CH1|PARTNERSHIP • Partner’s Equity Accounts- similar to

accounting sole proprietorships, the only

DEFENITION OF PARTNERSHIP
Partnership is…
• Two or more persons bind themselves to
contribute money, property or industry to a
common fund with the intention of diving
profits among themselves. Two or more
people my also form a partnership to
exercise profession.
• It can be based upon express or implied
agreement
• It is an entity, distinct and a part of its
members
General Professional Partnership
difference lies in the number of partners’
equity accounts, each partner has a capital
account and a withdrawal account.
• Income Taxes- except general professional
partnerships, partnerships are subject to tax
rate of 30% of taxable income (RA 9337).
Partnerships VS Proprietorships
Advantages
• Bigger amount of capital
• Two or more heads are better than one
• Better management
• Sharing of Losses

• Paragraph 2 of Article 1767 relates to the Disadvantages

exercise of a profession. The practice of a
• Conflicting opinions/divisiveness
profession is not a business for profit.
• Misunderstanding and disputes
However, the law allows the joint of two or
• Sharing of profits
more persons as partners. The law does NOT
allow individuals to practice profession as a
corporate entity.
• Ex. law, accounting, engineering, Partnership VS Corporation
architecture Advantages
Characteristics of partnership • Easier and less expensive
• Mutual Contribution- each partner must • More personal and informal
contribute to a mutual fund Disadvantages
• Division of Profits and Loses- each partner
must share in the profits or losses of the • Easily dissolve and thus unstable
undertaking; absence of agreement, law • Mutual agency and unlimited liability may
prevails (divide it on create personal obligations
investment/contributions at the formation of • Less effective in raising large amounts of
the partnership) capital
• Mutual Agency- a partner can bind the
others in a contract if they are acting within
their express or with implied authority to do
so
• Co-Ownership of Contributed Assets- all
assets contributed into the partnership are
owned by the partnership and is separate
and distinct juridical personality. If one
partner contributes an item, all items are
jointly owned by the partnership.
• Limited Life- it may be dissolved by
admission, death, insolvency, incapacity,
withdrawal of a partner or expiration of the
term.
Classification of Partnership
As to object
1. Particular partnership – use or fruits, specific
undertaking, or exercise of a profession or
vocation.
2. Universal partnership
a. of all present property
• partners contribute all their present property
to a common fund with the intention of
dividing the property and all the profits.
b. of profits
• partners retain ownership of the things they
have placed into the common fund.
• actual contribution will be their industry and
the use of the things they have placed into
the common fund.
• only the profits that the partners may
acquire by their industry during the
existence of the partnership will be divided
among themselves
As to liability of the partners:
1. General partnership
general partners or a combination of general and
industrial partners.
are personally liable for the partnership’s debts
2. Limited partnership
Both limited and general partners
Only the limited partner shall be liable to the extent
of his contribution to the partnership
At least one must be a general partner to assume
the partnership’s unpaid liability
As to its duration:
1. Partnership at will
May be terminated any time by the will of any
of the partners or by mutual agreement of the
partners.
Has no fixed period of existence.
2. Partnership with a fixed term
• Specified period of existence
• As to the legality of its existence
As to the legality of its existence:
1. De jure partnership – in accordance with all the
legal requirements for its existence.
2. De facto partnership – without complying with
the legal requirements for its existence.
As to representation to others:
1. Ordinary or real partnership – actually exists
among partners and also as to third persons.
2. Ostensible partnership or partnership by estoppel
– considered a partnership only in relation to those
who, by their conduct or admission, are precluded
to deny or disprove its existence.
As to publicity:
1. Secret partnership – the existence of certain
persons as partners is not avowed or made known
to the public by any of the partners.
2. Open or notorious partnership – existence is
avowed or make known to the public by the
members of the firm.
As to purpose:
1. Commercial partnership
• engages in trading, merchandising, or
manufacturing of goods for a profit.
• a partnership rendering service may be
classified other than the practice of
profession.
2. General profession partnership
• Organized for the exercise of a common
profession, renders service based on the
partners’ acquired profession.
• CPAs, medical doctors and lawyers.
As to nature of business:
1. Trading partnership
• Business partnership
• Buys and sells finished merch and
manufactures goods as it primary
operational activity
• Examples are: groceries, stores, factories
2. Non-Trading partnership
• Renders service only for a fee Ex. vulcanizing
service
Classification of Partners
As to Contribution
1. Capitalist- money or property
2. Industrial- their personal services
3. Capitalist-Industrial- not only money or
property but personal services as well
As to Liability
1. General Partner- one who is liable for
partnership debts up to the extent of his
personal assets
2. Limited Partner- one who is liable for
partnerships debts up to the extent of his
interest in the partnership only
Other Classifications
• Nominal- makes no investment & does not
participate, but permits his name to be used
either for accommodation or consideration
• Secret- not known as a partner but actively
participates in running the partnership
• Silent- does not take an active part in
running the partnership but is a general
partner
• Dormant- has a financial interest in the
partnership but does not take an active part
running it and is not known as a partner
• Managing- partners appointed as managers
for the partnership
• Liquidating- designed to wind up or settle
the affairs of the partnership after dissolution
Partnership Contracts
• A partnership is based upon contract
• It may 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 the same shall appear in
the public instrument to be recorded in the
SEC when:
o The capital of the partnership is
P3,000 or more in money and in
property
o Immovable property or real rights
are contributed
• In an event where immovable property or
real rights are contributed and no inventory
of the property is made, signed by the
parties, and attached to the public
instrument submitted to SEC, the partnership
contract is void.
Articles of Co-Partnership
• This is the name given to the instrument in
writing by which the parties enter into a
contract or agreement of partnership.
• These are its principal parts:
a. Partnership name of the company that
shall transact business
b. Names, nationalities, and residences of
partners. If it is a limited partnership, the
kind of partner, whether general or
limited
c. Principal office of partnership
d. Purpose/s of the partnership
e. Duration/term of existence
f. Capital of the partnership
g. Transfer clause
h. Undertaking to change the partnership
name
i. Other provisions, conditions, terms and
stipulations
j. Signatures of partners
k. Notarial page
Partnership Taxation
• General professional partnership:
o Exempt from income tax
o Partners’ share is subject to 10% tax
o Individual partner’s income is subject to
individual income tax
• Co-partnership:
o Subject to 30% income tax
o Dividend tax of 10%
o Not subject to individual income tax
ACCOUNTING FOR PARTNERSHIP o If they want their net income/loss part of
the capital account, then the capital
Owners’ Equity Accounts
account should be used
• Partner’s capital account
o Credited for his initial and additional net
investments** and the credit balance of Loans to/from Partners
the drawing account at the end of the
• Loans Receivable-Partner
accounting period.
o Debited
o Debited for his permanent withdrawals
o If partner withdraws a substantial
and debit balance of the drawing
amount with the intention of repaying
account at the end of the period.
it.
o **(assets contributed – liabilities assumed
o Should be classified separately from
by the partnership)
other receivables

