FAR 1 ACCOUNTING FOR PARTNERSHIP CORPORATION Midterms
Review
Bachelor of Science in Accountancy (BSA)
FAR 1 MIDTERMS:
 REVIEW OF ACCOUNTING
 NATURE & FORMATION OF A PARTNERSHIP
 PARTNERSHIP OPERATIONS
MODULE 1
 REVIEW OF THE ACCOUNTING PROCESS
- ACCOUNTING is a service activity. Its function is to
provide quantitative information, primarily financial in
nature, about economic entities, that is intended to be
useful in making economic decisions, in making reasoned
choices among alternative courses of action.
- ACCOUNTANT - provides services and furnishes
quantitative information expressed in terms of money
that is useful to the users of the accounting information.
- FINANCIAL STATEMENTS - The information are outlined
into reports called financial statements and served as a
basis for making important economic decisions.
- The users of the accounting information are categorized
as either internal or external users.
- EXTERNAL USERS - are decision makers who have no
direct access to the information provided by the
operations of the company.
- INTERNAL USERS - represent the managers or the
decision makers of an entity and they need the
accounting information for the continued operation of
their business.
- INVESTORS - influenced with the returns from their
investments and to decide whether to make additional
investments, hold or sell their shares of stocks.
- CREDITORS/ SUPPLIERS/ LENDERS - need accounting
information to help in their decision whether to extend
credit or loans being applied by businesses.
- GOVERNMENT & THEIR AGENCIES - need to know if an
entity is abiding the implemented government rules and
regulations.
- EMPLOYEES/ LABOR UNIONS - interested in the stability
and profitability of the company they are working with
and for the assurance of their security of tenure.
- GENERAL PUBLIC & CUSTOMS - need to know if the
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company would provide them continuity of their services
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and updates on improvements of their products and
services.
* BRANCHES OF ACCOUNTING
- TWO MAIN BRANCHES OF ACCOUNTING
- FINANCIAL ACCOUNTING - designed in providing
accounting information for all parties external to the
operating responsibility of the company. It is the process
of preparing accounting reports known as financial
statements
- MANAGEMENT/ MANAGERIAL ACCOUNTING -
designed in providing accounting information and
operational needs for use by the internal users, the
management. It involves financial analysis, budgeting
and forecasting, cost analysis, and evaluation of business
decisions
* AREAS OF ACCOUNTING
- BOOKKEEPPING - recording of business transactions,
only one of the functions of accounting while accounting
is a diversified profession.
* ACCOUNTANT 4 BROAD / SPECIALIZED AREAS:
1. PUBLIC ACCOUNTING - offers accounting and related
services to its clients on a fee basis. licensed
professionals known as Certified Public Accountants
2. PRIVATE ACCOUNTING - offers accounting services for
a specific company and is an important part to the
success of any organization
3. GOVERNMENT ACCOUNTING - Under Section 109, of
the PD No. 1445, defined as one that encompasses the
process of analyzing, classifying, summarizing and
communicating all transactions that are involved in the
receipt and disbursement of all government funds and
properties, and interpreting the results thereof.
4. ACCOUNTING EDUCATION - area of accounting that
covers the upgrading, researching and teaching
accounting knowledge to students, aspiring accountants
or accounting professionals seeking continuous
education and updates. (Certified Public Accountants)
* FORMS OF BUSINESS ORGANIZATION (3) (FB – SPC)
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- SOLE PROPRIETORSHIP - organized and owned by only
one person. He is also personally liable for all financial
obligations and debts of his business.
- PARTNERSHIP - formed by two or more individuals who
agreed to carry on a trade or business.
- CORPORATION - more complex form of business
organization. It is a separate legal entity whose
ownership is divided into shares of stocks. Its owners are
known as shareholders. It is also subject to more legal
requirements and government regulations.
* TYPES OF BUSINESS ACTIVITIES
- THREE MAJOR TYPES OF BUSINESS (3) (TB – SMM)
- SERVICE BUSINESS - provides services rather than
products to customers or clients for a fee.
