
agreement must be made:
a. An allowance for bad debts of 3% of accounts receivable must be established.
b. The inventories of used cars for sale is to be valued at their current fair market value
amounting to P404,000.
c. Prepaid insurance of P13,000 and accrued utilities of P8,000 are to be recognized.
d. Luis is to invest sufficient cash to give him 40% interest in the new partnership.
Instruction: Prepare adjusting and closing entries in the books of the sole proprietor, and the
entries in the new partnership books assuming new books will be used for the partnership.
GENERAL JOURNAL – SOLE PROPRIETOR’S BOOKS

POST
REF
1 1
2 2
3 3
4 4
5 5
6 6
7 7
8 8
9 9
10 10
11 11
12 12
13 13
14 14
15 15
16 16
17 17
18 18
19 19
20 20
21 21
22 22
GENERAL JOURNAL – PARTNERSHIP BOOKS
POST
REF
1 1
2 2
3 3
4 4
5 5
6 6
7 7
8 8
9 9
10 10
11 11
12 12
13 13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
Summative Assessment (Graded Activity) – Partnership Formation
Tanya and Uma, each operating a separate business agreed to join in partnership as of July
1, 2020. The account balances presented by each partner as of this date were as follows:
Accounts Tanya Uma

Cash P 32,000 P 12,000
Accounts Receivable 3,200 24,000
Merchandise Inventory 40,000 36,000
Office Equipment 10,000 12,000
Total Assets P 85,200 P 84,000
Accounts Payable P 10,000 P 16,000

Notes Payable 2,000
Capitals 73,200 68,000
Total Liabilities and Capital P 85,200 P 84,000
The assets of the two partners were carefully examined and it was agreed that certain
adjustments be made, and the above statements of financial position as adjusted be
the basis on which the partnership begins operations.
The adjustments agreed upon are as follows:

a. Tanya’s accounts receivables are to be taken over at a book value less 15% and
Uma’s accounts receivable at book value less 10%.
b. Tanya’s office equipment is new and is considered adequate for the new business,
therefore, it is decided that Uma dispose of his equipment at the highest cash
price possible and that Tanya bear one-fourth of the loss resulting from the sale.
Uma’s office equipment is disposed of at a book value less 10%.
c. It is further agreed that Uma pay sufficient cash to give him a one-half interest in
the business after charging to Tanya’s capital account his share of the loss on the
sale by Uma of office equipment.
Instructions:
1. Prepare the journal entries in the books of Tanya and in the books of Uma to give
effect to the agreement.
2. Open the books of the new partnership, making separate entries for the contributions
of Tanya and Uma.
3. Determine the adjusted capital of Tanya. Show supporting computation.
4. Determine the cash contribution of Uma. Show supporting computation.
5. Record Uma’s cash contribution, which gives him half interest in the new partnership.
6. Prepare statement of financial position for the new partnership after the
consummation of the entire agreement.

MODULE 1a - Partnership Nature and Formation

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MODULE 1a - Partnership Nature and Formation

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CMPC 131-

COURSE LEARNING OUTCOMES

What comes easy won’t last long,

Paragraph 2 of Article 1767 relates to the exercise of a profession. A profession is a calling in

1. Essentially a Contract - A business partnership is like a marriage. To be successful, the

2. Voluntary Association - Starting a partnership is voluntary. A person cannot be forced to

A dissolution of a partnership may result to either: a formation of a new partnership

ASSETS LIABILITIES AND CAPITAL

7. Joint Ownership of All Partnership Properties - Property contributed to the partnership is

A partnership being essentially a contract is a voluntary association, wherein members of

B. As to Liability of the Partners

E. As to Legality of its Existence

Partners' Capital and Drawing Accounts

Name of Partner, CAPITAL Name of Partner, DRAWING

VALUATION OF ASSETS AND LIABILITIES CONTRIBUTED

1. Cash contributed to the partnership is recorded at Face Value.

2. Non-cash assets contributed by the partners should be valued at Agreed Values, or in

3. When industry is contributed into the partnership, a memorandum entry is prepared.

1. Cash contribution only

The journal entry to record the investment is:

2. Cash and other Property contributed

As discussed previously, it is necessary for partners to agree on the valuation of the

3. Cash, property and industry contributed

The entry to record their investments is as follows:

The contribution of Joey to the partnership is recorded by a memorandum entry as

“Joey is admitted into the partnership as an industrial partner. He shares 35% of

Kris, capital 50,000

REVALUATION (GOODWILL) APPROACH:

BONUS versus REVALUATION (GOODWILL) APPROACH

B. Sole Proprietorship and Another Individual Forming a Partnership

ASSETS LIABILITY AND CAPITAL

Both parties agreed on the values of some of the assets as follows:

NEW PARTNERSHIP BOOKS OPENED

Name of Owner, Capital

STEP 2: In the NEW Books of the Partnership:

B. Record the investment of individual.

Using the procedures, the entries are:

STEP 1: Books of Cheez Grocery (SOLE PROPRIETOR)

(b) Merchandise Inventory50,000 610,000 560,000 50,000

(c) Accumulated Depreciation* 29,000 210,000 181,000 29,000

STEP 2: NEW Books of the Partnership

A. Record investment of Cheez, (the sole proprietor)

B. Record the investment of Heart (an individual)

Cash ( ½ x P660,000) 330,000

STEP 2: Record the investment of the individual.

STEP 1: Adjust the books of Cheez Grocery

Accumulated Depreciation 160,000

STEP 2: Record the investment of Heart (an individual)

Assets Liability and Capital

Assets Liability and Capital

Assets Liability and Capital

1. NEW PARTNERSHIP BOOKS ARE OPENED

STEP 1: In the Books of All Sole Proprietorships:

STEP 2: In the NEW Books of the Partnership:

STEP 1: Books of the SOLE PROPRIETORS

Books of John Trading

(b) John, Capital 6,000

B. Close the books

Books of Lloyd Enterprises

(b) Merchandise Inventory 10,000

(c) Lloyd, Capital 9,000

B. Close the books

A2: Record the investment of Lloyd