• Partner’s Drawing Account

• Loans Payable-Partner
o Typically, partners do not wait until the
o Credited
end of the year to determine how much
o When a partner lends amounts to the
of the profit they wish to withdraw from
partnership more than their intended
the partnership.
permanent investment
o Debited to reflect the assets temporarily
o Must be classified among the liabilities
withdrawn from the partnership.
but separate from the liabilities to
o At the end of each accounting period,
outsiders
the balances in the drawing accounts
o **The distinction is important because
are closed to the related capital
in case of liquidation loans payable
accounts
to, partners must be paid after the
claims of outside creditors have been
paid in full. These loans have priority
• Permanent withdrawals
over partner’s equity.
o Made with the intent of permanently
decreasing partner’s capital accounts

PARTNERSHIP FORMATION

• Temporary withdrawals Valuation of investments by Partners

o Regular advances made by partners in
anticipation of their share in their net
income
***The use of drawing accounts for temporary
withdrawals provides a record of each partner’s
drawings under an accounting period (for control).
• Net income/loss may be recorded either to
the drawing account or to the capital
account
o If the partners wish to maintain their
capital accounts for investments and
permanent withdrawals, then the net
income/loss should be entered in the
drawing account
• In the absence of an agreement, the
contributions will be recognized at their fair
market values at the date of transfer to the
partnership
• Fair market value:
o Estimated amount that a willing seller
would receive from a financially
capable buyer from a sale of an asset
in a free market
o IFRS No. 3 defined fair value as the
price at which an asset or liability
could be exchanged in a current
transaction between knowledgeable,
unrelated and willing parties
Adjustment of Accounts Prior to Formation

• When the prospective partners have existing

businesses, their respective books will have
to be adjusted to reflect the fair market
values of their assets, or to correct
misstatements in the accounts
• If the adjustments will not be made, the
initial capital balances of the partners may
be inequitable

Opening Entries of a Partnership Upon Formation

Involves these transactions

1. Individuals with no existing business form a

partnership
2. Conversion of a sole proprietorship to a
partnership:
a. A sole proprietor and an individual
without an existing business form a
partnership
b. Two or more sole proprietors form a
partnership