- MERCHANDISING BUSINESS - also called a trading
business. Merchandising companies buy goods in salable
form and sell them to their customers at a higher cost to
make a profit.
- MANUFACTURING BUSINESS - buys raw materials with
the intention of using them in making a new product.
* GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(GAAP)
- Common set of accounting principles, standards and
procedures that must be followed when preparing
financial statements. Encompass the conventions, rules,
and procedures necessary to define accepted accounting
practice at a particular time.
- EXAMPLES OF GAAP:
1. BUSINESS ENTITY CONCEPT - the activities of a
business are recorded separately from the activities of
the owner or owners. This concept is important because
it limits the economic data. Record the activities of the
business only.
2. GOING CONCERN OR CONTINUITY ASSUMPTION - the
accountant assumes that unless there is evidence to the
contrary, the business entity will continue to operate for
an indefinite period.
3. TIME PERIOD ASSUMPTION - requiring that changes in
a business’s financial position be reported over a series
of shorter time periods like annually, semi-annually,
quarterly or monthly.
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- CALENDAR YEAR – ends Dec. 31
- FISCAL YEAR – 1 year ex. July 1, 2017 – June 30,
2018.
4. UNIT-OF-MEASURE ASSUMPTION - specifies that
accounting should measure and report the results of a
business’s economic activities in terms of a monetary
unit such as the Philippine peso. Standard monetary unit.
* ACCRUAL BASIS & CASH BASIS OF ACCOUNTING
The difference lies in the timing of when is revenues and
expenses are recognized and incurred when recorded in
the books.
- CASH BASIS - revenues are recognized and recorded
when cash is received or collected and expenses when
cash is paid.
- ACCRUAL BASIS - revenues are recognized and recorded
when earned regardless of when cash is received or
collected. Adjusting entries are needed.
* THE ACCOUNTING CYCLE
also known as the accounting process, refers to
a series of steps accountants perform during an
accounting period for the orderly accumulation,
reporting and interpretation of data pertaining to the
financial operations of the business.
The steps in the accounting cycle include the following:
1. Documentation
2. Journalizing
3. Posting
4. Preparation of the trial balance
5. Compilation of data needed for adjustments
6. Preparation of the worksheet
7. Preparation of the Financial Statements
8. Adjusting entries are journalized and posted to the
ledger
9. Closing entries are journalized and posted to the
ledger
10. Preparation of the post-closing trial balance
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11. Reversing entries are journalized and posted to the
ledger
* RECORDING PHASE
- DOUBLE-ENTRY ACCOUNTING SYSTEM - a business
transaction has a dual effect when recorded. Has specific
rules of debit and credit for recording the transactions in
the accounts. Debit is the left side of an account while
credit is the right side. To summarize the rules of debit
and credit:
To summarize the rules of debit and credit:
DEBIT:
Increase in assets
Decrease in liabilities
Decreases in equity/ capital
- SUBSIDIARY LEDGER - a group of related accounts
showing the details of the balance in the control account.
- POSTING - The information from the journal is then
transferred to the book of final entry called the general
ledger and the process is called posting.
* SUMMARIZING PHASE
- PREPARARATION OF TRIAL BALANCE - will
mathematically prove the equality of the debit and credit
balances of each account but will not give the assurance
that no errors have been made during the journalizing
and posting process in case the total debit and credit
amounts are shown as equal.
* ERRORS
- TRANSPOSITION - erroneous rearrangement of writing
an amount like P 1,250 written as P 1,520.

- drawings - SLIDE ERROR - the whole amount is moved one or more

spaces to the right or the left, like P 1,000 written as P
- decrease in revenue 100 or P 10,000.
- increase in expense
CREDIT: * ADJUSTING ENTRIES
Decreases in assets
Increases in liabilities
Increases in equity/ capital
- investments
- increase in revenue
- decrease in expense

- JOURNALIZING - transactions are first recorded in the

book of original entry called the general journal and the
process is known as journalizing.
- GENERAL JOURNAL - will be used for entries that cannot
be recorded in the special journals such as adjusting and
closing entries.
- SPECIAL JOURNAL - sometimes used by businesses that
are designed for recording a single type of transaction
that occurs frequently.
- LEDGER - a complete listing of all the accounts as found
in the chart of accounts of a business. * DATA FOR ADJUSTMENTS ARE THEN COMPILED FOR
SUCH UPDATING (7)

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1. PREPAID EXPENSES = DEFFERED EXPENSES - paid by
the business in advance; or these are expenses already
paid in cash by the business but the expenses are not yet
incurred or only a portion of the amount paid was used
up as expense.
- TWO METHODS OF ACC FOR PREPAID EXPENSES:
A.) ASSEST METHOD - If at the date of payment, the
business debited an asset account
DR. Expense Account
CR. Asset Account
B.) EXPENSE METHOD - if at the date of payment, the
business debited an expense account.
DR. Asset Account
CR. Expense Account
2. UNEARNED REVENUES = DEFFERED REVENUES -
revenues collected or received by the business in
advance; or these are revenues already collected in cash
by the business but the revenues are not yet earned or
only a portion of the amount received was earned or
became revenue.
- TWO METHODS OF ACC FOR UNEARNED REVENUES:
A.) LIABILITY METHOD - if at the date of collection, the
business credited a liability account.
DR. Liability Account
CR. Revenue Account
B.) REVENUE METHOD - if at the date of collection, the
business credited a revenue account.
DR. Revenue Account
CR. Liability Account
3. ACCRUED EXPENSES = ACCRUED LIABILITIES /
UNRECORDED EXPENSES - expenses incurred in one
period but remain unrecorded and unpaid as of the end
of the period.
DR. Expense account
CR. Liability account
4. ACCRUED REVENUES = ACCRUED ASSESTS /
UNRECORDED REVENUES - revenues earned in one
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period but remain unrecorded and not received as of the
end of the period
DR. Asset account
CR. Revenue account
5. DEPRECIATION OF PROPERTY, PLANT & EQUIPMENT
- FIXED ASSETS / PLANT ASSESTS - Physical resources that
are owned and used by a business which are permanent
in nature or have a long useful life. LIMITED USEFUL LIVES
EX. land, building, equipment, trucks, automobiles, a
computer, store fixtures, or office furniture.
- DEPRECIATION - systematic allocation of the cost of the
fixed asset over its useful life. Depreciation is not a
process of asset valuation.
DR. Depreciation Expense – Name of asset
CR. Accumulated Depreciation – Name of asset
* STRAIGHT-LINE METHOD – simplest and most
commonly used method. Also take note that in the
adjusting entry for depreciation, the account credited is
the account Accumulated Depreciation. This is a contra-
asset account which will be deducted from the related
fixed asset account in the balance sheet. The credit is not
made directly to the fixed asset account in order to
preserve the original cost of the fixed asset in the balance
sheet.
COMPUTATION:
ANNUAL DEPRECIATION = COST – RESIDUAL VALUE
ESTIMATED LIFE
OR
ANNUAL DEPRECIATION = (COST – RESIDUAL VALUE) X
DEPRECIATION RATE
WHERE: DEPRECIATION RATE = RECIPROCAL OF LIFE
EX. 10 years = 1/10 or 10%
EX. P500,000 – 50,000 / 10 = P45,000
(P500,000 – 50,000) X 10% = P45,000
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 7. MERCHANDISE INVENTORY - these represents good on
hand and available for sale in the ordinary course of the
business.
- PERIODIC INVENTORY SYSTEM - adjusting entries are
required to replace or remove the beginning balance of
the merchandise inventory with the balance at the end
of the accounting period.
Income Summary xxx
Merchandise Inventory xxx
* BOOK VALUE- OR THE CARRYING AMOUNT To close the beginning inventory
Delivery Truck P 500,000
Less Accumulated Depreciation 45,000 Merchandise inventory xxx
Carrying amount or Book value P 455,000 Income Summary xxx
To record the ending inventory
6. UNCOLLECTIBLE ACCOUNTS - estimated amounts due - PERPETUAL INVENTORY METHOD - purchases and sale
from customers that may no longer be collected and are of goods are recorded in the merchandise inventory
considered to be as bad debts. account and the cost of goods sold account. Always
updated.
DR. Doubtful Accounts Expense
CR. Allowance for Doubtful Accounts
- FINANCIALSTATEMENT - represent the final output in
- ALLOWANCE FOR DOUBTFUL ACCOUNTS = ALLOWANCE
the work of an accountant. Include Statement of
FOR BAD DEBTS / ALLOWANCE FOR UNCOLLECTIBLE
Comprehensive Income, Statement of Changes in Equity,
ACCOUNTS.
Statement of Financial Position, the Cash Flow Statement
and Notes to the Financial Statements.
- STATEMENT OF COMPREHENSIVE INCOME - also known
as the Profit and Loss Statement, presents the income,
expenses and the operating result (profit or loss) during
an accounting period.
- STATEMENT OF CHANGES IN EQUITY - shows the
summary of changes (increases or decreases) affecting
the equity of the owner/s during an accounting period.
- STATEMENT OF FINANCIAL POSITION - also known as
the Balance Sheet, shows the financial condition of the
business as of a specific date.
- CASH FLOW STATEMENT - presents the movement of
cash (input and output) over a period and is classified as
either under operating, financing or investing activities.
- NOTES TO THE FINANCIAL STATEMENTS - integral part
of an entity’s financial statements. They are for
complying with the full disclosure principle.

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* The adjusting and closing entries are entries prepared
and posted in the ledger at the end of the accounting
period.
* ADJUSTING ENTRIES - prepared after the data for
adjustments are compiled and presented in the
worksheet.
- NOMINAL / TEMPORARY ACCOUNTS - include revenue,
expense, owner’s drawing and income summary
accounts.
- REAL / PERMANENT ACCOUNTS - include the assets,
liability and the owner’s equity (capital) accounts.
* CLOSING ENTRIES - prepared to reduce the nominal
account balances to zero on the general ledger.
- INCOME SUMMARY - credit balance in the Income
Summary indicates the profit while a debit balance
indicates a net loss.
* POST-CLOSING TRIAL BALANCE - list of accounts and
their balances after the closing entries have been
journalized and posted to the ledger.
* REVERSING ENTRIES - journal entries prepared on the
first day of the next accounting period which reverses
certain types of adjusting entries immediately made in
the preceding period.
* MERCHANDISING BUSINESS
The revenue activities of a merchandising
business involve the buying and selling of goods or
merchandise to its customers.
* INVENTORY SYSTEMS
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- TWO MAIN TYPES:
1. PERIODIC INVENTORY SYSTEM - relies upon the
physical count of the inventory to determine the ending
inventory balance.
2. PERPETUAL INVENTORY SYSTEM - purchases and sale
of merchandise is recorded in the Merchandise Inventory
account and the Cost of the Merchandise Sold account.
This system is used by companies that sell goods of high
unit value like automobiles, jewelry, and other large
home appliances.
* VALUE ADDED TAX
Value Added Tax (VAT) is a type of sales tax
which is levied on the consumption on the sale of goods,
services or properties, as well as goods imported in the
Philippines.
A 12% value added tax rate is levied on goods.
Payable to BUREAU OF INTERNAL REVENUE (BIR)
and is to be remitted by the company within 25 days of
the following month.
* SPECIAL JOURNAL
- designed to systematize the original recording
of major recurring types of transactions.
- SALES JOURNAL - used to record all sales of
merchandise on account (on credit).
- CASH RECEIPT JOURNAL - used to record all inflows or
receipts of cash into the business.
- PURCHASES JOURNAL - used to record all purchases of
merchandise and other items on account (on credit).
- CASH PAYMENT JOURNAL - used to record all payments
(or outflows) of cash by the business.
*GENERAL JOURNAL – is still needed. used to record all
transactions that cannot be recorded in any one of the
special journals. All five of these journals are books of
original entry.
* CONTROL ACCOUNTS & SUBSIDIARY LEDGERS
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- CONTROL ACCOUNT - account in the general ledger that
shows the total balance of all the subsidiary accounts
related to it. EX. Accounts Receivable
- SUBSIDIARY LEDGER ACCOUNTS - show the details
supporting the related general ledger control account
balance. May use the subsidiary accounts for payables to
determine the amount payable to each supplier.
arranged alphabetically
- SUBSIDIARY LEDGER - a group of related accounts
showing the details of the balance of a general ledger
control account.
* SCHEDULE OF ACCOUNTS PAYABLE - prepared to make
certain that the total of the balances in the subsidiary
ledger accounts agrees with the control account.
* SCHEDULE OF ACCOUNTS RECEIVABLE - prepared to
ensure that the total of the balances in the subsidiary
ledger account agrees with the control account. This
schedule is merely a listing of open account balances.
MODULE 2
 NATURE AND FORMATION OF A PARTNERSHIP
* PARTNERSHIP
- defined in Article 1767 of the Civil Code of the
Philippines as “a contract whereby two or more persons
bind themselves to contribute money, property or
industry into a common fund with the intention of
dividing profits among themselves.”
* CHARACTERISTICS & ELEMENTS OF A PARTNERSHIP
(8) (MMULDLCI)
1. MUTUAL CONTRIBUTION - the partners must
contribute money, property and/or industry to the
common fund.
2. MUTUAL AGENCY - Any partner can bind the other
partners to a contract if he is acting within the express or
implied authority. May act as agent of the partnership in
conducting its affairs.
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3. UNLIMITED LIABILITY - The personal assets of any
partner may be used to satisfy the partnership creditors’
claims upon liquidation, if partnership assets are not
enough to settle the liabilities to outsiders.
4. LIMITED LIFE - A partnership may be dissolved at any
time by admission, death, incapacity, or withdrawal of
any partner or by expiration of the term specified in the
partnership agreement.
5. DIVISION OF PROFIT & LOSSES - It is the reason why a
partnership was formed. The element that distinguishes
the partnership contract from a voluntary religious or
social organization. A stipulation which excludes one or
more partners from any share in the profits or losses is
void.
6. LEGAL ENTITY - A partnership has legal personality
separate and distinct from that of each the partners.
7. CO-OWNERSHIP OF CONTRIBUTED ASSETS - Property
contributed to the partnerships are owned by the
partnership by virtue of its separate legal personality.
Assets contributed by each partner are joint assets of all
partners.
8. INCOME TAX - Partnerships, other than general
professional partnerships (GPP) are subject to the same
tax of a corporation, 30% income tax. GPP are those
organized for the exercise of professions like CPA’s
lawyers, engineers, etc. are exempt from income tax.
* ADVANTAGES OF A PARTNERSHIP
1. Easy to organize
2. Unlimited liability of partners – attracts creditors.
3. Better opportunity for partners
4. More partners of different skills and expertise makes
it possible to manage all the partnership activities.
* DISADVANTAGES OF A PARTNERSHIP
1. It is less stable because it can easily be dissolved
(limited life).
2. Business partners are jointly and individually liable for
the actions of the other partners (Mutual agency).
3. The liability of the partnership will extend to the
personal property of the partners (unlimited liability).
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4. Since decisions are shared, disagreement among
partners may lead to dissolution.
5. A partner has to consult the other partners before a
decision can be arrived at.
* KINDS OF PARTNERSHIPS (7)
1. AS TO LIABILITY
a. GENERAL PARTNERSHIP - one consisting of general
partners who are liable to the extent of their separate
properties for partnership debts.
b. LIMITED PARTNERSHIP - one formed by two or more
persons having as members one or more general
partners and one or more limited partners. The limited
partners are not personally liable for the obligations of
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. There should be at least one general
partner in a limited partnership.
2. AS TO DURATION
a. PARTNERSHIP AT WILL - one for which no term is
specified and is not formed for a particular undertaking
and which may be terminated any time by mutual
agreement of the partners or at the will of any one
partner.
b.PARTNERSHIP WITH FIXED TERM - one in which the
term for the existence of the partnership is fixed or is
agreed upon or one formed for a particular undertaking.
3. AS TO LEGALITY OF EXISTENCE
a. DE JURE PARTNERSHIP - one that has complied with all
the requirements for its establishments.
b. DE FACTO PARTNERSHIP - one which has failed to
comply with one or more of the legal requirements for
its establishment.
4. AS TO PURPOSE OR ACTIVITY
a. COMMERCIAL / TRADING PARTNERSHIP - one whose
main activity is the manufacture and sale or the purchase
and sale of goods.
b. PROFESSIONAL / NON-TRADING PARTNERSHIP - one
formed for the exercise of profession or for the purpose
of rendering services.
5. AS TO SUBJECT
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a. UNIVERSAL PARTNERSHIP
1. UNIVERSAL PARTNERSHIP OF ALL PRESENT
PROPERTY - one in which each partners contribute to the
partnership at the time of its constitution. The properties
were contributed to a common fund with the intention
of dividing the same among themselves including it’s
profits which they may acquire therewith.
2. UNIVERSAL PARTNERSHIP OF ALL PROFIT - one
which the usufruct or use of assets only was contributed
to the partnership, either at the time of it’s formation
and/or during the life of the partnership by which the
partner may acquire thru industry or work. The original
movable or immovable property contributed do not
become the common partnership assets.
b. PARTICULAR PARTNERSHIP - one which has for its
object a determinate thing, their use or fruits, or a
specific undertaking or the exercise of a profession or
vocation.
6. AS TO REPRESENTATION TO OTHERS
a. ORDINARY PARTNERSHIP - one which actually exists
among the partners and to the third parties.
b. PARTNERSHIP BY ESTOPPEL - one which on reality is
not a partnership but is considered as one only in relation
to those who, by their conduct or omissions are
precluded to deny or disprove it’s partnership existence.
7. AS TO PUBLICITY
a. SECRET PARTNERSHIP - one wherein the existence of
certain person as partners is not made known to the
public by any of the partners.
b. OPEN PARTNERSHIP - one wherein the existence of
certain persons as partners is made known to the public
by the members of the firm.
* CLASSES OF PARTNERS (4)
1. AS TO CONTRIBUTION
a. CAPITALIST PARTNER - one who contributes capital in
cash (money) or property.
b. INDUSTRIAL PARTNER - one who contributes industry,
labor, skill, talent or service.
c. CAPITALIST-INDUSTRIAL PARTNER - one who
contributes cash, property, and industry.
2. AS TO LIABILITY
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a. GENERAL PARTNER - one whose liability to third 2. The names and address of the partners, classes of
persons extends to his separate (private) property. partners, stating whether the partner is a general or a
limited partner;
b. LIMITED PARTNER - one whose liability to third
persons is limited only to the extent of his capital 3. The effective date of contract;
contribution to the partnership.
4. The purpose or purposes and principal office of the
3. AS TO MANAGEMENT business;
a. MANAGING PARTNER - one who manages actively the 5. The capital of the partnership stating the contributions
business of the partnership. of individual partners, their description and agreed
values;
b. SILENT PARTNER - one who does not participate in the
management of the partnership affairs. 6. The rights and duties of each partner;
4. OTHER CLASSIFICATIONS 7. The manner of dividing net income or loss among the
partners, including salary allowance and interest on
a. LIQUIDATING PARTNER - one who takes charge of the
capital;
winding up of partnership affairs upon dissolution.
8. The conditions under which the partners may
b. NOMINAL PARTNER - one who is not really a partner,
withdraw money or other assets for personal use;
not being a party to the partnership agreement, but is
made liable as a partner for the protection of innocent 9. The manner of keeping the books of accounts;
persons.
10. The causes for dissolution; and
c. OSTENSIBLE PARTNER - one who takes active part int
the management of the firm and is known to the public 11. The provision for arbitration in settling disputes.
as a partner in the business.
d. SECRET PARTNER - one who takes active part in the * ORGANIZING A PARTNERSHIP - To operate legally, the
management of the business but whose connection with partnership has to comply with the registration
the partnership is concealed or unknown to the public. requirements of the following government offices:
e. DORMANT PARTNER - one who does not take active
part in the management of the business and is nit known
to the public as a partner; he is both a silent a secret * ACCOUNTING FOR PARTNERSHIPS - Accounting for a
partner. partnership is the same as with single proprietorship
except that there are more owners. There should be as
many any capital accounts and as many drawing
accounts as there are partners. (meaning, one capital
* PARTNERSHIP CONTRACT - A partnership is created by
an oral or a written agreement. account and one drawing account is maintained for each
partner).
- Since partnerships are required to be registered with
the Securities and Exchange Commissions, it is necessary
that the agreement be in writing. In this case
misunderstandings and disputes among the partners
relative to the nature and terms of the contract may be
avoided or minimized. The written agreement between
or among the partners governing the formation,
operation and dissolution of the partnership is referred
to as the Articles of Co-Partnership.

* ARTICLES OF CO-PARTNERSHIP contains the following

information:
1. The name of the partnership;
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* OPENING ENTRIES - Partners may contribute cash,
property, or industry to the partnership. Appropriate
asset accounts are debited for the assets contributed and
partner’s capital accounts are credited for the total
amount of assets contributed.
- FACE VALUE - If the assets contributed is in the form of
cash, it is recorded on the partnership books at face value
- AGREED VALUE - if the asset contributed is in the form
of property or non-cash asset, it is recorded at agreed
value
- FAIR MARKET VALUE - in the absence of an agreement
- MEMORANDUM ENTRY – prepared when industry is
contributed into the partnership
* PARTNERSHIP FORMATION
A. TWO OR MORE PERSONS FORM A PARTNESHIP FOR
THE FIRST TIME. ALL PARTNERS ARE NEW IN THE
BUSINESS.
B. A SOLE PROPRIETOR AND AN INDIVIDUAL FORM A
PARTNERSHIP
When one of the prospective partners is already
engaged in business prior to the formation of the
partnership. That partner may transfer his/ her net assets
(assets net of liabilities) to the partnerships at agreed
values or at fair market values if no agreed values. The
partnership may either: (1) use the books of the sole
proprietor, (2) open a new set of books.
C. TWO OR MORE SOLE PROPRIETORS FORM A
PARTNERSHIP
When all the prospective partners are already in
business, they made decide to transfer their asset and
liabilities (net assets) to the partnership at value agreed
upon or at fair market values, in the absence of agreed
values, The partnership may either: (1) use the books of
the sole proprietors, or (2) open a new set of books for
the partnership. As mentioned earlier, however, it is
more common to open a new set of books for the
partnership.
MODULE 3
* PARTNERSHIP OPERATIONS
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* NATURE OF PARTNERSHIP OPERATION
- Basically accounting for partnership operations and
accounting for the operations of a sole proprietorship is
essentially the same. Steps of the accounting cycle and
the rule of debit and credit to record the transactions are
also the same for both sole proprietorship and
partnership. Purchased of office chairs and table on
account is debited to Furniture and Fixtures and credited
to Accounts Payable. Payment of expenses is debited to
Expenses and credited to Cash. Sale of merchandise on
account is debited to Accounts Receivable and credited
to Sales. Collection of accounts is debited to Cash and
credited to Accounts Receivable.
- However, special problems are encountered in
accounting for partnership operations.
These problems include:
1. Closing entries of a partnership
2. Distribution of profits and losses
3. Preparation of a work sheet
4. Preparation of financial statements
a. Statement of income / statement of comprehensive
income
b. Statement of financial position
c. Statement of changes in partners’ equity
* CLOSING ENTRIES OF A PARTNERSHIP
1. Dr. revenue and nominal accounts w/ credit balances
( purchase discount & purchases returns and allowances)
Cr. Income summary
2. dr. income summary
Cr. Expense & nominal accounts w/ debit balances (Sales
Discounts and Sales Returns and Allowances)
- A credit balance in the Income Summary account
represents a profit and its balance is transferred to the
drawing accounts of the partners based on their profit
and loss sharing ratio.
- A debit balance in the Income Summary account
represents a loss and its balance is transferred to the
drawing accounts of the partners based on their profit
and loss sharing ratio.
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* DISTRIBUTION OF PROFIT & LOSSES
To make distribution of partnership profits and losses
equitable, the following factors are considered:
1. Services rendered by the partners to the partnership
2. Amount of capital contributed by the partners to the
business
3. Entrepreneurial ability or managerial skill of the
partners
* RULES FOR DIVIDING PROFIT & LOSSESS (2)
- divided in accordance with the agreement among the
partners. In the absence of an agreement, the partners
shall share in the profits in proportion to their capital
contributions after satisfying the share of the industrial
partner on such profit.
- division based on the provision of the New Civil Code
1. As to Capital Partners
a. Division of profits
1. in accordance with agreement
2. in the absence of an agreement, division of
profits is in accordance with capital contributions
b. Division of losses
1. In accordance with agreement
2. If only division of profits is agreed upon, the
division of losses will be the same as the
agreement on the division of profits
3. In the absence of an agreement, division of
losses is in accordance with capital contributions
2. As to Industrial Partners
a. Division of profits
1. In accordance with agreement
2. In the absence of an agreement, the industrial
partner shall receive a just and equitable share
of the profits and the capitalist partners shall
receive profits in accordance with their capital
contributions
b. Division of losses
1. In accordance with agreement
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2. In the absence of an agreement, the capitalist-
industrial partner in his/her character as
industrial partner shall have no share in the
losses, but in his/her character as a capitalist
partner will share in proportion to the capital
contribution
* METHODS OF DISTRIBUTING PROFITS BASED ON
PARTNERS’ AGREEMENT (6)
1. ARBITRARY RATIO (Percentage, Decimal, Fraction,
Ratio) - it is simple to apply but does not give recognition
on the disparity of capital contributions nor does it
recognize the time and effort that a partner may devote
in running the firm’s business operations.
2. CAPITAL RATIO (Original, Beginning, Ending, Average)
– this method recognizes the differences in the capital
contributions but does not take into account the time
and effort that a partner may devote in running the firm’s
business operations.
3. INTEREST ON CAPITAL AND THE BALANCE ON AGREED
RATIO - this method recognizes the differences in the
capital contributions but does not take into account the
time and effort that partner may devote in running the
firm’s business operations.
4. SALARY ALLOWANCES TO PARTNERS AND THE
BALANCE ON AGREED RATIO - this method recognizes
the time and effort that a partner may devote in running
the firm’s business operations but does not take into
consideration the differences in capital contributions.
5. BONUS TO MANAGING PARTNER AND THE BALANCE
ON AGREES RATIO - this method allows a bonus, as an
incentive, to the managing partner. It is usually a
percentage of the profit. Bonus, therefore, is allowed
only when there is a profit. It may be computed using any
one of the following as basis:
a. Bonus is based on profit before deducting bonus and
income tax
b. Bonus is based on profit after deducting bonus but
before deducting income tax
c. Bonus is based on profit after deducting income tax but
before deducting bonus
d. Bonus is based on profit after deducting both bonus
and income tax.
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6. INTEREST ON CAPITAL, SALARIES TO PARTNERS,
BONUS TO MANAGING PARTNER, AND THE BALANCE ON
AGREED RATIO.

* PREPARATION OF WORKSHEET AND FINANCIAL

STATEMENTS
- At the end of each accounting period, the partnership
books are adjusted and closed and financial statements
are prepared. In order to classify accounting data in a
convenient and orderly manner and to facilitate the
preparation of financial statements, a work sheet is
prepared. The form or columns of the worksheet may
vary depending on the needs of the company. The
following illustrative problem will use the simplest form
of worksheet with emphasis not on the form but the
underlying principles and procedures in preparing such
worksheet.

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